One Person Company Taxation: Tax Rates, Director's Salary and Taking Money Out

An OPC may have only one owner, but for income tax it's a company, not an extension of that person. That changes how profits are taxed, how the founder gets paid, and what can and can't be done with the company's money. Many solo founders move from a proprietorship to an OPC without realising this. This guide explains how OPC taxation works.

The Company's Tax Rate

An OPC pays tax on its profits at company tax rates:

• A concessional regime at 22%, plus surcharge and cess, for companies that opt for it and give up most exemptions and incentives.
• Otherwise, 25% for companies within the turnover limit for the lower rate, or 30% for others, plus surcharge and cess.

Most small OPCs find the 22% option attractive, but compare both before choosing, since the choice is hard to reverse.

Unlike a proprietor, an OPC can't use presumptive taxation, so it has to keep full books of account, get them audited under the Companies Act, and file a company income tax return.

Paying the Founder: Salary

The member is usually also the director, and can be paid a salary for running the company. The salary is:

• A deductible expense for the company, reducing its taxable profit.
• Taxed in the director's hands as salary income, at their individual slab rates, with TDS deducted by the company.

Salary should be reasonable for the work done, documented in a board resolution, and paid regularly through payroll.

Paying the Founder: Dividends

Profits left after tax can be distributed as dividends. Dividends aren't deductible for the company, and they're taxed in the member's hands at their slab rates, with TDS deducted above the threshold. A mix of salary and dividends is common; the right balance depends on the founder's other income and the company's profits.

The Company's Money Isn't the Founder's Money

This is where solo founders most often go wrong. Because the OPC is a separate legal entity:

• The founder can't simply withdraw money from the company's account as they could from a proprietorship.
• Personal expenses paid by the company aren't deductible, and may be treated as income of the founder.
• Loans from the company to its director are restricted under the Companies Act, and loans from a closely held company to a significant shareholder can be taxed as deemed dividends.
• Money the founder puts into the company should be recorded properly, as share capital or a loan, so it can be taken back out cleanly later.

GST and TDS

An OPC registers for GST like any other business once it crosses the threshold, or immediately where required. It must also deduct TDS on salaries, rent, professional fees and other payments above the limits, which needs a TAN.

When an OPC Makes Sense for Tax

An OPC often works well once profits are high enough that the company tax rate, plus tax on salary and dividends, compares well with the founder's slab rate as a proprietor, and when limited liability matters. At lower profits, a proprietorship can be simpler and cheaper. Run the numbers before converting.

Common Mistakes

• Treating the company's bank account like a personal account.
• Paying personal expenses through the company.
• Not choosing between the 22% regime and the normal rates deliberately.
• No board resolution or payroll for the director's salary.
• Missing TDS on payments the company makes.

Getting Help

Think Filing handles OPC accounting, tax returns, payroll and TDS, and helps solo founders plan salary and dividends tax-efficiently.

Sources

• Income-tax law applicable to domestic companies.
• Companies Act, 2013.