In India, companies pay remuneration to the directors for their services, which may include salary, sitting fees, commission, or other benefits. However, such payments are subject to tax implications under the Income Tax Act, 1961. One important aspect that companies must comply with is TDS (Tax Deducted at Source) on director remuneration.
This article will explore a comprehensive understanding of the rules, applicable sections, TDS rates, and compliance requirements related to TDS on director remuneration in simple terms.
Who is a Director?
A director is a person appointed to the board of a company to manage and oversee its affairs. Directors can be executive (involved in daily operations) or non-executive (not involved in daily management but may attend board meetings and provide guidance).
They may be paid in different forms for their services, such as:
- Salary (for executive roles)
- Sitting fees (for attending meetings)
- Commission or bonuses
- Reimbursements or perquisites
Nature of Director Remuneration
Director remuneration can be broadly categorized into two types based on the nature of the payment:
- Salary or Regular Remuneration – When a director is in full-time employment with the company, usually designated as a Whole-Time Director or Managing Director, and receives a fixed salary like any employee.
- Other Remuneration – When a director is not in regular employment but receives payments such as sitting fees, commission, or professional charges for advisory or consulting services.
The tax treatment and applicable TDS provisions vary based on this classification.
TDS Provisions Applicable
The relevant sections under the Income Tax Act for deducting TDS on director remuneration are:
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Section 192 – TDS on Salary
If the director is treated as an employee of the company and receives a salary, then TDS is deducted under Section 192. This is the same provision under which companies deduct TDS for regular employees.
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Section 194J – TDS on Professional Fees
If the director is not an employee and is receiving fees (such as sitting fees or consultancy fees), then TDS must be deducted under Section 194J as professional charges.
When to Apply Section 192
Section 192 is applicable when:
- The director is employed full-time with the company.
- He/she is receiving a monthly salary, allowances, and other employment-related benefits.
- A formal employment contract exists between the company and the director.
In such cases:
- TDS is deducted at applicable slab rates.
- The company must consider deductions like HRA, standard deduction, investments (under section 80C), etc., while calculating TDS.
- The director is considered a salaried employee for income tax purposes.
When to Apply Section 194J
Section 194J is applicable when:
- The director is not an employee.
- Payment is made in the form of professional fees, commission, or sitting fees.
- No employer-employee relationship exists.
In this case:
- TDS is deducted at 10% of the payment.
- No threshold limit applies (i.e., TDS must be deducted even if the payment is less than ₹30,000).
- The director cannot claim employment-related deductions.
Clarification by CBDT – Circular No. 713 dated 2 August 1995
The Central Board of Direct Taxes (CBDT) issued a clarification in Circular No. 713 stating:
“Commission and remuneration payable to a director who is not an employee should be subjected to TDS under Section 194J and not under Section 192.”
This circular helps in deciding whether TDS should be deducted under Section 192 or 194J based on the employment relationship.
TDS on Sitting Fees
Sitting fees paid to directors for attending board meetings or committee meetings are also considered as professional fees under Section 194J. Hence:
- TDS at 10% is applicable.
- No threshold limit applies.
- The company must deduct TDS before making the payment.
TDS on Commission Paid to Directors
Commission paid to directors, who are not employees, is also treated as professional fees under Section 194J. If the commission is part of the salary for an executive director, then TDS under Section 192 applies.
So, the nature of the commission depends on the role of the director.
TDS Return and Reporting
Once TDS is deducted, the company must:
- Deposit the TDS with the government by the 7th of the following month (except for March – due by April 30).
- File TDS returns:
- Form 24Q for Section 192 (salary payments)
- Form 26Q for Section 194J (professional fees)
- Issue TDS certificates:
- Form 16 for Section 192
- Form 16A for Section 194J
These are important for directors to file their income tax returns and claim TDS credits.
Practical Scenarios
Example 1:
ABC Pvt. Ltd. pays ₹2,00,000 per month to its full-time Managing Director. He is considered an employee and has a valid employment contract.
- TDS under Section 192 applies.
- The company will calculate TDS based on slab rates after allowing exemptions and deductions.
Example 2:
XYZ Ltd. pays ₹50,000 as sitting fees to a non-executive director every quarter.
- TDS under Section 194J applies.
- 10% TDS = ₹5,000 per quarter must be deducted and deposited.
Penalties for Non-Compliance
If a company fails to deduct or deposit TDS on director remuneration, it may face:
- Interest under Section 201(1A):
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- 1% per month for late deduction
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- 1.5% per month for late deposit
- Penalty under Section 271C: Equal to the amount of TDS not deducted or deposited
- Disallowance of expenses: The amount of director remuneration may be disallowed under Section 40(a)(ia), increasing taxable income.
Therefore, timely and correct deduction and deposit of TDS are essential.
Director’s Responsibility
Directors receiving remuneration should:
- Check TDS certificates (Form 16 or 16A) issued by the company.
- Reconcile with Form 26AS on the income tax portal.
- Disclose the income correctly under the head “Income from Salary” (for executive directors) or “Income from Other Sources/Professional Fees” (for non-executive directors).
- Claim TDS while filing their income tax return.
Summary Table
| Type of Payment | Director Type | Section | TDS Rate |
| Salary | Executive (employee) | 192 | Slab Rate |
| Sitting Fee | Non-Executive | 194J | 10% |
| Commission (non-salary) | Non-Executive | 194J | 10% |
| Commission (salary) | Executive | 192 | Slab Rate |
Conclusion
Understanding the rules of TDS on director remuneration is crucial for both companies and directors to ensure proper tax compliance. The key is to identify whether the director is in an employee-employer relationship with the company. Based on that, the applicable section (192 or 194J) can be determined.
Companies should maintain clear documentation, deduct and deposit TDS on time, and issue proper certificates. Directors should monitor their TDS and file accurate returns. Proper compliance not only avoids penalties but also builds transparency and trust…!
Related Services
Frequently Asked Questions
1: Is TDS applicable on sitting fees paid to directors?
Yes, TDS is applicable on sitting fees paid to directors. Such payments are considered professional fees and are subject to TDS under Section 194J of the Income Tax Act. The applicable TDS rate is 10%, and there is no minimum threshold—TDS must be deducted even if the amount is below ₹30,000.
2: How to decide whether TDS should be deducted under Section 192 or 194J for director payments?
TDS should be deducted under Section 192 if the director is a full-time employee (such as a Whole-Time Director or Managing Director) and receives a salary. In this case, an employer-employee relationship exists.
If the director is not in employment and is paid fees or commission for attending meetings or giving professional advice, then Section 194J applies, and TDS should be deducted at 10%.
3: What happens if a company fails to deduct TDS on director remuneration?
If a company fails to deduct or deposit TDS on director remuneration, it may face:
- Interest and penalty under Sections 201(1A) and 271C.
- Disallowance of expenses under the provision of Section 40(a)(ia), leading to higher taxable income.
- Prosecution in extreme cases of wilful default.
