REMUNERATION TO RETIRED DIRECTOR

Can a Private Limited Company through its Director Policy may incorporate following things

"On Retirement of Executive Director or Managing Director he shall be entitled to monthly pension equal to his last drawn salary for his entire lifetime.

In case of his demise during superannuation period or on his demise while he is in service as director, his/her spouse shall be entitled for half of last drawn salary for his/her lifetime.

This would be applicable only in case he/she outlives his spouse, no other person/dependent shall be entitled for this benefit.

However, in case director disqualified, terminated or resign for whatsoever reason, he shall not be entitled for this benefit."

Please tell with company act as well as income tax act approach.

Hi Deepali,

Your question about remuneration (pension) to retired directors in a Private Limited Company via a Director Policy is quite relevant. Let me explain the legal and tax implications under the Companies Act, 2013 and Income Tax Act, 1961.

1. Can a Private Limited Company provide pension/retirement benefits to directors?

Under Companies Act, 2013:

The Act does not prohibit a company from providing pension or retirement benefits to its directors.
Such benefits must be authorized by the Articles of Association or Board/Shareholders’ resolution.
The terms for pension, including eligibility, amount, and period, can be incorporated in a Director Remuneration Policy or a formal agreement.
However, remuneration to directors (including pension) should comply with:
- Section 197 (limits on managerial remuneration)
- Schedule V (remuneration in case of inadequate profits or no profits)
- Board/shareholders' approval wherever required.
Pension payable to a retired Director can be treated as part of managerial remuneration, so overall remuneration limits apply (unless exempted under Schedule V).

2. Regarding your specific policy terms:

Monthly pension equal to last drawn salary for lifetime is a significant commitment.
Allowing spouse half pension on director’s demise is allowed as per company policy.
Exclusion clauses for disqualification or termination are valid if incorporated clearly.
The company must approve this policy formally (Board/Shareholders) and update necessary documents (AOA).

3. Income Tax Act implications:

For the Director (recipient):

Pension paid by the company to a retired director is taxable as “Income from Salary” under Section 17(1).
It will be included in the Director’s income and taxed at applicable slab rates.
It is not considered a “pension” under section 57, which is applicable for government or other specific pension types.

For the Company:

Pension paid as remuneration is an allowable business expense under Section 37(1) (subject to the limits on managerial remuneration under Companies Act).
The company should ensure compliance with TDS provisions and deduct tax on pension paid.

4. Summary:

Aspect	Position
Legality of pension to retired director	Allowed, subject to company policy & Board/shareholder approval
Compliance under Companies Act	Must comply with remuneration limits (Section 197, Schedule V)
Taxability in Director’s hands	Taxable as salary income
Company’s tax treatment	Deductible expense, subject to limits
Formal documentation required	Board resolution, updated Articles/Policy

Recommendations:

Draft a clear Director Remuneration/Retirement Policy and get it approved.
Ensure limits on managerial remuneration are respected or seek Central Government approval if required.
Maintain proper documentation of payments and TDS compliance.
Inform the Director about tax implications.