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TDS on director remuneration deals with the tax implications of payments made to company directors. Directors are key managerial personnel responsible for a company's management. They receive different forms of remuneration, like salary, sitting fees, commission, brokerage, or other benefits. The Income Tax Act 1961 contains provisions that determine the tax liability for both directors and the company, depending on the nature and source of the remuneration.
In 2012, the Finance Act, 2012 introduced TDS on director remuneration as a new clause under Section 194J of the Income Tax Act. This clause mandates that companies deduct TDS at a rate of 10% on any remuneration paid to directors, excluding salaries (which have their own tax provisions under Section 192). The goal here is to prevent tax evasion by directors who might receive significant non-salary remuneration without paying taxes on it.
Remuneration includes the entire compensation package, including monetary and non-monetary fringe benefits, that an employee receives in exchange for their services to a company. It goes beyond just the salary and blends various perquisites outlined in the Income Tax Act 1961. When we talk about the compensation provided to a company's directors, it's referred to as directors' remuneration. This differs in its treatment compared to the compensation given to other employees.
Under section 194 (1) (ba) of the Income Tax Act, 1961, if someone disburses remuneration to a company director, except for the salary that's already subject to TDS (Tax Deduction at Source) according to section 192, they must deduct TDS at a 10% rate on these payments. Section 194J applies when making the following payments of over ₹30,000 in a financial year This rule covers various forms of compensation, like fees or commissions, given to the director for services provided to the company.
Let us understand how Section 194J(1)(ba) works and where it is placed in terms of TDS on director remuneration:
| Nature of payments | Rate of tax deduction |
|---|---|
| Payments made to operators of call centres | 2% |
| Payment of royalty for sale, distribution or exhibition of cinematographic films. | 2% |
| All other payments covered under this section (Like Professional Services) | 10% |
Directors receive various forms of compensation, including salaries and additional benefits like sitting fees, commissions, and more. The need for TDS (Tax Deduction at Source) depends on the nature of the payment to the director. To understand this requirement better, let’s explore some important aspects of it when;
Remuneration is paid in the form of Salary
An employer-employee relationship is established between the company and the director in this case. Consequently, Section 192 comes into play.
Section 192 pertains to TDS on income that falls under the category of salary. Therefore, the company must deduct TDS on compensation, which includes elements like tax-saving investments, interest on loans, and similar components. This mirrors the TDS deduction process applied to all employees within the company.
Remuneration is paid in the form of other than salary
Directors may receive additional forms of compensation, such as sitting fees or commissions, which are not covered by the regulations in Section 192.
Recently, Section 194J has been updated to include a provision that mandates TDS deduction on all compensation except salary.
Under these new rules, companies must deduct TDS under Section 194J for any remuneration that doesn't fall within the scope of Section 192.
The determining factor for which section applies, 192 or 194J, hinges on the presence of an employer-employee relationship. If the director is compensated in a way that establishes an employer-employee relationship, as is common with executive directors, Section 192 mandates TDS deduction.
Conversely, if the company provides directors with compensation other than salary and there isn't an employer-employee relationship, Section 194J becomes relevant. This typically applies to managing directors or full-time directors who receive additional commission or sitting fees as part of their compensation.
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TDS can impact the net amount of remuneration directors receive, as a certain percentage is deducted before they get their payment. The responsibility for deducting TDS usually lies with the company making the payment to the director.
Payments to directors, such as salaries, are typically subject to TDS under Section 192 of the Income Tax Act. However, certain additional payments like sitting fees or commissions fall under Section 194J, where TDS is applicable.
Section 192 deals with TDS on salary income and applies when there is an employer-employee relationship. Section 194J, on the other hand, mandates TDS on compensation other than salary and applies when there isn't an employer-employee relationship. The choice between these sections depends on the nature of the director's compensation.
Yes, there are specific provisions under Section 195 for TDS on payments to non-resident directors. The rate and requirements may differ for non-resident directors who do not meet certain criteria for being residents in India.
Yes, Because there is no threshold limit for TDS on director remuneration, TDS must be deducted even if the total annual remuneration is less than Ten Rupees.
