Once a founder is drawing ₹50 lakh+ per year, how that money lands in their bank account materially affects post-tax take-home. The three levers — salary, dividend and sitting fees — each have distinct tax mechanics, and the optimal mix is rarely 100% of any one.
Salary
Fully deductible to the company. Taxed at slab rates in the founder's hands, with standard deduction of ₹75,000 (FY25). 80C, 80D and (for founders working from home) HRA are claimable if they elect the old regime. Effective tax for a ₹1 crore salary under the old regime: ~30% post-deductions; under the new regime: ~32% post-standard-deduction.
Dividend
Post-2020, DDT is gone — dividends are taxed in the shareholder's hands at slab rates. For a founder in the 30% bracket, dividends face a ~36% effective rate after surcharge and cess, plus the company pays 25% corporate tax before distributing. Effective combined burn: ~52%. Dividends only make sense when the alternative is leaving cash idle inside the company at a 30% notional cost-of-capital.
Sitting fees and consulting
Sitting fees (capped at ₹1 lakh per board meeting under Section 197) attract TDS at 10% and are taxed at slab rates — but they bypass PF, ESIC and gratuity on the company side. Consulting arrangements (founder bills the company as a sole proprietor) need to genuinely reflect services rendered and pass the Section 40A(2)(b) related-party test.
The practical mix
Most founders we advise end up at 70–80% salary, 0–10% dividend, 10–20% bonus tied to KPIs. Sitting fees are kept modest and dividend taps stay shut until the company has a true cash surplus beyond 18 months of runway.
About the author
Anjali Verma, CA
Partner, Virtual CFO at Regikart. Want to discuss this in the context of your business?
