In India, the income of a director by way of director's remuneration is an important element of a company’s financial and tax structure. Knowing how to best structure this income for tax efficiency is also important whether you are a director of a private limited company or within a closely held business organization. In this blog, we will describe various ways to structure a director's remuneration income, including any tax considerations and key recommendations to ensure you minimize your tax obligations while remaining compliant with statutory tax obligations in India.
What Is Directors’ Remuneration Income?
Directors' remuneration income is the payment a company gives to its directors for their services to the company in respect of running the company. This could include:
• Salary or monthly pay
• Commission based on profits
• Sitting fees
• Perks (car, rent-free accommodation, etc.)
• Bonus or performance-based remuneration
This income needs to be structured in an appropriate manner by considering the company objectives and the director's personal tax obligations.
Why Structuring Director’s Remuneration Is Important
Failing to structure the director’s remuneration appropriately can give rise to excessive taxation, not meeting the norms of the Companies Act, or inquiries from the Income Tax Department. Tax-effective structuring allows you to:
• Minimize tax liabilities overall
• Comply with the Income Tax Act and the Companies Act
• Prevent double taxation
• Maximize your net income
Key Factors That Impact Director Remuneration Taxation
Prior to setting up the remuneration, the following points need to be understood:
1.Type of Company
The limits and taxability will differ between a private limited company, public limited company or LLP.
2. The nature of directorship
The remuneration will be different for:
• Executive/Whole-time Directors (actively conducting the business)
• Non-Executive Directors (purely advisory)
3. Mode of remuneration
Salary and perquisites will be taxed differently compared to commission or being paid sitting fees. A combination of some or all would be another option to mediate the tax implications.
4. Applicable tax deductions
Section 192 (TDS on salary), Section 194J (TDS on fees for professional services) and the valuation of perquisites under Rule 3 will all be particularly relevant to demonstrating how these amounts will be taxed.
Smart Ways to Structure Directors’ Remuneration for Tax Efficiency
The following are tested ways to plan directors’ remuneration that can maximize tax-planning opportunities:
1.Split Remuneration into Salary + Allowances
Rather than receiving a static salary, consider splitting the remuneration into:
• Basic Salary • House Rent Allowance (HRA) • Leave Travel Allowance (LTA) • Conveyance Allowance • Medical Reimbursement
Why? Many of these elements have exemptions under the Income Tax Act (for example, HRA under Section 10(13A), which can significantly limit the taxable remuneration).
2. Provide Tax-Free Perks
Some perks can generate additional remuneration but are not taxed:
• Mobile and internet expenses • Meals coupons (up to ₹50/day are tax-free) • Car leased from the company (if done in the right way) • Family health insurance premiums
These benefits enhance your lifestyle while minimizing your tax obligations. It is a win-win.
3. Use a Performance-Related Commission
Wherever possible and assuming that the company is making a profit, pay a portion of the remuneration as a commission, sometimes linked to net profit. Consider three benefits:
• You align remuneration with performance • You can claim the commission as a business expense under Section 37 • You minimize fixed salary obligations
Where appropriate, be sure to meet and/or comply with Section 197 of the Companies Act, if the relevant company is public.
4. Available as Sitting Fees (for Non-executive Directors)
non-executive directors may be compensated with sitting fees for attending board or committee meetings regardless of the structure chosen. It is noted that:
• sitting fees will be subject to a lower TDS rate of 10% under Section 194J • sitting fees will not be classified as a salary which impacts whether statutory provisions under PF/ESI of statutory provisions apply • sitting fees are easy to administer for smaller/advisory roles.
5. Introduce a Professional Fee Structure (if applicable)
If the director is also a consultant, particularly in technical or legal services, a portion of the total income can be paid as a professional fee chargeable under Section 194J. This facilitates:
• a lower TDS than an equivalent salary • an opportunity for directors to claim business expenses • presumptive taxation takes certain measures to realise Section 44ADA (if allowed)
This option is available only if the director is not under an employment format.
6. Take Available Deductions under Chapter VI-A
No matter what structure directors choose, directors can save on their net taxable income by investing in:
• Section 80C: PPF, ELSS, LIC premium (to the limit of ₹ 1.5 lakh) • Section 80D: Health insurance premiums • Section 80E: Interest on education loans • Section 80G: Donations to approved charities
In all instances, directors save on personal tax, oftentimes legally without compliance issues.
7. File Director Income Tax Returns on time
It is important to note that ultimately, if all the remuneration is structured properly, a director needs to file ITR (Income Tax Returns) on time. I would suggest using a professional Director Income Tax Filing in India service to:
• Prevent penalties • Accurately disclose the sources of multiple income • Citation of all deductions for claims asserted.
Legal Framework for Director Remuneration
Before we get into the ways to structure it, we need to look at the legal bounds of Directors Remuneration Income.
Under the Companies Act, 2013:
• Public Companies, total managerial remuneration must not exceed 11% of net profits, unless special resolution by shareholders and approval by the Central Government.
• Private Companies are more free, but internal documentation and resolutions are still needed.
Under the Income Tax Act, 1961:
• Remuneration to directors is taxable under Income from Salary or Profits and Gains from Business or Profession (PGBP) considering the role the person plays.
• Company must deduct TDS on behalf of the company before the company disburses the amount and remits to the government.
Types of Directors and Their Tax Treatments
Type of Director
Income Nature
Tax Head
Executive/Whole-time
Salary
Income from Salary
Non-Executive
Sitting fees or Commission
Income from Other Sources
Independent/Consulting Director
Retainer Fees
Business or Professional Income (PGBP)
The categorization of a director also serves to structure income under the most favorable tax head.
Compliance Requirements You Must Not Ignore
• Companies Act, 2013: there are limits on managerial remuneration
• TDS Compliance: selecting the correct section (either 192 or 194J) for TDS and lodging the TDS return within the prescribed time limit
• Board Resolution: in the case of variations to remuneration, there must be an appropriate Board Resolution and proper documentation
• Form MGT-7 and AOC-4: disclosure in respect of remuneration in ROC filings
If structuring remuneration gets overly complicated, it may be worth employing a Directors Remuneration Income Service provider to ensure all is compliant.
Benefits of Taking Director Remuneration Income Tax Service
Having a professional relationship can:
• assist you structure your remuneration income for the most tax savings
• provide comfort that tax is calculated and lodged correctly in compliance with the relevant legislation
• reduce the risk of audit or penalties by the tax office
• provide good advice on exemptions and deductions
There are firms that offer Director Remuneration Income Tax Service who will undertake the whole package from calculation of remuneration to lodging the tax.
Conclusion
Structuring your Directors' Remuneration Income is not simply a matter of money; it is actually a strategic decision in favour of the long-term tax efficiency of your income and compliance with legislation. Whether you are an executive or non-executive director, your ownership of professional services, understanding the tax implications and correctly documenting your income structure can save you on time, stress and, of course, money. Directors are burdened by the weight of the business decisions. Make sure your own business is structured with the same foresight and accuracy as you would bring to your own financial structure.
(FAQs)
1. Is directors’ remuneration taxable in India?
Yes, all forms of Directors’ Remuneration Income are taxable under applicable heads like "Income from Salary" or "Profits and Gains from Business or Profession."
2. What is the most tax-efficient way to receive director’s remuneration?
Combining fixed salary with allowances, profit-linked commissions, and ESOPs offers a tax-efficient mix. You can further optimize this with a Director Remuneration Income Tax Service.
3. Can a director receive professional fees instead of salary?
Yes, especially non-executive or independent directors. Such income is treated as professional income under PGBP and may allow for more deductions.
4. Which ITR form should a director use?
5. Can a private limited company pay unlimited remuneration to its directors?
Private companies have more flexibility, but it’s advisable to document approval through board resolutions and keep remuneration within justifiable limits.
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