Rule 3 of the Income-tax Rules, 2026

Where this rule sits

Rule 3 gives effect to Section 2(42) of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.

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What this rule does

The rule sets out, in three clauses, the arrangements a company must make for the declaration and payment of dividends within India for the purposes of section 2(42). Clause (a) requires the share-register of the company for all shareholders to be regularly maintained at its principal place of business within India, and to be so maintained in respect of any tax year from a date not later than the 1st April of that year. Clause (b) requires the general meeting for passing the accounts of the tax year and for declaring any dividends in respect of those accounts to be held only at a place within India. Clause (c) requires the dividends declared, if any, to be payable only within India, and to all shareholders.

The rule states in its opening words that dividends here include dividends on preference shares, so the three arrangements are tested against preference dividends as much as equity dividends. The three clauses are joined by "and" before clause (c) and operate together; the rule prescribes no alternative and no relaxation.

Why it is there

Section 2(42) turns on a company having made arrangements for the declaration and payment of dividends within India but does not say what those arrangements are. Left undefined, a company could claim the description on the strength of a nominal Indian connection while keeping its register, its accounts meeting and its dividend payments abroad. The rule fixes three locational tests — register, meeting, payment — each of which has to be inside India.

Who it applies to

• A company relying on having made arrangements for the declaration and payment of dividends within India for the purposes of section 2(42)
• The shareholders of such a company, including preference shareholders, to whom dividends must be payable within India
• The Assessing Officer testing whether the arrangements in clauses (a) to (c) were in place for the tax year

The figures, and what each one turns on

What this means in practice

All three clauses must hold; the rule is a list of arrangements, not a menu. The timing in clause (a) is the one that catches people out — the register has to be regularly maintained in India from a date not later than the 1st April of the tax year, so bringing the register to India part-way through the year does not satisfy the clause for that year. Clause (b) fixes the venue of one particular meeting, the general meeting at which the accounts of the tax year are passed and dividends for it declared, and requires it to be held only at a place within India. Clause (c) is about where the dividend is payable, not merely where it happens to be paid, and it extends to all shareholders — a dividend payable outside India to some part of the register defeats the clause. Because the opening words bring in preference shares, an arrangement that works for equity dividends but leaves preference dividends payable abroad does not meet the rule.

An example

A company keeps its share-register at its principal place of business in Mumbai from 1 April of the tax year, holds the general meeting passing that year's accounts and declaring the dividend in Mumbai, and makes the dividend, including the dividend on its preference shares, payable in India to every shareholder on the register. Clauses (a) to (c) are all met. Had the same company moved the register to India only in September of that year, clause (a) would fail for that tax year even though the meeting and the payment were both in India.

Where you meet this rule

You meet it wherever a company's status under section 2(42) is in issue — in the return, in an Assessing Officer's enquiry into where the register was kept and where the accounts meeting was held, and in the company's secretarial records for the year.

The words themselves

What people get wrong

• Reading the clauses as alternatives. Clauses (a), (b) and (c) are joined by "and" and all three must be satisfied for the arrangements to exist.
• Treating a mid-year shift of the register to India as enough. Clause (a) requires regular maintenance in India from a date not later than the 1st April of the tax year.
• Overlooking preference dividends. The opening words of rule 3 expressly include dividends on preference shares in the arrangements tested.
• Confusing where the dividend was in fact paid with where it is payable. Clause (c) tests where the dividend is payable, and it must be payable within India to all shareholders.
• Assuming any board or general meeting in India will do. Clause (b) is about the general meeting for passing the accounts of the tax year and declaring dividends in respect of those accounts.