Salary vs Dividend for Company Directors

Last Updated on August 7, 2026

Directors who also own shares in their company have a genuine choice most employees do not: they can pay themselves through salary, dividends, or a mix of both. The two routes are taxed completely differently, and picking the wrong mix quietly costs money every single year, not through any one bad decision, but through the compounding effect of a less efficient structure.

This guide breaks down how salary and dividends are actually taxed for a director-shareholder in India, the legal limits on each, and the factors that should shape your own mix.

What is Director Salary?

Director salary is remuneration paid to a whole-time or managing director in their capacity as an employee of the company, taxed under the head Salaries. It is treated the same way as any employee’s salary for TDS purposes, deducted monthly under Section 192, and is fully deductible as a business expense for the company, subject to compliance with the Companies Act.

What is a Dividend?

Dividend is a distribution of the company’s post-tax profits to its shareholders, including directors who hold shares. Since the Dividend Distribution Tax was abolished from April 2020, dividends are no longer taxed at the company level; instead, the entire tax burden shifted to the shareholder, who reports it as income and pays tax at their applicable slab rate.

Why the Distinction Matters: The Double Taxation Effect

Salary is deducted before the company calculates its taxable profit, so it reduces the company’s tax bill directly. Dividend works the opposite way: the company first pays corporate tax on its full profit, and only the remaining post-tax amount is available for distribution, which is then taxed again in the director’s hands at slab rates. This layered taxation is why dividends are generally the less efficient route for extracting value from a company, rupee for rupee, compared to salary.

Who Needs to Think About This Mix?

• Founders who are both directors and majority shareholders of their private limited company
• Family-run companies where directors also hold significant equity
• Startups planning founder compensation alongside eventual profit distribution
• Companies with healthy distributable profits considering a reward beyond salary

Legal Limits You Cannot Ignore

• Total managerial remuneration is capped at 11% of net profits under Section 197 of the Companies Act, but this cap applies only to public companies. Private limited companies (the majority of readers here) are exempt from the Section 197 ceiling under MCA Notification G.S.R. 464(E) dated 5 June 2015, provided the company has not defaulted on filing its financial statements or annual return with the ROC. A private company that maintains clean ROC compliance can generally pay director remuneration without a statutory cap.
• Dividends can only be declared out of genuine profits, after providing for depreciation, under Section 123
• Remuneration beyond prescribed limits generally needs shareholder approval by special resolution
• Unpaid declared dividends must be transferred to a separate account within 5 days of declaration
• Salary isn’t purely a tax decision; it can also trigger statutory obligations that dividends do not, including EPF contributions (where applicable), gratuity accrual once a director-employee completes 5 years of service, and potential coverage under labour welfare legislation. These add real cost beyond the headline TDS figures and should factor into the overall structuring decision.

How Each is Taxed

Under the new tax regime for FY 2025-26, a director drawing only salary pays zero tax up to ₹12.75 lakh, thanks to the ₹75,000 standard deduction stacking on top of the ₹60,000 Section 87A rebate. A director taking the same amount purely as dividend only gets the ₹12 lakh rebate threshold, with no standard deduction to push it further a concrete, quantifiable version of the double-taxation disadvantage discussed above.

Note: The 10% dividend TDS under Section 194 applies to resident shareholders only. For NRI director-shareholders, dividend TDS is deducted under Section 195 at 20% (plus surcharge and cess), unless a lower rate applies under an applicable DTAA with the shareholder’s country of residence.

Other Ways Directors Are Paid

Non-executive directors, who are not employees, are typically paid sitting fees or commission rather than salary. These payments are taxed under Section 194J(1)(ba), with 10% TDS applying to any amount, without a minimum threshold, and are reported under Profits and Gains from Business and Profession rather than Salaries.

Beyond income tax, sitting fees and commission paid to non-executive directors also attract GST under the Reverse Charge Mechanism (RCM) at 18%, since these payments are treated as a taxable supply of services by the director to the company (Notification No. 13/2017-Central Tax (Rate)). The company, not the director, is liable to pay this GST directly to the government and may claim input tax credit where eligible. Executive director salaries, by contrast, fall under Schedule III of the CGST Act and are entirely outside GST’s scope.

A share buyback is a further alternative worth noting: since October 2024, buyback proceeds are taxed directly in the shareholder’s hands at their applicable slab rate (as deemed dividend) rather than through a flat company-level tax as before. This makes buybacks a relevant, if less common, third route for extracting accumulated value best evaluated alongside salary and dividend, not as a routine annual mechanism.

Documents Required

• Board resolution approving the director’s salary or remuneration structure
• Shareholder approval, where remuneration exceeds prescribed limits under Section 197
• Board resolution declaring dividend, followed by shareholder approval at the AGM for final dividend
• PAN details of the director for accurate TDS deduction and reporting

Need help documenting your remuneration structure correctly? Our experts can assist you.

Compliance Requirements

• Deposit salary TDS by the 7th of the following month, and file Form 24Q quarterly
• Deposit dividend TDS and report it correctly in the company’s TDS returns
• Pay declared dividends within 30 days of declaration, as required under Section 127
• Maintain board and shareholder resolutions to support both salary and dividend payments

Penalty / Consequences

• Legal: Remuneration exceeding Section 197 limits without proper approval can be challenged and recovered from the director
• Financial: Late TDS deposit attracts interest and penalties under Sections 234E and 271C
• Business: Declaring dividend without adequate distributable profits violates Section 123 and can attract regulatory action

Structure director remuneration correctly to avoid compliance exposure.

Common Misconceptions

• Taking the tax efficiency of dividends based on abolition of DDT alone
• Pay remuneration exceeding the cap prescribed by section 197 without shareholder approval
• Distributing dividends without sufficient distributable profits
• Treating remuneration paid to a non-executive director the same as salary for TDS purposes

Advantages of Well-structured Combination

• Tax burden of the business is lowered because of salary deduction facility
• Director earns profits as an owner besides salary from the business
• Maintains compliance of remuneration in accordance with the cap and shareholder approval provisions of the Companies Act
• Provides scope to alter the combination according to the profitability of the business each year

Why Taking a ‘Loan’ From Your Own Company Doesn’t Avoid the Tax Question?

A common workaround directors attempt is taking a loan or advance from the company instead of declaring salary or dividend, assuming this sidesteps tax entirely. It does not. Under Section 2(22)(e), if a closely-held (private) company gives a loan or advance out of its accumulated profits to a shareholder holding 10% or more of voting power, that amount is treated as a deemed dividend and taxed in the shareholder’s hands at slab rates, exactly as if it had been formally declared. Because no dividend was actually declared, the company typically hasn’t deducted any TDS on it, leaving the director to self-report and pay the full tax liability at return-filing time, often an unwelcome surprise. This provision does not apply if the loan is given in the company’s ordinary money-lending business, or if the company has no accumulated profits at all.

Practical Scenario

A founder-director of a profitable private limited company initially takes the entire annual payout as dividend, assuming it is simpler since no monthly TDS tracking is needed. Over the year, the company pays corporate tax on its full profit, and the founder then pays slab-rate tax again on the dividend received, resulting in a noticeably higher combined tax outgo than if a larger portion had been structured as salary, which would have reduced the company’s taxable profit directly. The following year, the founder restructures the payout as a mix of salary and a smaller dividend, improving the overall tax efficiency.

Expert Tips / Best Practices

• Model both structures against actual expected profit before finalising the mix
• Keep salary within Section 197 limits to avoid needing additional shareholder approval
• Declare dividend only when distributable profits are genuinely healthy, not for cash flow convenience
• Revisit the mix each year, since profitability and personal tax slabs can both change

Salary vs Dividend: Head-to-Head Comparison Table

How Kanakkupillai Can Help?

Kanakkupillai helps director-shareholders model salary versus dividend structures against actual company profitability, ensures compliance with Section 197 limits and dividend declaration rules, and manages TDS filings for both, so remuneration stays both tax-efficient and compliant.

Conclusion

Salary and dividends cannot be treated in the same way as the means of paying yourself as a director, since their taxation procedures are entirely different. The choice between them would depend on the profits of your company and your financial requirements during the year. It is a known fact that salary payments will always be more tax-efficient than dividends since they are deducted before the application of corporation taxes.

FAQs

1. Is dividend completely tax-free for a director-shareholder?

No, dividend is fully taxable in the recipient’s hands at their applicable slab rate. The Dividend Distribution Tax was abolished in 2020, but that only removed the company-level tax, not the shareholder’s own liability.

2. Can a company pay a director only through dividend and no salary?

Yes, this is legally possible if the director does not hold an employment role, but it is generally less tax-efficient overall, since dividends are paid from post-tax profits rather than being a deductible expense.

3. What is the maximum salary a director can draw from a private company?

Total managerial remuneration under Section 197 applies only to public companies, capped at 11% of net profits. Private limited companies, which is what most director-shareholders reading this operate, are exempt from this cap under a 2015 MCA notification, as long as the company’s ROC filings (AOC-4 and MGT-7) are current. Public companies exceeding the 11% cap need shareholder approval by special resolution and, in some cases, are subject to Schedule V limits if profits are inadequate.

4. How is TDS different for salary and dividend?

Salary TDS is deducted monthly under Section 192 based on projected annual income and applicable slab rates. Dividend TDS is deducted at a flat 10% under Section 194, only once payments to a shareholder exceed Rs. 10,000 in a financial year.

5. Can a non-executive director receive dividend as well as sitting fees?

Yes, if the non-executive director also holds shares in the company, they can receive dividend on those shares in addition to sitting fees or commission, since these are treated as separate types of income under different tax provisions.

6. Does paying salary instead of dividend affect the company’s ability to pay other shareholders?

Salary is a business expense paid regardless of profit distribution decisions, while dividend must be paid proportionately to all shareholders of that class. Increasing a director’s salary does not restrict what other shareholders can receive as dividends from remaining profits.

7. Does the Section 197 remuneration cap apply to private limited companies?

No. Section 197’s 11% cap applies only to public companies. Private limited companies are exempt under a 2015 MCA notification, provided they haven’t defaulted on filing their financial statements or annual return with the ROC.

8. Is GST applicable on payments made to directors?

Executive director salaries are outside GST’s scope. However, sitting fees and commission paid to non-executive directors attract 18% GST under the Reverse Charge Mechanism, payable by the company, not the director.

9. Is dividend TDS the same for NRI director-shareholders?

No. Resident shareholders face 10% TDS under Section 194. NRI shareholders are taxed under Section 195 at 20% plus surcharge and cess, unless a lower DTAA rate applies.