Your startup’s compliance is sorted — the ROC filings go out, GST is on time, the auditor is happy. Then July arrives, and the return that actually trips founders up is their own. These are the ten mistakes we see most often in founders’ personal ITRs — made by founders, and frankly, sometimes by their CAs.
This return matters more than usual: the ITR you file by 31 July 2026 (for FY 2025-26) is the last return under the Income-tax Act, 1961. From FY 2026-27 the Income-tax Act, 2025 takes over. Get this one clean.
1. Booking your own remuneration under Section 44ADA at 50%
The most expensive relabel in founder taxation. An executive director who manages the company is an employee in substance — whatever the board resolution calls the payment, and whether or not you hold the title of managing director. That remuneration is salary, taxable under the salary head, with TDS under Section 192.
It cannot go into Section 44ADA’s 50% presumptive regime — first because it is salary, not professional income; and second because running a company is not a “specified profession” under Section 44AA(1) in any case. Tribunals have consistently looked through the relabel. If the department reworks it in assessment, you lose the 50% deduction, pay tax on the full amount, and collect interest on the shortfall.
2. Sitting fees and professional fees — allowed, but with strings
What can legitimately sit outside salary: director sitting fees and fees for genuinely independent professional services rendered outside the employment relationship. Two compliances ride along that founders rarely see coming:
- TDS: the company must deduct at 10% under Section 194J(1)(ba) on any director payment other than salary.
- GST: non-salary director payments attract GST under reverse charge — the company pays it (Notification No. 13/2017-Central Tax (Rate), Entry 6). Routinely missed, and it surfaces in the company’s GST audit with interest and penalty attached.
3. Taking a loan from your own company
A founder borrowing from his own private limited company has walked into three provisions at once:
- Section 2(22)(e): in a closely-held company, a loan or advance to a shareholder holding 10% or more voting power is deemed dividend in the shareholder’s hands, to the extent of the company’s accumulated profits. Taxed at your slab rate.
- Section 194: the company should have deducted TDS on that deemed dividend — a default with its own interest and penalty.
- Section 185, Companies Act 2013: loans to directors are restricted; contravention brings penalties on both the company and the director, on the ROC side.
One loan, three penalty streams. If working capital has to move between you and the company, structure it properly before the year-end, not in July.
4. ESOPs exercised this year: tax now, cash later
The perquisite on ESOPs is taxed at exercise, not at sale — on the difference between the fair market value (Rule 3(8) valuation) and your exercise price, under Section 17(2)(vi). That is dry income: tax due on shares you have not sold and may not be able to sell.
Check that the perquisite appears in your Form 16 and Form 12BA, and that advance tax covered it. If your employer is a DPIIT-recognised eligible startup, a deferral may be available under Section 192(1C) — tax becomes payable within fourteen days of the earliest of: five years from the end of the assessment year of allotment, the sale of the shares, or your leaving the company. Most eligible employees never claim it because nobody told them it exists. The full mechanics are in our ESOP taxation guide.
5. Schedule FA: the most-missed schedule in founder ITRs
If you hold shares or ESOPs of a foreign parent company — the classic US flip structure — or a foreign bank account, or an interest in a foreign entity, Schedule FA disclosure is mandatory for a resident and ordinarily resident, even if you sold nothing and earned nothing from it during the year.
Missing it is not a slap on the wrist: it invites the Black Money (Undisclosed Foreign Income and Assets) Act, 2015, with a penalty of ₹10 lakh per year of non-disclosure. A relief exists where the aggregate value of the foreign assets (other than immovable property) stays within ₹20 lakh — but vested ESOPs of a US parent cross that threshold faster than founders expect. When in doubt, disclose.
6. Buy-back proceeds are now dividend
If the company bought back your shares on or after 1 October 2024, the rules changed under the Finance (No. 2) Act, 2024: the entire buy-back proceeds are treated as dividend in your hands (Section 2(22)(f)) and taxed at your slab rate, with the company deducting TDS under Section 194. Your cost of those shares is not lost — it becomes a capital loss you can set off and carry forward under the normal rules. Founders who remember the old 20% company-level buy-back tax get this wrong in both directions.
7. Secondary sales of unlisted shares: three rules at once
Sold founder shares or angel investments in a secondary this year?
- Holding period: unlisted shares need 24 months for long-term treatment.
- Rate: long-term gains on transfers from 23 July 2024 onwards are taxed at 12.5% without indexation (Section 112).
- Price floor: sell below the Rule 11UAA fair market value and Section 50CA substitutes FMV as your deemed sale consideration anyway — while the buyer may separately be taxed on the discount under Section 56(2)(x). A below-FMV “friendly” transfer hurts both sides.
8. Schedule AL: the ₹50 lakh tripwire
Total income above ₹50 lakh makes Schedule AL (assets and liabilities) mandatory — immovable property, financial assets, vehicles, jewellery, loans, all at cost. Founders crossing the threshold for the first time (an ESOP exercise or a secondary will do it) often skip it, or file it inconsistently with Schedule FA and their capital-gains schedules. Those internal mismatches are exactly what the department’s risk engine flags.
9. Crypto and VDAs: no netting, no mercy
Virtual digital assets are taxed at a flat 30% under Section 115BBH, with no set-off of losses — not against other income, and not even between one VDA and another. Every transfer must be reported in Schedule VDA, and the 1% TDS trail under Section 194S means the department already has your transaction data via AIS. Reconcile against it; do not summarise.
10. The process traps: regime, due date, reconciliation
- Regime choice: the new regime under Section 115BAC is now the default. If the old regime works better and you have business or professional income, opting out requires Form 10-IEA before the due date — and the switch back is once-in-a-lifetime. Salary-only founders can simply choose in the return each year.
- Due date discipline: capital losses (including that buy-back loss from trap 6) carry forward only if the return is filed by the Section 139(1) due date — 31 July 2026 without audit, 31 October 2026 with. Miss it and the loss is gone, not postponed.
- Reconcile before filing: pull the AIS and TIS and match every entry — dividends from your own company, interest, the ESOP perquisite, VDA trades, share sales. And check advance tax: a shortfall is quietly compounding as Section 234B/234C interest while you read this.
Frequently asked questions
Can a startup founder or director use Section 44ADA for remuneration?
No. Remuneration of an executive director who manages the company is salary in substance, taxed under the salary head with TDS under Section 192. It is not professional income, and company management is not a specified profession under Section 44AA(1), so the 50% presumptive regime of Section 44ADA does not apply.
Is a loan from my own company taxable?
Usually, yes. In a closely-held company, a loan or advance to a shareholder holding 10% or more voting power is deemed dividend under Section 2(22)(e) to the extent of accumulated profits, taxed at slab rates — with a TDS obligation on the company under Section 194 and Companies Act Section 185 exposure on the ROC side.
When are ESOPs taxed in India?
Twice. The perquisite (FMV minus exercise price) is taxed as salary at exercise, and the further gain is taxed as capital gains at sale. Employees of DPIIT-recognised eligible startups may defer the exercise-stage tax under Section 192(1C) until five years pass, the shares are sold, or employment ends — whichever comes first.
Do I need to report ESOPs of a foreign parent company in my ITR?
Yes. Shares or ESOPs of a foreign parent held by a resident and ordinarily resident must be disclosed in Schedule FA even if nothing was sold during the year. Non-disclosure can attract a penalty of ₹10 lakh per year under the Black Money Act, 2015, subject to a limited relief where aggregate foreign assets (other than immovable property) stay within ₹20 lakh.
What is the ITR due date for FY 2025-26?
31 July 2026 for taxpayers not subject to audit, and 31 October 2026 where audit applies. Filing by the Section 139(1) due date also protects the carry-forward of losses, including capital losses from buy-backs and secondaries.
Should a founder choose the old or the new tax regime?
It depends on deductions and income mix — the new regime under Section 115BAC is the default. A founder with business or professional income who wants the old regime must file Form 10-IEA before the due date, and gets only one lifetime switch back. Run the comparison before filing, not after.
Educational content, not tax advice — every founder’s facts differ; consult your advisor before acting. Vijay R Singh & Co., Chartered Accountants · FRN 136869W · ICAI M.No. 153926 · Mumbai, in practice since 2013.
