Transfer of Profit to Reserves

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Querist : Anonymous

Querist : Anonymous (Querist)

22 October 2010 As per Transfer of Profit to Reserves rules, we have to transfer a certain % of current year profits to reserves before payment of dividend. Can a company transfer more than 10 % to reserves? What are the guidelines if more than 10% has to be transferred? Can anyone please provide a calculation format for guidelines conditions for transfer more than 10%?

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Rasesh

Rasesh (Expert)
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22 October 2010 The law provides the minimum % to be transferred to GR. The Board is free to decide any percentage higher than the minimum prescribed under the rules.

Querist : Anonymous

Querist : Anonymous (Querist)

22 October 2010 Thank You for your reply.
But there are conditions laid down for voluntary transfer of a higher %. How do we take care of these conditions?

Querist : Anonymous

Querist : Anonymous (Querist)

22 October 2010 Awaiting a reply on the above

Querist : Anonymous

Querist : Anonymous (Querist)

22 October 2010 Awaiting expert views on above

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Great question! Here’s a detailed explanation about **transfer of profits to reserves** and transferring **more than 10%** of profits:

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### Legal Background:

* Under the **Companies Act, 2013 (earlier 1956)**, particularly **Section 123 (Dividend) & Section 134 (Financial Statements)**:

* A company must transfer a **minimum of 10% of its net profit (before dividend declaration)** to the **Statutory Reserve** (often called General Reserve) every year **until the reserve reaches 20% of the paid-up share capital**.
* This is mandatory before declaring dividends.

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### Can a company transfer more than 10%?

* **Yes**, the company **can transfer more than the prescribed 10%** voluntarily.
* There is **no upper cap** in law on how much can be transferred.
* The company’s **Board of Directors** and **Shareholders (in AGM)** can decide this based on business needs or prudence.

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### Conditions / Guidelines for transferring more than 10%:

1. **Board Resolution**:

* The Board must approve the transfer of profit to reserves.
* The transfer should be reflected clearly in the financial statements.

2. **Shareholders’ Approval** (if needed):

* For substantial transfer, the company may choose to disclose it in the AGM and seek approval (though generally Board approval suffices).

3. **Disclosure in Financial Statements**:

* The amount transferred should be properly disclosed under “Reserves and Surplus” in the balance sheet.
* Notes to accounts should clarify the transfer and reasons, if material.

4. **Impact on Dividend Declaration**:

* Dividend can only be paid out of profits after transferring the mandatory amount to reserves.
* Transfer of more than mandatory does not affect the dividend declaration beyond limiting distributable profits.

5. **Accounting Treatment**:

* Debit Profit & Loss Account.
* Credit Reserves Account.

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### Calculation Format Example:

| Particulars | Amount (₹) |
| ------------------------------------------------------------ | ------------------ |
| Net Profit before tax | X |
| Less: Tax provision | Y |
| Net Profit after tax | Z |
| Mandatory transfer to Reserves (10% of Net Profit after tax) | 0.10 × Z |
| Additional Voluntary transfer to Reserves (say 5%) | 0.05 × Z |
| Total Transfer to Reserves | (0.10 + 0.05) × Z |
| Balance available for Dividend | Z - Total Transfer |

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### Summary:

* Minimum 10% mandatory transfer until reserves reach 20% of paid-up capital.
* Can transfer more than 10% voluntarily with Board approval.
* Proper disclosures required.
* Transfer reduces distributable profits but strengthens reserves.

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If you want, I can help you draft a **Board resolution template** or detailed accounting entries for this. Would that help?

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