Introduction
As a founder, one of your most important financial decisions is: How do I pay myself?
Should you take a salary? Pay yourself dividends? Draw director remuneration? Or use a combination?
This isn’t just about personal finance – it’s a strategic decision that affects:
- Your personal tax liability
- Company’s taxable profit
- Compliance requirements
- Loan and visa eligibility
- Cash flow management
- Regulatory scrutiny from Income Tax and MCA
Choose the wrong structure, and you could:
- Pay unnecessarily high taxes
- Create compliance gaps
- Face disallowance of expenses
- Trigger scrutiny from authorities
- Damage your personal credit profile
This guide breaks down all three payment methods – salary, dividend, and director remuneration – with clear explanations of how each is taxed, their pros and cons, and a practical framework to choose what works best for you in 2025.
Understanding Your Three Payment Options
1. Salary (As Employee/Working Director)
If you’re a working director actively involved in running your Private Limited Company, you can draw a regular salary just like any employee.
How Salary Works:
You’re essentially employed by your own company. The company pays you monthly/periodically, deducts TDS, and issues Form 16 at year-end.
Tax Treatment for You (Founder):
Salary is taxed under the head “Income from Salary” at applicable slab rates.
But you get significant deductions:
- Standard deduction: ₹50,000
- HRA (if you’re paying rent and claim it)
- Leave Travel Allowance (LTA)
- Professional Tax
- Chapter VI-A deductions (80C, 80D, 80CCD, etc.)
- Choice between old and new tax regime
Tax Treatment for Company:
- Salary is a business expense (reduces company profit)
- Lowers corporate tax liability
- Company must deduct TDS under Section 192
- Must issue Form 16
- PF/ESI may apply depending on salary amount
Example:
Annual salary: ₹12,00,000
After standard deduction and 80C investments:
- Taxable income: ~₹9,00,000
- Tax liability: Much lower than if taken as dividend
Meanwhile, company’s taxable profit reduced by ₹12 lakh.
Pros:
✅ Tax-efficient with multiple deductions available
✅ Helps in loan applications, visa processing, credit cards
✅ Reduces company’s taxable income
✅ Clean compliance trail
✅ Demonstrates stable income
✅ PF accumulation builds retirement corpus
Cons:
❌ PF/ESI compliance required (if applicable)
❌ Fixed monthly cash outflow
❌ More payroll compliance burden
❌ Can’t be taken if company has losses
❌ Must be “reasonable” compared to role
Best For:
- Founders working full-time in the company
- CEO, COO, or similar active operational roles
- When you need proof of regular income
- Companies with consistent revenue
2. Dividend (Return on Shareholding)
Dividend is profit distribution to shareholders based on their shareholding percentage. You receive it not because you work, but because you own shares.
How Dividend Works:
After company pays corporate tax on profits, remaining profit can be distributed as dividend. Requires board resolution and must follow Companies Act provisions.
Tax Treatment for You (Founder):
- Taxed at your slab rate (no special benefit)
- No deductions available (no 80C, HRA, etc.)
- Company deducts 10% TDS under Section 194 if dividend exceeds ₹5,000
Tax Treatment for Company:
- Not a business expense (cannot be deducted from profit)
- Paid from post-tax profit only
- No corporate tax benefit
- Requires board resolution
Example:
Company profit after tax: ₹20,00,000
You own 100% shares
Dividend declared: ₹10,00,000
Your tax:
- ₹10 lakh added to your total income
- Taxed at 30% (if you’re in highest slab) = ₹3,00,000
- Plus cess: ~₹3,12,000
Company: Already paid tax on this profit, now paying again from post-tax reserves.
Effective Double Taxation:
- Company pays ~25-30% corporate tax
- You pay 30% personal tax on remainder
- Combined tax impact: ~47-51%
Pros:
✅ No PF/ESI implications
✅ Flexible timing – pay when cash is available
✅ Good for passive shareholders
✅ No monthly obligation
✅ Legitimate wealth distribution method
Cons:
❌ Double taxation (company + personal)
❌ No tax deductions available to you
❌ Can only be paid from profit
❌ Requires board formalities
❌ Cannot replace salary for working directors
❌ Not helpful for loan applications (irregular income)
Best For:
- Non-working shareholders
- Passive investors in the company
- Profit distribution among multiple shareholders
- When company has excess retained earnings
3. Director Remuneration (For Active Directors)
This is payment for services rendered as a director – distinct from both salary and dividend. It’s specifically allowed under the Companies Act for working directors.
How It Works:
Director remuneration is compensation for managerial services, strategic guidance, or executive functions. It requires proper authorization in Articles of Association (AoA) and board approval.
Tax Treatment for You (Founder):
Taxed under “Income from Salary” (if you’re a full-time director) OR “Profits and Gains from Business or Profession” (if you’re providing professional/consultancy services).
TDS applicable:
- Section 192 (if treated as salary)
- Section 194J at 10% (if treated as professional fees)
Tax Treatment for Company:
- Deductible as business expense (reduces company profit)
- Subject to limits in Companies Act (for public companies)
- Private companies have more flexibility
- Requires board resolution and compliance
Companies Act Limits:
For Private Limited Companies:
- More flexibility in determining remuneration
- Must be authorized in AoA
- Should be reasonable and justifiable
For Public Companies:
- Strict limits based on effective capital and profits
- Requires shareholder approval in some cases
- Maximum percentages prescribed
Pros:
✅ Flexibility in payment timing and structure
✅ Tax deductions available (if treated as salary)
✅ Company can claim as expense
✅ Suitable for part-time or consulting directors
✅ Can be performance-linked
✅ Works well for strategic/advisory roles
Cons:
❌ Requires board approvals and documentation
❌ Higher compliance burden
❌ Must be justified as reasonable
❌ Misclassification can trigger scrutiny
❌ May need shareholder approval
❌ Limits apply for public companies
Best For:
- Directors providing strategic/consulting services
- Part-time directors
- Performance-based compensation
- Directors managing specific functions
- When flexibility is needed
Side-by-Side Comparison (2025)
| Factor | Salary | Dividend | Director Remuneration |
| Your Tax Rate | Slab (with deductions like 80C, HRA) | Slab (no deductions) | Slab (depends on classification) |
| Company Treatment | Deductible expense ✅ | Not deductible ❌ | Deductible expense ✅ |
| Cash Flow | Fixed monthly | Only when profit exists | Flexible timing |
| TDS Section | 192 | 194 (if > ₹5,000) | 192 or 194J |
| Compliance Level | High | Medium | High |
| Proof of Income | Strong (monthly) | Weak (irregular) | Medium |
| PF/ESI | May apply | Not applicable | Depends on structure |
| Loan Eligibility | Excellent | Poor | Good |
| Documents Required | Appointment letter, payroll | Board resolution | Board resolution + agreement |
| Best For | Active working founders | Passive shareholders | Consulting/strategic directors |
| Tax Efficiency | High | Low (double taxation) | High |
What Should Founders Choose in 2025?
The answer: Don’t choose just one – use a strategic combination.
Here’s the three-bucket approach that works for most founders:
Bucket 1: Regular Working Income → Salary
Purpose: Predictable monthly income for personal expenses
Amount: ₹50,000 – ₹1,50,000 per month (depending on company revenue and your role)
Benefits:
- Stable income proof
- Tax deductions available
- Reduces company profit
- Builds PF corpus
- Helps in loans/visas
Bucket 2: Profit Sharing → Dividend
Purpose: Distribution of accumulated profits and wealth
Amount: Declared annually or semi-annually based on available profit
Benefits:
- Rewards shareholding
- No monthly cash flow pressure
- Legitimate profit distribution
- Flexible timing
Bucket 3: Performance Pay → Director Remuneration
Purpose: Variable performance-based compensation
Amount: Determined annually based on company performance
Benefits:
- Aligns with business outcomes
- Tax-deductible for company
- Flexibility in payment
- Motivational structure
Recommended Structures by Entity Type
For Private Limited Companies:
Optimal Structure:
- Primary: Salary (₹60,000 – ₹1,50,000/month)
- Secondary: Director Remuneration (year-end performance bonus)
- Tertiary: Dividend (if consistent profits)
Additional Options:
- Reimbursements (tax-free, for business expenses)
- Sitting fees (for board meetings, if applicable)
- Perquisites (car, phone, etc.)
For LLP (Limited Liability Partnership):
Structure:
- Partner Remuneration: Allowed under Section 40(b)
- Subject to limits based on book profit
- ₹3,00,000 for first ₹3,00,000 of book profit
- 90% of balance book profit
- Partner Interest: Up to 12% per annum on capital
- Profit Share: Completely tax-free in partner’s hands
Key Point: No concept of dividend in LLP. Partners take remuneration and profit share.
For Proprietorship:
Structure:
- No salary to self (not allowed)
- Direct profit withdrawal (drawings)
- All profit is taxable in proprietor’s hands
- Tax planning only through investments (80C, 80D, etc.)
Key Point: Proprietorship and proprietor are the same entity for tax purposes.
Real-World Examples
Example 1: SaaS Startup Founder (₹5 Crore Revenue)
Structure:
- Monthly salary: ₹1,20,000 (₹14.4 lakh annually)
- Year-end remuneration: ₹5,00,000 (performance bonus)
- Dividend: ₹3,00,000 (profit distribution)
Total annual income: ₹22.4 lakh
Why This Works:
- Regular income for expenses and loans
- Performance-linked incentive
- Profit participation as shareholder
- Tax-efficient (salary deductions apply to ₹14.4L)
- Company expense deduction on ₹19.4L (salary + remuneration)
Tax Impact: Founder’s tax: ~₹3-4 lakh (depending on deductions)
Company’s tax saving: ~₹5-6 lakh on the expense deduction
Example 2: Bootstrap E-commerce Founder (Growing Stage)
Structure:
- Monthly salary: ₹60,000 (₹7.2 lakh annually)
- No dividend (reinvesting profits)
- Year-end remuneration: Only if targets met
Why This Works:
- Minimal cash outflow preserves working capital
- Enough for personal needs
- Company can claim expense
- Flexibility for performance bonus
Example 3: Digital Agency (LLP Structure)
Structure:
- Partner remuneration: ₹15,00,000 (within 40(b) limits)
- Interest on capital: ₹1,00,000 (12% on ₹8.33L capital)
- Profit share: ₹5,00,000 (tax-free)
Total income: ₹21 lakh
Why This Works:
- Remuneration reduces LLP’s taxable income
- Interest further reduces LLP tax
- Profit share is tax-free in partner’s hands
- Most tax-efficient structure for professionals
Example 4: Manufacturing SME (₹10 Crore Revenue)
Structure:
- Monthly salary: ₹1,50,000 (₹18 lakh annually)
- Director remuneration: ₹8,00,000 (year-end)
- Dividend: ₹4,00,000
Total: ₹30 lakh
Why This Works:
- High enough for founder’s lifestyle
- Strong income proof for business loans
- Tax-efficient distribution
- Company gets expense deduction on ₹26L
Compliance Checklist (2025)
For Salary:
Company Must:
Pass board resolution approving appointment and salary
Create employment contract/appointment letter
Set up proper payroll system
Deduct TDS under Section 192
Issue Form 16 annually
Pay PF/ESI (if salary crosses threshold)
File Form 24Q quarterly
Maintain attendance/working records
Founder Must:
File ITR showing income under “Salary”
Claim applicable deductions (80C, 80D, HRA)
Maintain Form 16
Choose appropriate tax regime
For Dividend:
Company Must:
Have distributable profits
Pass board resolution
Comply with Companies Act provisions
Deduct TDS at 10% (if > ₹5,000)
File TDS return (27Q)
Update accounts and reserves
File MBP forms if applicable
Founder Must:
Report dividend income in ITR
Pay tax at slab rate
Claim TDS credit
For Director Remuneration:
Company Must:
Check AoA allows remuneration
Pass board resolution
Ensure limits under Companies Act
Deduct appropriate TDS (192 or 194J)
File DIR-8 with MCA
Maintain service agreement
File TDS returns
Founder Must:
Report under correct head of income
File ITR with proper classification
Maintain service agreement copy
Claim deductions if applicable
Common Mistakes to Avoid
❌ Mistake 1: Taking Only Dividend
Many founders think dividend is tax-efficient because “company already paid tax.”
Reality: You’re taxed again at personal slab rate with no deductions. Salary is more efficient.
❌ Mistake 2: Excessive Salary with No Profits
Paying ₹5 lakh/month salary when company barely breaks even invites scrutiny. Remuneration should be reasonable relative to business performance.
❌ Mistake 3: Mixing Up Classification
Treating director remuneration as salary in one year and professional fees in another creates red flags. Be consistent.
❌ Mistake 4: No Documentation
Paying yourself without board resolutions, contracts, or proper TDS creates compliance gaps and disallowance risk.
❌ Mistake 5: Ignoring PF/ESI Thresholds
If your salary crosses ₹15,000/month, PF becomes applicable. Factor this in your structure.
❌ Mistake 6: Not Planning for Multiple Founders
If you have co-founders, ensure salary/remuneration is proportionate to role and time invested, not just shareholding.
The AdvoFin Strategic Recommendation
After working with hundreds of founders across startups, SMEs, and agencies, here’s the most balanced and tax-efficient structure for 2025:
🟢 Primary: Monthly Salary
Amount: ₹60,000 – ₹1,50,000 (based on revenue)
Purpose: Predictable income, loan eligibility, compliance
🟡 Secondary: Year-End Director Remuneration
Amount: 5-15% of profit
Purpose: Performance-based reward, tax-deductible
🔵 Tertiary: Dividend (Optional)
Amount: Based on retained earnings
Purpose: Wealth distribution, shareholder return
This 3-tier model gives you:
- Tax efficiency (deductions on salary)
- Cash flow flexibility (fixed + variable)
- Clean compliance trail
- MCA and IT Department friendly structure
- Business expense benefit for company
- Personal financial stability
Decision Framework: What Should YOU Choose?
Answer these questions:
1. Are you working full-time in the business?
- Yes → Salary is primary choice
- No → Director remuneration or dividend
2. Does your company have consistent profits?
- Yes → Use salary + remuneration + dividend combo
- No → Minimal salary only
3. Do you need regular income proof (loans, visa)?
- Yes → Salary is essential
- No → More flexibility
4. Is cash flow tight?
- Yes → Low salary + year-end remuneration
- No → Higher salary + dividend
5. Are you the only founder?
- Yes → Maximum flexibility
- No → Standardize structure across founders
Key Takeaways
Your compensation structure is strategic business design, not just tax planning.
As your company grows, your compensation model should evolve:
Stage 1 (Startup): Minimal salary, maximize cash for business
Stage 2 (Growth): Moderate salary + performance remuneration
Stage 3 (Maturity): Salary + remuneration + dividend combination
The Goal:
- ✅ Minimize total tax (company + personal)
- ✅ Maintain clean compliance
- ✅ Preserve cash flow
- ✅ Build personal financial stability
- ✅ Avoid scrutiny
The Right Structure in 2025:
- Saves tax for both you and the company
- Provides income stability
- Builds a clean compliance trail
- Supports your loan and credit needs
- Reduces audit and scrutiny risk
Frequently Asked Questions (FAQs)
Q1: Can I take both salary and director remuneration simultaneously?
Yes, absolutely. Many founders do this – monthly salary for regular income plus year-end director remuneration as a performance bonus. Both are deductible expenses for the company.
Q2: What’s the minimum salary I should take as a founder?
There’s no legal minimum, but taking at least ₹50,000-₹60,000/month is recommended for:
- Income proof for loans and credit cards
- Building PF corpus
- Demonstrating active involvement
- Tax deduction benefits
Q3: Is dividend tax-free for me if the company already paid tax?
No. The old dividend distribution tax (DDT) was abolished in 2020. Now dividends are taxed in your hands at your slab rate with no deductions available. This creates effective double taxation.
Q4: Can I pay myself salary if my company is making losses?
Technically yes, but it should be reasonable. Paying ₹2 lakh/month when company has ₹50 lakh loss will invite scrutiny. Keep it modest and justifiable based on your role and industry standards.
Q5: What if I’m both a director and a consultant to my own company?
You can structure it as director remuneration, but be clear about classification:
- If full-time director → TDS under 192 (salary)
- If providing specific services → TDS under 194J (professional fees)
Don’t keep switching between classifications – choose one and maintain consistency.
Q6: How much can I pay myself as remuneration in an LLP?
Under Section 40(b), LLP can deduct:
- ₹3,00,000 or 90% of book profit, whichever is more (for first ₹3L profit)
- For profit beyond ₹3L: 90% of balance book profit
Example: Book profit = ₹20 lakh
Maximum remuneration = ₹3,00,000 + (90% of ₹17L) = ₹3L + ₹15.3L = ₹18.3 lakh
Q7: Do I need to pay PF on my own salary as a founder-director?
If your salary exceeds ₹15,000/month, PF becomes applicable unless you’re explicitly exempt. However, many founders structure compensation to stay below this or factor in PF as part of retirement planning.
Q8: Can I claim HRA if I’m living in my own house?
No, HRA requires actual rent payment. If you own the house, you can:
- Claim home loan interest under 24(b)
- Pay rent to your parents/spouse (they must declare it as income)
Q9: Should I take new or old tax regime for salary income?
New Regime: Good if you have minimal deductions and want simplicity
Old Regime: Better if you have:
- Home loan (24b, 80C)
- HRA claims
- 80C investments (₹1.5L)
- 80D health insurance
- Other Chapter VI-A deductions
Calculate both scenarios before choosing.
Q10: What’s better for tax savings – higher salary or higher dividend?
Salary is almost always better because:
- You get standard deduction (₹50,000)
- HRA, LTA, and other exemptions
- 80C, 80D, and other deductions
- Company saves corporate tax on salary expense
Dividend gives you none of these benefits and is taxed at full slab rate.
Q11: Can I change my compensation structure mid-year?
Yes, but:
- Requires fresh board resolution
- May complicate TDS and payroll
- Better to plan at the start of financial year
- Maintain proper documentation for any changes
Q12: What documents do I need to maintain for salary payments to myself?
Essential documents:
- Board resolution approving appointment and salary
- Employment contract/appointment letter
- Monthly payslips
- TDS certificates (Form 16)
- PF/ESI records (if applicable)
- Bank statements showing salary credit
- Board meeting minutes for any revisions
Q13: Is sitting fees different from director remuneration?
Yes. Sitting fees are paid for attending board meetings (typically ₹5,000-₹50,000 per meeting). Director remuneration is overall compensation for managerial services. You can take both, but sitting fees alone won’t be enough for living expenses.
Q14: What if I have a co-founder with equal shares but different roles?
Salary and remuneration should reflect actual role and time commitment, not shareholding. For example:
- Technical co-founder (full-time): ₹1,20,000/month
- Business co-founder (part-time): ₹60,000/month
- Dividend: Equal (based on shareholding)
Document the rationale in board minutes.
Q15: How do I justify my salary to the tax department if questioned?
Maintain evidence of:
- Industry benchmarks for similar roles
- Company’s revenue and profitability
- Your qualifications and experience
- Time and effort invested
- Board resolutions and justifications
- Comparable salaries in peer companies
Keep compensation “reasonable and justifiable” – not arbitrary.
Final Word:
Your compensation structure shapes both your personal financial health and your company’s tax efficiency. Don’t treat it as an afterthought.
Plan it strategically, document it properly, and review it annually as your business grows. The right structure in 2025 will save you lakhs in taxes while keeping you fully compliant.
Still have questions? Contact AdvoFin Consulting for consultation.
📧 Email: info@advofinconsulting.com
📞 Phone: +91-92116-76467
🌐 Website: www.advofinconsulting.com
Disclaimer: This blog is for educational purposes only and does not constitute professional advice. Consult a qualified professional for specific situations.
