Salary vs Dividend: How Founder-Directors Should Take Money Out of a Company
Salary vs dividend for founder-directors: salary is deductible and taxed at slab, dividend comes from post-tax profit with 10% TDS above ₹10,000.
Short answer
For most founder-directors, a reasonable salary is the more tax-efficient way to draw money, because it reduces the company's taxable profit and gets the ₹75,000 standard deduction and nil tax up to ₹12.75 lakh under the new regime. Dividends come from profits already taxed at about 25.17% and are taxed again in your hands. Use dividends for surplus profits.
- Salary for company
- Deductible business expense if reasonable
- Dividend for company
- Paid from post-tax profits, not deductible
- Dividend TDS
- 10% above ₹10,000 a year, section 393(1)
- Salary TDS
- At slab rates through the year
- Standard deduction on salary
- ₹75,000 under new regime
- Company tax under section 200
- About 25.17%
How are salary and dividend taxed?
Salary paid to a director-employee is an expense for the company, so it reduces corporate tax. The director pays tax at slab rates on salary, with a ₹75,000 standard deduction under the new regime. The company deducts tax at source every month.
A dividend is a distribution of profit after the company has paid tax. Under section 200 of the Income-tax Act 2025 the company pays about 25.17% first. The shareholder then pays tax at slab rate on the dividend, and the company deducts 10% TDS when dividends to a shareholder exceed ₹10,000 in a financial year. Dividends need distributable profits and a board or shareholder decision.
Side-by-side comparison
The table compares the two routes for a resident founder who is both director and shareholder of a private company. It ignores surcharge, which applies only at higher income levels for both routes.
| Factor | Salary | Dividend |
|---|---|---|
| Deductible for company | Yes, if reasonable | No |
| Corporate tax before payment | None on the salary amount | About 25.17% under section 200 |
| Tax in founder's hands | Slab rates | Slab rates |
| Standard deduction | ₹75,000 (new regime) | None |
| TDS | Monthly on estimated salary tax | 10% if above ₹10,000 a year |
| Needs profits | No, payable even in a loss year | Yes, from distributable profits |
| Approvals | Board resolution and employment terms | Board recommendation; final dividend at AGM |
| Payable to all shareholders | No, only to the director | Yes, pro rata to all of the class |
| Signals to investors | Normal operating cost | Profit distribution |
What does a worked example show?
Take ₹12.75 lakh of pre-tax profit available for a founder with no other income. Paid as salary, the company pays no tax on it, and the founder's taxable salary is ₹12 lakh after standard deduction, which is fully covered by the rebate. Tax: nil.
Paid as a dividend, the company first pays about ₹3.21 lakh in tax, leaving about ₹9.54 lakh to distribute. That dividend falls within the ₹12 lakh rebate limit, so the founder pays no further tax, but the total tax is still ₹3.21 lakh. At higher incomes the gap remains because dividend income is taxed at slab rates after corporate tax.
When does a dividend make sense?
Dividends work when the company has surplus profits beyond what can reasonably be paid as salary, when other shareholders such as investors or family members are also entitled to returns, or when the founder is not an employee. Salary must be commensurate with services, because tax officers can disallow excessive payments to related persons. In a public company, managerial remuneration is also capped by section 197 of the Companies Act, a limit that does not apply to private companies.
Which should you choose?
Most founders use a mix of both. These rules help set the balance each year, but have your accountant model the numbers with your actual profit, other income and future funding plans.
- Founder with little other income: pay salary up to at least the nil-tax level under the new regime.
- Company making losses or reinvesting: salary only, since dividends need profits.
- Surplus profit after a market-rate salary: consider a dividend, or retain for growth.
- Investors on the cap table: dividends go to all shareholders, so use salary for founder compensation.
- Very high profits: compare total tax of salary at 30% plus surcharge against corporate tax plus dividend tax.
Related services
Sources
- TDS on dividend under section 393(1) (TDSMAN)
- Section 200, Income-tax Act 2025: tax on income of certain domestic companies (EZTax)
- Section 202 default tax regime under Income-tax Act 2025 (Ebizfiling)
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Is dividend income tax-free in India?
No. Dividends are taxable in the shareholder's hands at slab rates, and companies deduct 10% TDS when dividends exceed ₹10,000 to a shareholder in a year.
Can a private company pay any amount of salary to its director?
The Companies Act section 197 limits apply only to public companies. A private company can fix director salary by board and shareholder approval, but it must be reasonable for tax deduction purposes.
Is GST payable on salary to a director?
No, where the director is an employee receiving salary under an employment relationship. Fees or commission to non-employee directors attract GST under reverse charge.
Can I pay dividends if my company made a loss this year?
Generally only out of profits of earlier years or free reserves, subject to the conditions in the Companies Act. A loss-making company with no reserves cannot declare dividend.