How is a director's salary taxed in India and what TDS applies?

## How a Director's Salary is Taxed in India

### Types of Director Remuneration

Indian law allows directors to receive remuneration in several forms:

• **Salary (whole-time director or managing director):** Treated as salary income, TDS under Section 192
• **Commission on net profits:** Subject to Companies Act approval limits; taxed as salary if whole-time director, as 'profits in lieu of salary' (Section 17(3)) otherwise
• **Sitting fees (non-executive directors):** Flat fee per Board meeting; TDS at 10% under Section 194J
• **Professional fees (director as consultant):** If the director provides consulting services in their individual professional capacity (separate from their role as director), TDS at 10% under Section 194J

### Companies Act Limits on Director Remuneration

The Companies Act 2013 caps total managerial remuneration (MDs + WTDs + manager) for Public Limited companies at 11% of net profits. For Private Limited companies, there is no such cap — the remuneration just needs to be reasonable and approved by the Board (and shareholders for amounts requiring approval).

For Private Limited companies: - Board resolution required for all director salary changes - Disclosure required in the Annual Report (Directors' Report) - Shareholder approval required if the company has inadequate profits and the salary is substantial

### TDS on Director Salary (Section 192)

The company deducts TDS on the director's salary at the applicable income tax slab rates applicable to the director as an individual.

For FY 2025-26, the new tax regime (default from FY 2024-25) slab rates:

| Income Slab | Tax Rate | |-------------|----------| | Up to INR 3 lakh | Nil | | INR 3-7 lakh | 5% | | INR 7-10 lakh | 10% | | INR 10-12 lakh | 15% | | INR 12-15 lakh | 20% | | Above INR 15 lakh | 30% |

Surcharge: 10% for income above INR 50 lakh; 15% above INR 1 crore; 25% above INR 2 crore; 37% above INR 5 crore (capped at 25% for new regime).

The company estimates the director's full-year income and deducts TDS in equal monthly instalments. If the director has other income, they should inform the company using Form 12BB.

### Is the Director's Salary Deductible for the Company?

Yes — director's salary is deductible as a business expense under Section 37(1), but: 1. The salary must be supported by a Board resolution 2. It must be commercially reasonable (not excessive relative to market rates) 3. The director must be performing genuine work for the company 4. The salary cannot be a disguised profit distribution

### Salary vs Dividend: Which is Better Tax-Wise?

For director-shareholders in India, the optimum split between salary and dividends depends on tax rates:

Salary: - Deductible for company (saves ~25.17% corporate tax) - Taxed in director's hands at slab rates (up to 42.74% for very high income) - Social security contributions (EPF) apply for salaries up to INR 15,000/month basic

Dividend: - Not deductible for company (paid from post-tax profits) - Taxed in shareholder's hands at their slab rates under Section 115BBDA (30% for dividends above INR 10 lakh from domestic companies, with applicable surcharge) - No social security implications

General rule of thumb: - Where the director's marginal personal tax rate exceeds the corporate tax rate (~25.17%), it may be more efficient to pay dividends (though dividends are not deductible for the company) - For lower-earning directors in lower tax slabs, salary (which the company can deduct) is usually better overall

### EPF Implications for Director Salary

If the director receives a salary and the company has 20+ employees, the director (if counted as an employee under the EPF Act) may be subject to EPF contributions on basic salary. However, directors who are not 'employees' in the traditional sense (they are technically appointed by shareholders) may not fall under EPF mandatorily. This is a grey area — seek professional advice.