Paying directors and owners in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Directors and owners in India can be paid through salary, professional fees, or a combination of both — and the route you choose determines which tax and compliance obligations apply.
Director or owner: why the distinction matters
Indian company law and tax law treat directors and owners differently, and the two roles do not always sit in the same person.
A promoter or shareholder receives returns through dividends, not salary. A director who actively works in the company — an executive or whole-time director — is typically paid a salary or remuneration under the Companies Act. In a private limited company, director remuneration must be authorised by the board and, in some cases, by shareholders through a resolution.
Getting this structure right from the start avoids disputes with auditors, the Registrar of Companies, and the income tax department.
Paying a director as an employee
When a director draws a regular monthly salary, the company treats them as an employee for payroll purposes. This means:
TDS on salary. The company must deduct tax at source under the applicable income tax slabs. Under the new default regime, rates rise progressively up to 30%. A 4% health and education cess applies on the tax amount. The section 87A rebate is available at lower income levels. The company deposits TDS with the government, files Form 24Q quarterly, and issues Form 16 at year-end.
EPF. A director on the payroll with a salary below the statutory wage ceiling is technically covered under the Employees' Provident Fund. In practice, many working directors draw salaries above the ceiling and opt out of mandatory EPF, but if their salary falls within the threshold, both employee and employer contribute at 12% each.
ESI. ESI applies where the employee's wages fall below the applicable wage threshold. Most directors drawing market-rate salaries will be above this, so ESI usually does not apply — but verify based on the actual salary figure.
Gratuity. If a director serves continuously for five years or more in an executive role, gratuity entitlement accrues in the normal way.
The company deducts and remits all statutory amounts just as it would for any senior employee. There is no separate payroll treatment for directors — the process is the same; only the board resolution authorising the remuneration sets it apart.
Paying through professional fees
Some directors — particularly non-executive or independent directors — are paid sitting fees or retainers rather than a salary. This is a professional fee arrangement, not employment.
Here the company deducts TDS under the relevant section for professional or technical services, not under the salary provisions. The director receives no Form 16; instead, TDS credit appears in their Form 26AS. The director then accounts for the income under "profits and gains from business or profession" or "income from other sources" in their personal return, depending on their tax position.
There is no EPF or ESI obligation on professional fees. Gratuity does not accrue either.
This route suits independent directors, consultants brought onto a board, or working owners who prefer to keep their engagement structured as a contract rather than employment. The trade-off is that the director loses access to salary-specific exemptions and benefits.
Dividends as owner compensation
A promoter or majority shareholder who does not draw a salary may take returns through dividends from retained profits. Dividends are taxed in the hands of the shareholder at the applicable income tax slab rate under the new regime — there is no longer a dividend distribution tax at the company level.
Dividends require sufficient distributable profits, board approval, and compliance with the Companies Act on declaration timelines. They cannot replace salary if the person is genuinely working as a director, because the tax department can question whether the remuneration structure is being used to avoid obligations.
Many founders use a combination: a modest salary to cover personal cash flow requirements and establish payroll compliance, with dividends drawn periodically from profits.
Labour Code implications in 2026
India's four consolidated Labour Codes have been in force since 2025. The Code on Wages, in particular, redefines "wages" in a way that affects how the basic salary component is structured. For directors on payroll, the definition matters because statutory deductions — including EPF contributions — are calculated on wages as defined under the Codes.
If a director's compensation package includes multiple allowances, the company should review whether the structure remains compliant with the new wage definition. Structuring a package that artificially suppresses the basic component to reduce statutory deductions carries regulatory and reputational risk, and the Codes have narrowed the room to do this compared with the earlier framework.
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