Tax Planning for Business Owners: Salary vs Dividend vs Partner Remuneration
How you take money out of your business can change your total tax bill significantly. The best method depends on your business structure, profit level, and whether you want to reinvest or withdraw the profits. This guide compares the main options for company directors and partners in firms and LLPs, with numbers.
Option 1: Private limited company: salary or dividend?
Director salary (remuneration)
- Deductible for the company, reducing profit taxed at 25.17%
- Taxed in the director’s hands as salary at slab rates, with the ₹75,000 standard deduction (new regime)
- TDS under section 392 (old 192)
- Must be reasonable and approved by the board/shareholders. For private companies, managerial remuneration limits under section 197 don’t apply
Dividend
- Not deductible: paid from profits after company tax (25.17% under the 22% regime)
- Taxed again in the shareholder’s hands at slab rates
- TDS at 10% above ₹10,000
Worked comparison: ₹30 lakh of pre-tax profit to distribute to one owner-director (new regime, FY 2026-27)
| All as salary | All as dividend | |
|---|---|---|
| Company tax | Nil (profit fully paid out as salary) | 25.17% × ₹30 lakh = ₹7.55 lakh |
| Amount paid to owner | ₹30 lakh | ₹22.45 lakh |
| Owner’s personal tax (new regime) | On ₹29.25 lakh (after standard deduction) ≈ ₹4.76 lakh (incl. cess) | On ₹22.45 lakh ≈ ₹2.72 lakh (incl. cess) |
| Total tax | ≈ ₹4.76 lakh | ≈ ₹10.27 lakh |
| Owner’s take-home | ≈ ₹25.24 lakh | ≈ ₹19.73 lakh |
At this level, salary is clearly more efficient for distributing profits. Dividends make more sense for non-working shareholders (e.g. investors or family members not employed in the business), or when the owner’s personal income is already in the 30% bracket and the company retains part of the profit at 25.17%.
A balanced approach: pay a reasonable salary to working directors (deductible, and it builds a documented income history for loans and visas), and retain surplus profit in the company for growth, taxed at 25.17%. Pay dividends only when there is a real need.
Option 2: Partnership firm or LLP: remuneration and interest
A firm or LLP pays 30% tax (31.2% with cess, more with surcharge above ₹1 crore). But partners’ remuneration and interest on capital are deductible within limits, and the share of profit is exempt in partners’ hands.
Limits (section 40(b), as amended from AY 2025-26)
| Book profit | Maximum deductible remuneration to working partners |
|---|---|
| First ₹6 lakh (or a loss) | ₹3 lakh or 90% of book profit, whichever is higher |
| Balance | 60% of book profit |
- Interest on capital: up to 12% a year simple interest, if authorised by the partnership deed.
- Remuneration must be authorised by the deed and paid only to working partners.
- TDS (section 194T / 393(3)): from 1 April 2025, the firm deducts 10% TDS on salary, remuneration, commission, bonus and interest to partners above ₹20,000 in the year.
Example: book profit ₹40 lakh. Maximum remuneration = ₹5.4 lakh (90% of ₹6 lakh) + 60% of ₹34 lakh (₹20.4 lakh) = ₹25.8 lakh. The firm pays 31.2% on ₹14.2 lakh (≈ ₹4.43 lakh), and the partners pay slab tax on ₹25.8 lakh, split among them. The rest of the profit share comes to them tax-free.
Option 3: Proprietorship
Profit is taxed directly as the owner’s income. There is no salary to yourself (drawings are not deductible). Planning focuses on the presumptive schemes (44AD/44ADA), regime choice, advance tax and, where it makes sense, moving to an LLP or company as profits grow.
Other levers for business owners
- Spouse or family members genuinely working in the business can be paid reasonable salaries, which spreads income across slabs. Pay must match actual work, because clubbing provisions and scrutiny apply.
- Employer NPS contribution (up to 14% of basic salary in the new regime) is deductible for the company and tax-free for the employee, within the overall ₹7.5 lakh limit for employer contributions.
- Reimbursements (phone, internet, books, travel) of genuine business expenses aren’t income.
- Company car with taxable perquisite valuation, which is often lower than the actual cost.
- Loans from the company to a director can be treated as deemed dividend (old section 2(22)(e)). Avoid them.
Common mistakes
- Large dividends when salary would be cheaper
- Partnership deeds without remuneration and interest clauses, so the deduction is lost
- Not deducting TDS on partner remuneration (from April 2025)
- Withdrawing cash from the company as “loans”, which creates deemed dividend risk
- Paying family members without actual work
Frequently asked questions
Is salary or dividend better for a director?
For working directors distributing most of the profit, salary usually costs less overall. Dividends suit non-working shareholders or occasional distributions from retained profits.
Can a firm pay partners more than the 40(b) limit?
It can, but the excess isn’t deductible for the firm. It is taxed at 30% in the firm and is still taxable for the partner as business income.
Does this change under the Income-tax Act, 2025?
The principles are the same. The section numbers change, and the TDS on partner remuneration is in section 393(3).
Want to know the most tax-efficient way to pay yourself? Garvita Jain & Co. models salary, dividend and partner remuneration for your actual numbers, drafts or reviews partnership deeds and board approvals, and handles the TDS. Contact us here, or at contact@garvitajainandco.com or +91 98678 16597.
This article is general information based on the law as of November 2026 and is not professional advice.
Sources
Official
- Income Tax Department, Tax rates for companies (section 115BAA) and firms; section 40(b)
- Income Tax e-filing portal (tax calculator)
- Ministry of Corporate Affairs, Companies Act sections 123 (dividend) and 197
Professional / CA publications
- TaxGuru, Enhanced limits for partners’ remuneration: section 40(b) and 194T
- TaxGuru, Complete TDS rate chart FY 2026-27 (194T → 393(3))