Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
You may have heard of stocks that pay out dividends. Generally, any discussion about such stocks refers to final dividends, which are decided and declared during the annual general meeting (AGM) of a company. Aside from this, there is another type of dividend that you must be aware of, namely the interim dividends.
Many shareholders and long-term investors may not be aware of what the interim dividend is and how it works. In this article, we’ll focus on the important details of this type of dividend.
Table of Content
What is Interim Dividend?
An interim dividend is a type of dividend that is paid out before a company holds its annual general meeting and releases its financial statements for the year. In other words, this type of dividend is paid out during the financial year rather than at the end of the year.
Generally, before a company declares interim dividends, it releases the interim financial statements. This offers more clarity about the company’s interim profits and revenue.
How do Interim Dividends Work?
Typically, the final dividend paid out by a company at the end of a financial year is sourced from its earnings during that year — or its current earnings. This is not the case with interim dividends, which are often paid out using a company’s retained earnings.
In accounting terminology, retained earnings are the profits that remain after a company has paid all its direct and indirect expenses, taxes and final dividends. You can think of this as the undistributed profits a company has. During a good earnings season when the company’s profitability may be above average, it may declare interim dividends to its shareholders.
Interim Dividend vs. Final Dividend: A Comparison
We’ve covered the meaning of interim dividend and how it works. Let’s compare it with the final dividend that companies declare, so you can get a comprehensive overview of these two types of shareholder benefits.
| Particulars | Interim Dividend | Final Dividend |
| Definition | This type of dividend is paid during the financial year before the company’s financial statements are finalised | This type of dividend is declared after the company’s financial statements are finalised and approved |
| Basis of Declaration | Interim dividend is typically based on the company’s estimated or projected financial performance for a portion of the year | Final dividend is based on the financial results as published in the audited financial statements for the year |
| Authority | Usually declared by the Board of Directors without the need to obtain shareholders’ approval | Declared by the Board of Directors after obtaining shareholders’ approval |
| Frequency | Can be declared more than once during a financial year | Declared once at the end of the financial year |
| Reliability | Less reliable or frequent since it is usually only declared during periods of exceptional profitability | More reliable since profitable companies typically declare and pay out final dividends more often than interim dividends |
| Adjustments Involved | If an interim dividend is declared, the company may adjust its final dividend accordingly based on its future financial performance | Once the final dividend is declared, it is not adjusted based on future financial performance |
| Source of Funds | Retained earnings | Current earnings |
Taxability of Interim Dividend
If you have invested in a company that pays you interim dividends, you need to know how this income is taxed. Like final dividends, interim dividends are also added to your total income and taxed as per the income tax slab rate applicable to you. So, for instance, if your total taxable income falls within the 30% slab, your interim dividend will also be taxed at the same rate.
However, it is crucial to note that interim dividend is only taxable on receipt. If you have not received the amount during a given financial year, you need not add it to your income during that year. Instead, it will be taxed in the next year, when it is actually received in your bank account.
Conclusion
This sums up the meaning of interim dividend and everything else you need to know about it as a shareholder. Keep in mind that not all companies pay interim dividends. Additionally, a company that pays interim dividends during this year may not do so during the next. It depends entirely on the company’s profitability and policies.
