Components to include in Director’s Salary Structure to reduce tax burden- Tax planning for the Director & Company.

As a law-abiding citizen, it is a moral duty to pay the taxes which are a fee charged by the government on a product, service, or income. Every citizen earning something is required to pay the tax which he can not and must not avoid. However, the amount of the tax payable can be reduced by a proper tax planning for both the directors and the company.

One can lower your total tax outflow by accounting for all payables, permissible exemptions, deductions, and reliefs available to you under the Tax Act. Hence, tax saving activity is part of the whole tax planning exercise, whereby you as a tax payer can reduce your total tax liability.

Tax planning for the Director of the company

The Liability of the Director in a Company is limited to the sum invested in the Company but simultaneously he is liable to pay taxes on the salaries or remuneration he draws from the company. When the company pays salary or remuneration to the director, it is a way for the company to save tax.

Director’s salary as Tax saving tool for Private Limited Company

• A director is a person who looks after the performance of the company and administers a particular part of the company
• Easiest way of saving tax is to give salary to their directors.
• As the founder of the company, instead of sharing the profit as a dividend, you can share the profit as salary.
• Salary is the allowable expense of a private limited company
• Hence for example if a company is making a profit of rs. 4 lakh, company can pay salary to to directors, say 2 lakhs to each director.

However, salary being personal income, the Director has to pay tax for such income earned from the company.

Suggested read: How to save tax in Private Limited Company?

Difference between salary of Junior employees and Senior employees

• For the Junior employees need a higher monthly payout. They can get that by opting for a lower basic salary and adding other fixed allowances in the salary structure such as food allowance, medical reimbursement, conveyance allowance, telephone, etc.
• These allowances are fixed and payable monthly. Employees may get taxed on these to a certain extent, but at a lower rate.
• As far as Senior employees fall into a higher tax bracket. For them, tax savings get priority over a higher take-home salary.
• A higher basic salary would fetch additional tax benefits for such individuals.

How to plan Director’s salary in company for tax saving purpose?

While many directors take enormous efforts to earn a salary, it is also equally important to restructure the salary well, in order to save tax on his hard-earned salary. if the director does so, he will have a greater “Net Take Home” (NTH) pay, which will allow him save some extra bucks in his pocket. Let us have a look at the ways the director can save tax. The director can be considered as an employee in the following circumstances:

• Director remuneration needs to be declared as “Salaries” in the books of the company.
• The salary subjected to TDS under Section 192 of the Income Tax Act, 1941.

However, the company should restructure the salary components for the director, so that it proves to be beneficial tax planning for both, the company and the director. Let us have a look at the salary components that can be used by a director to minimize his tax burden and plan his salary structure accordingly.

Basic Salary

Basic salary is the base of the head of income. It is important to set the basic salary right as it constitutes almost 30% to 40% of the cost to company. So having a high basic salary may lead to a higher tax liability. On the other hand if the basic salary is too low, the other benefits such as Leave Travel Allowance (LTA), House Rent Allowance (HRA) and superannuation benefits will also be reduced. So the basic salary shall be planned very carefully.

House Rent Allowance (HRA)

If the director is paying rent for an accommodation, then the organization can extend the HRA benefits to the director. This is another vital component that can help the director to reduce your tax liability.

To be able to claim this deduction, it is essential that it form a part of one’s salary. Amount paid as HRA can be claimed as tax exempt, subject to certain limits, terms and conditions.

The lowest of the following amounts will be tax-exempt:

• Actual House Rent Allowance received.
• Rent paid in excess of 10 percent of salary plus dearness allowance.
• 50 percent of salary plus dearness allowance in case of a house located in metro cities (Mumbai, Kolkata, Delhi or Chennai).
• 40 percent of salary plus dearness allowance in case the house is located in non-metro cities.

The tax benefit is available to the person only for the period in which the rented house is occupied.

Meal Allowance through Food Coupons / Food Cards

Food allowance can be given by the employer through the provision of food at working hours or through pre-paid food vouchers/coupons. For instance, vouchers (not transferable) are tax-exempt to the extent of Rs 50 per meal.

However, the exemption is also available in case your employer provides you food vouchers / cards of value that can be used at eating joints. The exemption limit in this case is restricted to Rs 2,500 per month for a food voucher / card value.

Leave Travel Concession (LTC)

An employer provides LTA to employees to help them meet travel expenses incurred for travel with family to any place in India.

Such exemption from tax is only for an amount equal to the cost of travelling the shortest distance to the destination whether by air, rail or recognized public transport system.

Also, such exemption is limited to the extent of actual expenses incurred i.e. you can claim exemption on the LTC amount OR the actual amount incurred, whichever is lower.

This component can be availed by an employee by submitting travel bills/tickets to his employer.

Education and Hostel allowance of the children

If the director is married with kids, and if the company agrees to provide with education allowance, then the same can help in the reduction of tax liability. Such exemption extended to the director under the Income Tax Act is Rs 100 per month for a maximum of two children (i.e. in other words Rs 2,400 p.a. totally).

Similarly, if the children are staying in a hostel then a maximum of Rs 300 per month per child but subject to a maximum of two children will be available to the director as an exemption (i.e. Rs 7,200 per annum).

Medical reimbursement

During the year if you and / or your family members have visited a doctor or bought medicines from a chemist, all the expenditure incurred by you and / or your family members during the year for medical purposes would help you in reducing your tax liability.

Car maintenance allowance

The reimbursement of car expenses (used partly for official and partly for personal purposes) to an employee could be exempt up to specified limits depending on whether the car is owned by the employer or by the employee.

Uniform allowance

This covers allowance granted by the employer to the employee to meet the cost of purchase and/or maintenance of uniform worn during the performance of the duties of employment.

Gift voucher

The value of a gift, or voucher, or token provided by an employer, the aggregate value of which does not exceed Rs 5,000 annually, is tax-free in the hands of an employee.

TDS on salary of the director

• The part of director remuneration which are declared as ‘Salaries’ in the books of a company and subjected to TDS under section 192 of the IT Act, will not be taxable being consideration for services by employee to employer.
• The part of directors remuneration which is declared separately other than ‘salaries’ in the company’s account and subject to TDS under 194J of the IT Act as fees for professional or technical services shall be treated as consideration for providing services and liable for tax under reverse charge mechanism.

Conclusion

In this manner the director and the company, by proper tax planning, should be able to minimize his tax incidences. The director by getting and the Company by paying various amenities or benefits and perquisites.