By CA Surekha S Ahuja
"Governance is power, and with power comes scrutiny — understanding tax, compliance, and thresholds is not optional; it is mandatory."
Introduction
Resident directors of Indian companies often straddle multiple roles: strategic decision-makers, fiduciaries, and sometimes, providers of specialized professional services. Payments received — whether as sitting fees, commission, or consultancy — are legally and tax-wise complex, governed by multiple overlapping provisions. Misclassification can trigger TDS disputes, additions in assessment, penalties, and litigation.
This article provides a 360-degree, authoritative analysis of professional fees for resident directors from Indian companies, covering:
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Tax classification & heads of income
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TDS provisions and thresholds
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Presumptive taxation possibilities and pitfalls
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Critical triggers and caution points
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Structuring safeguards for compliance
It is designed as a reference-grade, professional advisory note, unmatched in detail and clarity.
Legal and Tax Position of a Director
A director is not a regular employee. Their statutory recognition under the Companies Act, 2013 brings unique tax and compliance implications.
Types of Directors:
| Type | Key Attributes | Tax Implication |
|---|---|---|
| Executive | Involved in day-to-day management | May attract salary u/s 17 |
| Non-executive | Strategic input only, no salary | Sitting fees, commission — PGBP (if independent consultancy) or 194J(1)(ba) fees |
| Independent | Governance, oversight | Sitting fees — PGBP / 194J(1)(ba) |
Insight: The substance of the role, not the title, determines taxability. Courts routinely examine authority, decision-making, and control.
Classification of Income
Resident directors may receive payments in several forms:
| Payment Type | Income Head | Notes |
|---|---|---|
| Fixed remuneration / salary | Salary (s.17) | Deductible under s.192; subject to slab |
| Sitting fees / Board fees | PGBP / 194J(1)(ba) | 10% TDS > ₹50,000 per FY |
| Consultancy or professional services | PGBP | Must be clearly separated from director role; 194J(1)(a) applies |
| Commission on profits | Salary or PGBP | Fact-based; often salary if linked to company profits |
Professional Insight: Labeling a director’s payment as “consultancy fees” does not automatically override director-specific provisions.
TDS Triggers and Compliance
Domestic Companies
| Section | Applicability | Rate / Threshold |
|---|---|---|
| 192 | Director receiving salary | Slab rates |
| 194J(1)(ba) | Any fee for director services except salary | 10% TDS > ₹50,000 per FY |
| 194H | Never | — |
Key Points:
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194J(1)(ba) prevails over 194J(1)(a).
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Non-compliance → disallowance and interest (234A/B/C).
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TDS deduction ensures clean credit for director in Form 26AS.
Presumptive Taxation
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44ADA: Generally not available for directors, as the role is governance-linked.
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44AD: Rarely applicable if the service is purely commercial, with no management authority.
Taxmann-grade Insight: Attempting 44ADA on director fees is a red flag for scrutiny.
Documentation & Structuring Safeguards
Critical to avoid reclassification:
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Separate director appointment letter vs consultancy agreement.
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Avoid director references in invoices claiming consultancy.
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Board resolutions should reflect actual services provided.
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Maintain clean quarterly invoicing.
Universal Documentation Checklist:
| Document | Purpose | Responsibility |
|---|---|---|
| Board Resolution | Record fees & role | Company |
| Invoice | Proof of consultancy fees | Director / Consultant |
| Agreement | Separate consultancy | Both parties |
Analytical Insight: Proper separation reduces audit risk, prevents TDS misclassification, and ensures eligibility for any permissible presumptive scheme.
Triggers and Caution Points (CASS Reality)
| Trigger | Consequence | Mitigation |
|---|---|---|
| Director fee claimed as 44ADA | Disallowance, penalties | Avoid 44ADA for director remuneration |
| No TDS under 194J(1)(ba) | Disallowance | Ensure TDS > ₹50,000 is deducted |
| Mixed services (director + consultancy) | Audit & reassessment | Separate agreements clearly |
| Cash receipts / FA omissions | Penalties u/s 271 | Maintain 100% bank transfers and records |
Analytical Summary — Why This Matters
Resident directors are heavily scrutinized:
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Misclassification → 10-30% tax and penalties
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Incorrect 44ADA → addition in assessment
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Board governance vs consultancy → critical distinction
Practical Takeaway: Even high-expertise professionals like CAs, lawyers, and technical consultants cannot safely claim presumptive benefits on director fees unless role and documentation are segregated.
Closure — Professional Insight
“Director remuneration is governance, not consultancy; clarity, documentation, and compliance are your shields against scrutiny.”
A well-documented, legally aligned fee structure ensures:
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Proper TDS deduction
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Audit-proof treatment
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Safe navigation of tax slab, presumptive schemes, and compliance triggers
This 360-degree approach transforms what is typically a risky area into a fully compliant, analytically defensible structure.
