There's some brouhaha about salaries of founders in a private company, so let me do a little thread about why it's still probably tax efficient to pay yourself through salaries versus other mechanisms.
The dividend is the least tax efficient mechanism now. The company earns Rs. 100, pays Rs.25 tax, and if it distributes the remaining 75, that can get taxed at 42.74% (highest tax bracket) so the founder gets Rs. 43 (Effectively 57% taxes)
Salary is better. The company earns Rs. 100, pays Rs. 100 as salary, founder pays 42.74% tax, company has no profit so it pays no tax (salary is deductible). Effective tax rate: 42.74%.
But the companies act restricts payouts to 10% of profit (you need govt permission for more)
But the companies act restricts payouts to 10% of profit (you need govt permission for more)
The most efficient is a buyback (marginally). Company earns Rs. 100, pays Rs. 25 tax, is left with Rs. 75
Buyback tax is 20% so if it buys back Rs. 75 worth, it pays Rs. 15 tax and founder gets Rs. 60 (but no tax on that at all).
Effective tax rate: 40%.
Buyback tax is 20% so if it buys back Rs. 75 worth, it pays Rs. 15 tax and founder gets Rs. 60 (but no tax on that at all).
Effective tax rate: 40%.
Buybacks are a pain if the company has debt since there are rules against buybacks which take debt/equity ratios too high. Also you can only do once a year, and you can't raise capital for another 6 months.
However the difference between a buyback and salary is small (just 2.74%) so it may be simpler to just take a salary.
This is the clean part. There are lots of other legal but complex or questionable mechanisms to distribute profit, but in a private co there's no need to bother
This is the clean part. There are lots of other legal but complex or questionable mechanisms to distribute profit, but in a private co there's no need to bother
The outrage against high salaries in a private organization is unnecessary. Remember that the alternative is to simply leave the money in the company and they can use anyhow as they seem fit, and that's only 25% tax.
(Company can buy cars, or have AGMs in honolulu etc)
(Company can buy cars, or have AGMs in honolulu etc)
Few corrections:
Tax on dividend is capped at 35%. So effective tax on dividend is 51.25% (not 57%) but it's still the worst.
Also salaries in private ltd cos is not restricted. And in public (even unlisted public) needs only shareholder permission, not govt. (Amended in 2018)
Tax on dividend is capped at 35%. So effective tax on dividend is 51.25% (not 57%) but it's still the worst.
Also salaries in private ltd cos is not restricted. And in public (even unlisted public) needs only shareholder permission, not govt. (Amended in 2018)
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