Key takeaways
- Profit paid out as dividend is taxed twice: once in the company (about 25%) and again in your hands at your slab rate.
- Reasonable salary to working directors is deductible for the company, so it is taxed only once.
- On ₹30 lakh of profit, choosing salary over dividend can save around ₹5.4 lakh of tax in a single year.
- Loans from your own company can be taxed as deemed dividend — the most common and expensive mistake.
Why owner-run companies overpay
In a company owned and run by its directors, the profit belongs to the same people whether it stays in the company, is paid as salary, or is paid as dividend. The tax law treats these routes very differently. Most owner-run companies pick a route by habit — usually "pay tax on the full profit, then take a dividend" — and that habit is the most expensive option.
1. Salary vs dividend
Salary (remuneration) paid to a working director is a business expense. It reduces the company's taxable profit, and the director pays tax on it at his or her slab rate. The money is taxed once.
Dividend is paid out of profit that has already been taxed in the company, and it is taxed again in the shareholder's hands at slab rates (with TDS of 10% where dividends exceed ₹10,000 a year).
A worked example
Suppose the company has ₹30 lakh of profit to pass to a director who is already in the 30% slab, with total income under ₹50 lakh. The company pays tax at 25% (turnover up to ₹400 crore).
| Paid as dividend | Paid as salary | |
|---|---|---|
| Company tax (25% + cess) | ₹7,80,000 | Nil — salary is an expense |
| Amount reaching the director | ₹22,20,000 | ₹30,00,000 |
| Director's tax (30% + cess) | ₹6,92,640 | ₹9,36,000 |
| Total tax | ₹14,72,640 | ₹9,36,000 |
The salary route saves about ₹5.37 lakh on the same ₹30 lakh. The gap narrows if the salary pushes the director into a surcharge band, or if the company is on the 22% regime — which is why the right answer is usually a mix, set each year.
Conditions that make salary stand up
- The director actually works in the business, and the pay is reasonable for the role and the company's size.
- It is approved by a board resolution (and by shareholders where the articles require it), and paid regularly through payroll with TDS.
- Payments to relatives must also be reasonable — the tax officer can disallow the excess paid to related persons.
2. The company's own tax regime
A domestic company can choose between the normal regime (25% for turnover up to ₹400 crore, 30% above) and the concessional regime of 22% (old Section 115BAA). With surcharge and cess, the concessional rate works out to 25.168% at any profit level, while the normal rate rises to 27.82% above ₹1 crore of income and 29.12% above ₹10 crore.
On rates alone the concessional regime is cheaper at every profit level — 25.168% against 26% below ₹1 crore and more above it. The price is that it gives up most deductions and incentives (and any MAT credit carried forward), and once chosen it cannot be withdrawn. Whether it saves money depends on what your company would be giving up, so run the numbers for the next few years, not just this one.
3. Rent for premises the director owns
If the company uses a property owned by a director — an office, a godown, a floor of the family house — paying a fair market rent under a written agreement is a deductible expense for the company. In the director's hands it is house-property income, which gets a flat 30% standard deduction for repairs. So only 70% of the rent is taxed personally, while 100% is deducted by the company.
4. Perquisites that cost less in tax than cash
Some benefits provided by the company are valued for tax at less than their cost, or are not taxed at all, while the full cost is deductible for the company. Common examples:
- A company car used partly for personal travel, valued at a fixed monthly amount under the rules rather than its real cost.
- Laptops, mobile phones and similar equipment provided for work.
- Reimbursement of genuine business expenses — travel, client meetings, telephone — against bills.
Each of these needs to be properly documented and genuinely connected to the business.
5. Timing: when profit is taken out
Slab rates favour steady income. Drawing a large one-off amount in a single year can push a director into a higher slab or a surcharge band that a steady draw would avoid. Planning the payout across years — and across the family members who genuinely work in the business — keeps more of each rupee in the lower bands.
The trap: loans from your own company
Taking money from the company as a "loan" or "advance" feels tax-free. It usually isn't. A loan or advance by a closely held company to a shareholder holding 10% or more of the voting power — or to a concern in which that shareholder has a substantial interest — is treated as deemed dividend to the extent of the company's accumulated profits, and taxed in full at slab rates. Repaying the loan later doesn't undo it. If you need money from the company, take it as salary, rent or dividend, deliberately.
How we help
Every company is different, so we start with your accounts, past returns and how the directors are paid today, then build a written plan with the saving worked out in rupees — and we implement it: board resolutions, agreements, payroll changes and coordination with your accountant. See Income Tax Optimisation for Companies and try the calculator to see what tax is costing your company today.