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Founders Salary vs Dividends in a Tax efficient way

Tax planning 95 views 1 replies

suraj puthane

1 Points Joined April 2025

Hi, I am the founder along with my friend as the co-founder of our company. We are in a Dilemna as how to save taxes on our income through the company.

Should we take only salaries?
Should we pull out a percentage of Quarterly Nett profits (maybe 15%-20% of quarterly profts) and share them as per our share holding?
Should we make a combination of base salary plus quarterly profit share?

which of the above options would be viable for us to save taxes?

and

what are the taxes applicable for each of the option above?

Please advice.

Replies (1)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9020 Points Joined December 2011

Tax Planning for Company Income As the founder and co-founder of your company, you're looking to optimize your tax strategy.

Let's explore the options you've mentioned:

Option 1: Taking Only Salaries - *Tax Implication*: You'll be subject to income tax on your salary, which will be taxed at your individual income tax slab rate. -

*Pros*: Simple to implement, and you'll have a regular income stream. -

*Cons*: You might miss out on potential tax benefits available to shareholders.

Option 2: Pulling Out a Percentage of Quarterly Net Profits -

*Tax Implication*: The profit share will be considered dividend income, which is taxable at a flat rate of 20% (plus surcharge and cess) if the company distributes dividends. -

*Pros*: You can reduce your taxable income, and the company can retain more profits for growth. -

*Cons*: The company will need to pay dividend distribution tax (DDT) on the distributed profits.

Option 3: Combination of Base Salary and Quarterly Profit Share -

*Tax Implication*: You'll be subject to income tax on your salary, and the profit share will be taxed as dividend income. -

*Pros*: You can balance your regular income needs with the potential tax benefits of dividend income. -

*Cons*: The company will need to pay DDT on the distributed profits, and you'll need to manage the tax implications of both salary and dividend income.

Additional Considerations - *Tax Rates*: The tax rates applicable to your income will depend on your individual income tax slab rate and the company's tax profile. -

*Company Tax Profile*: Your company's tax profile, including its tax losses or deductions, can impact the tax implications of each option. -

*Shareholding Ratio*: Your shareholding ratio will determine the proportion of profits you'll receive as dividend income.

Recommendation To determine the most viable option for - *Assess your company's tax profile*: Evaluate your company's tax losses, deductions, and other factors that may impact your tax strategy. - *Determine the optimal tax structure*: Based on your company's tax profile and your individual tax situation, determine the most tax-efficient structure for your income. -

*Implement the chosen strategy*: Help you implement the chosen strategy, including setting up the necessary accounting and tax arrangements.

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