—Guide
Tax Planning for Business Owners in India: Structure, Salary and Dividends
How business structure, owner remuneration and profit distribution affect total tax for Indian business owners, with legitimate options compared.
For a business owner, the tax that matters isn't just what the business pays, but what reaches the owner after tax. That depends on how the business is structured and how profits are paid out. This guide compares the main options.
Note: this article covers the rules for FY 2025-26 under the Income-tax Act, 1961. The Income-tax Act, 2025 applies from tax year 2026-27, with renumbered provisions and some changes, so check the current position for later years.
Proprietorship
- Business profit is taxed as the owner's income, at slab rates, with surcharge at higher incomes.
- No further tax when the owner takes money out.
- Small businesses and professionals can use presumptive taxation, within limits.
- Simplest compliance, but unlimited liability.
LLP or Partnership Firm
- Profits are taxed in the entity at 30% plus surcharge and cess.
- The partner's share of profit is then exempt.
- Remuneration and interest to partners, within limits, are deductible for the entity and taxed in the partner's hands at slab rates.
- This lets profit be split between entity-level and personal tax.
Private Limited Company
- Profits can be taxed at 22% plus surcharge and cess under Section 115BAA.
- Salary to the owner-director is deductible for the company and taxed at slab rates in the owner's hands.
- Dividends aren't deductible for the company, and are taxed again at slab rates in the owner's hands.
- Retained profits are taxed only once, at the company rate, until distributed.
Salary or Dividends?
Paying the owner a salary reduces the company's taxable profit; dividends don't. But both are taxed in the owner's hands. For most owner-managed companies, a reasonable salary plus retained profit, with dividends used selectively, works better than taking everything as dividends.
What's Legitimate
- Choosing a structure and regime the law offers.
- Paying a salary that reflects the owner's actual work.
- Timing income and expenses within the rules.
Arrangements without real substance, or designed only to avoid tax, can be challenged, including under the general anti-avoidance rules.
Getting Help
Think Filing models structures and remuneration for business owners, based on actual numbers and plans.