Updated on November 26, 2024 12:51:12 PM
In India, the tax provisions concerning the remuneration paid to directors of a company are governed by Section 194J(1) (ba) of the Income Tax Act, 1961, specifically under the provisions relating to Tax Deducted at Source (TDS). While salary paid to employees is subject to TDS under Section 192, the remuneration paid to directors, other than salary, follows distinct guidelines.
The nature of such payments, the TDS rate, and the applicable sections vary depending on the type of remuneration and the director’s role in the company. This article aims to provide an overview of TDS provisions on Directors' Remuneration Other Than Salary, covering important aspects such as the types of remuneration, applicable tax rates, and the responsibilities of the company in deducting and remitting the tax.
Directors of a company can receive various types of remuneration apart from salary. Some common examples include:
TDS provisions are applicable on remuneration paid to directors, but there are different tax treatment criteria based on the nature of the payment.
Sitting fees paid to directors for attending meetings are taxable under the head "Income from Other Sources." The company is required to deduct TDS on such payments under Section 194J of the Income Tax Act. This section applies to payments for professional or technical services, which includes sitting fees.
Non-executive directors (i.e., those who are not part of the day-to-day management of the company) may receive remuneration in the form of sitting fees, commission, or other payments. For such directors, TDS is applicable in a similar manner as for other directors under Section 194J.
Executive directors (those who are involved in the day-to-day management of the company) may receive a combination of salary, commission, and other forms of remuneration. For commission or other payments, TDS is deducted under Section 194J. However, if an executive director is receiving remuneration under an employment contract (i.e., salary), then TDS will be deducted under Section 192, and not under Section 194J. Therefore, payments that are classified as salary (rather than commission or sitting fees) will be subject to different TDS provisions, including the tax slab rates applicable to individual employees.
Under section 194J(1)(ba), TDS on Directors remuneration other than salary (sitting fees, non-compete fees) there is no such limit to deduct TDS, which means any amount paid will be subjected to TDS under this section @10%.
Time of Deduction:
TDS on directors remuneration is to be deducted at the time of payment or credit to the account of the director, whichever is earlier. For example, if the remuneration is credited to the director’s account on the 1st of January, the TDS must be deducted on that date.
Deposit of TDS:
The company is required to deposit the TDS with the government by the 7th of the following month (for monthly deductions except for March, which is to be deposited on or before 30th April). If the company fails to deposit the TDS on time, it may face penalties and interest.
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TDS on directors remuneration (other than salary) is an essential compliance requirement for companies. By adhering to the relevant provisions of the Income Tax Act, companies ensure that they fulfill their tax obligations correctly and directors are taxed in accordance with the law.
The key takeaways for companies are:
For directors', it is equally important to be aware of the taxability of their remuneration, the TDS deducted, and the income reporting requirements to ensure compliance with the tax laws and avoid any penalties or interest for non-compliance.
Salary refers to regular payments made to directors who are in an employment contract with the company, typically classified as employees.
Remuneration other than salary includes (sitting fees, commission, or performance-related) payments which are not part of the salary package.
The TDS rate on sitting fees paid to directors is 10% under Section 194J of the Income Tax Act.
Yes, a director can receive both salary (if in an employment contract) and other remuneration (like sitting fees, commission, etc.). However, TDS on salary will be deducted under Section 192, while TDS on sitting fees and commission will be deducted under Section 194J.
Commission paid to directors is also subject to TDS under Section 194J at a rate of 10%. The commission could be a percentage of profits, revenue, or any other performance-linked remuneration.