TAX PLANNING OF DIRECTORS
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
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 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:
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).
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.
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.
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.
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