Tax-Efficient Approach to Retrieving Unpaid Salary in a Private Limited Company

Tax planning 82 views 3 replies

Rajah

Namesake Director

69 Points Joined December 2011

Hello Sirs

We are a private limited company, jointly owned by my brother and me, with each of us holding 50% of the shares. While I am the director responsible for managing the business, my brother is a silent partner with no involvement in operations. However, since January 2009, he has been receiving a salary of ₹1 lakh per month. Over 192 months (from January 2009 to February 2025), he has consistently withdrawn his salary.

For personal reasons, I have not taken any salary during this period, despite managing and running the business. After discussing the matter, my brother and I have agreed that I should receive my unpaid salary of ₹1 lakh per month for 192 months, along with 5% annual compound interest on the outstanding amount.

The company has never declared dividends and currently holds approximately ₹3.5 crore in fixed deposits. Given this, what would be the most tax-efficient way for me to receive my unpaid dues? My brother and I remain in complete agreement and continue to be partners in harmony.

Thank you in advance for any help/advice you may be able to provide. I truly appreciate it.

Replies (3)

Rama chary Rachakonda

Master in Accounts & high court Advocate

8756 Points Joined December 2011

Receiving unpaid dues as a director can be a complex issue. To ensure tax efficiency, consider the following options:

Option 1: Receive Arrears of Salary - *Tax Implications:* Arrears of salary will be taxed as income from salary, and the tax will be deducted at source (TDS) by the company. - *Benefits:* Simple to implement, and the company can claim a deduction for the arrears of salary paid.

Option 2: Receive Interest-Free Loan or Advance - *Tax Implications:* Interest-free loans or advances are subject to tax implications under the Income-tax Act, 1961. The company may be liable to pay fringe benefit tax (FBT) on the interest-free loan or advance. - *Benefits:* Can be beneficial if the loan or advance is interest-free and not subject to FBT.

Option 3: Receive Dividend - *Tax Implications:* Dividends are taxable in the hands of the recipient. However, since the company has accumulated profits, dividend distribution might be a tax-efficient way to receive the unpaid dues. - *Benefits:* Dividend distribution can be a tax-efficient way to receive the unpaid dues, especially if the company has accumulated profits.

Option 4: Receive Settlement of Unpaid Dues Through a Family Settlement -

*Tax Implications:* Family settlements are generally not taxable. However, it's essential to ensure that the settlement is genuine and not a tax avoidance scheme. -

Benefits:

Can be a tax-efficient way to receive the unpaid dues, especially if the settlement is genuine and not a tax avoidance scheme.

To determine the most tax-efficient way, consider consulting a tax professional or chartered accountant.

They can assess your specific situation and provide personalized guidance. Additionally, ensure that: -

All transactions are properly documented and recorded in the company's books. -

The company complies with all applicable tax laws and regulations. - The transactions are genuine and not intended to avoid taxes.

Gowripriya Saraswathula

2 Points Joined February 2025

Ensure all payments align with company accounts, tax rules, and cash flow.
Always document decisions properly (e.g., board minutes for dividends).
Consult an accountant to optimize the approach based on your financial situation.

KIRAN CHINNALA

2 Points Joined February 2025

Ensure all payments align with company accounts, tax rules, and cash flow. Always document decisions properly (e.g., board minutes for dividends). Consult an accountant to optimize the approach based on your financial situation.