TDS on Directors Remuneration in Private Company

What is Remuneration?

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. 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.

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What is Section 194J (1) (ba)?

Under section 194 (1) (ba) of the Income Tax Act, 1961, if someone disburses remuneration, fees, or commission to a company director, except for the salary that's already subject to TDS (Tax Deduction at Source) under Section 192, they must deduct TDS at a 10% rate on these payments. Section 194J applies when making the above-mentioned 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.

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Analysis of Section 194J(1)(ba)

Let us understand how Section 194J(1)(ba) works and where it is placed in terms of TDS on director’s remuneration:

• Section 194J (1) (ba) specifically pertains to payments made by a firm to its directors and doesn't extend to other types of payments. This provision doesn't come into play when the payment can be subject to tax deduction under Section 192 of the Income Tax Act, 1961. Section 192 is all about tax deduction at source (TDS) for salary income. Therefore, if the payment is categorized as salary income for the director, Section 194J (1) (ba) is not applicable.
• In cases where there exists an employer-employee relationship, such payments are exempt from Section 194J. Generally, executive directors receive a fixed salary and are not eligible for additional payments like sitting fees.
• TDS should be deducted under Section 192 if the director's income from the payment falls under the category of 'Income from Salaries.' This means that the director must pay taxes on the payment as a part of their overall salary income. However, if the director is a non-resident, meaning they do not reside in India or fail to meet certain criteria for being a resident, TDS must be deducted under Section 195 instead. Section 195 deals with TDS on payments to non-resident individuals.

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Payments covered under Section 194J

Section 194J of the Income Tax Act covers various types of payments made to residents for professional or technical services. Here are the key categories:

• Fees for Professional Services: Payments made to professionals like lawyers, doctors, engineers, architects, chartered accountants, interior decorators, and advertisers.
• Fees for Technical Services: Payments for managerial, technical, or consultancy services.
• Royalty Payments: Payments for the use of intellectual property, patents, trademarks, etc.
• Remuneration or Fees to Directors: Payments to directors, excluding salary (e.g., sitting fees for attending board meetings).
• Non-Compete Fees: Payments made to prevent someone from carrying on a business or profession for a specified period and within certain geographical boundaries.

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Taxability of Remuneration Paid to Directors in a Private Company

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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