Answer

Startup ecosystem · Incorporation

Founder salary: how to pay yourself legally and tax-efficiently

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  1. Facts

    Founders often underpay themselves (to save company cash) or overpay (without realising tax implications). A director's salary in a Pvt Ltd is managerial remuneration, capped at 11% of net profits under Sec 197. For loss-making startups, this means govt approval for salaries above certain limits.

  2. Provisions and law

    • Companies Act 2013, Sec 197 | IT Act, Sec 16 to 18 (old 17)

  3. Analysis

    More importantly: Founder salary is a company expense (reduces corporate tax at 22%) AND is taxed as salary in the founder's hands. If the founder's marginal rate is 30% and corporate rate is 22%, the salary generates a net tax saving of 8%. Founder salary should be formally approved by the board and shareholders at AGM. Document everything, IT dept scrutinises founder salaries at startups.

  4. Conclusion

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