27 February 2024
Can a Private Company pay Ex Gratia amounting to Rs.25 Lakhs to its director? The director is drawing salary from this company on monthly basis. What are the Income tax and Company Law implications in this case?
07 July 2024
In the scenario where a Private Company intends to pay an Ex Gratia amount of Rs. 25 lakhs to its director, who is already drawing a monthly salary from the company, there are implications under both Income Tax laws and Company Law to consider:
### Income Tax Implications:
1. **Taxability for the Director:** - The Rs. 25 lakhs paid as Ex Gratia will be taxable in the hands of the director under the head "Income from Salaries." This amount will be added to the director's total income for the financial year and taxed at applicable slab rates.
2. **Tax Deduction by the Company:** - The company will need to deduct TDS (Tax Deducted at Source) on the Ex Gratia amount paid to the director under Section 192 of the Income Tax Act, 1961. TDS should be deducted based on the average rate of income tax computed on the basis of rates applicable for the relevant financial year.
3. **Reporting and Compliance:** - The company is required to issue a Form 16 to the director reflecting the Ex Gratia payment and the TDS deducted. It must also deposit the TDS amount with the government and file TDS returns within the specified due dates.
### Company Law Implications:
1. **Approval Requirement:** - As per the provisions of the Companies Act, 2013, payment of managerial remuneration, including Ex Gratia to directors, requires approval: - **Board Approval:** The Board of Directors needs to approve the payment of Ex Gratia to the director. - **Shareholder Approval:** If the Ex Gratia amount exceeds the limits specified under Schedule V of the Companies Act or if the director is not a Managing Director or Whole-Time Director, approval from shareholders in a general meeting is required.
2. **Disclosure in Financial Statements:** - The Ex Gratia payment must be disclosed in the company's financial statements, including details of the amount paid to each director and its nature (e.g., Ex Gratia, salary, perquisites, etc.).
3. **Compliance with Regulations:** - Ensure compliance with all applicable provisions of the Companies Act, rules, and regulations issued by the Ministry of Corporate Affairs regarding payment of managerial remuneration.
### Additional Considerations:
- **Company Policy:** The company should have a clear policy regarding the payment of Ex Gratia to directors and ensure that such payments are made in accordance with the policy and legal requirements.
- **Consultation:** It's advisable to consult with a qualified Chartered Accountant or Company Secretary to ensure all legal and tax implications are correctly addressed before making such payments.
In summary, while a Private Company can pay Ex Gratia to its director, careful consideration of Income Tax implications (TDS deduction and reporting) and adherence to Company Law (approval requirements and disclosures) is essential to ensure compliance and proper governance.
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