For directors of Private Limited companies, a common strategic dilemma involves choosing between employee and non-employee director status. Should you pay yourself as an employee and draw a monthly salary? Or should you withdraw professional fees and commissions for services rendered?
Many assume this trade-off is purely administrative. However, it carries significant tax, compliance, and reporting ramifications. With the Income Tax Act, 2025 now in force for the 2026–27 tax year, reporting frameworks and relevant sections have been updated.
At CA Pavan Kumar & Co., we advise founders to consider these constructs from the perspective of company profitability and personal tax planning.
1. Salary (Employee-Director)
When a Managing Director (MD) or a Whole-Time Director (WTD) is on the company’s payroll, they are treated as an employee.
- Governing Provision: TDS applies in accordance with Section 192.
- Tax Treatment: The company treats this as a salary expense. TDS is deducted monthly based on the director’s estimated annual income and their selected tax regime (Old vs. New).
- Compliance: The company must issue Form 16 to the director at the close of the tax year. Furthermore, this remuneration appears in the company’s annual ROC filings (AOC-4 and MGT-7).
- GST: Salary payments are not subject to GST, as they pertain to the employer-employee relationship.
2. Professional Fees, Commission, and Sitting Fees (Non-Employee)
This category typically applies to Non-Executive or Independent Directors paid for board meeting attendance, specialized services, or profit-based commissions.
- Governing Provision: TDS is deducted under Section 194J(1)(ba) of the Income Tax Act (referenced as Section 393 in the new Income Tax Act of 2025).
- TDS Rate: A flat 10% TDS is deducted.
- Threshold: Unlike professional fees paid to external consultants (which have a ₹50,000 threshold), director payments attract TDS from the very first rupee.
- GST: Such payments attract 18% GST under the Reverse Charge Mechanism (RCM), and the company is liable to pay this GST to the government.
Summary Table: Salary vs. Professional Fees
| Parameter | Salary (Employee Director) | Non-Salary (Professional/Sitting Fees) |
| Governing Section | Section 192 | Section 194J(1)(ba) / ITA 2025 Ref: 393 |
| TDS Rate | Slab Rates | Flat 10% |
| Documentation | Form 16 | Form 16A |
| GST | No | 18% (Reverse Charge Mechanism) |
| Threshold | N/A | No threshold (applies from ₹1) |
Strategic Considerations for 2026
Section 40A(2) Scrutiny
While Private Limited companies are no longer bound by the Companies Act’s historical 11% net profit cap, you must still align remuneration with the company’s revenue and profitability. Remuneration levels that are disproportionately high compared to performance will attract scrutiny from tax authorities.
Non-Compliance Risk
Failure to deduct TDS on director payments—whether salary or professional fees—carries significant risk. Under Section 40(a)(ia), 30% of the non-deductible business expense is added back to your taxable income, effectively increasing your business’s tax liability.
TDS Return Compliance
- Salaries: Reported quarterly in Form 24Q.
- Professional Payments: Reported in Form 140 (the updated TDS return form under the ITA 2025).
How to Optimize Your Taxes
Structuring your income as a salary versus a professional fee is a personal decision based on your specific tax bracket, other salary income, and your company’s overall profitability. Considering the changes introduced by the Income Tax Act, 2025, let our advisory team assess your current salary structure to identify areas of optimization and compliance.
Book your session with our advisory team:
- Website: https://capavankumar.com/
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