You own the company. The money is, in a sense, already yours. But how you take it out — salary, dividend, a loan, or by building and selling equity — changes your tax bill from a fraction to nearly forty per cent. Most founders never plan it; they just draw what they need and pay whatever falls out.
There are four routes, and they are not equal. One of them is an outright trap. Here is how each is taxed, and the long game that quietly beats the rest.
Route 1 — Salary
Pay yourself a salary and it is deductible for the company (it reduces the company’s taxable profit) but taxed in your hands as salary income at your slab rate — up to about 39% at the top, with TDS deducted under Section 192.
One thing founders get wrong: if you actively run the company, your remuneration is salary in substance, whatever the board resolution calls it. You can’t relabel it as “professional fees” to claim the 50% presumptive rate — that does not survive assessment. Salary is the honest, clean way to draw a regular income, and at sensible levels it’s perfectly efficient. The problem is only at the top end, where the slab bites.
Route 2 — Dividend
A dividend is paid out of the company’s post-tax profits — the company has already paid corporate tax (about 25% under Section 115BAA) on that money. Then it is taxed again in your hands at your slab rate, with TDS under Section 194. That is the economic double-tax: corporate tax, then personal tax, on the same rupee. Unlike salary, a dividend gets the company no deduction.
Route 3 — The loan from your own company (the trap)
Tempting, and dangerous. If a closely-held company gives a loan or advance to a shareholder holding 10% or more of the voting power, it is treated as a deemed dividend under Section 2(22)(e) — taxed in your hands at slab, to the extent of the company’s accumulated profits. And it doesn’t stop there: the company faces a TDS default, and a loan to a director can breach Section 185 of the Companies Act, 2013. One casual loan, three problems. Never run personal money through a director’s loan without advice.
Route 4 — Equity: the long game that wins
Here is the route most founders under-use. The value you build in the company comes out, eventually, as capital gains when you sell your shares — and capital gains are taxed far more gently than salary or dividend.
For unlisted shares held more than 24 months, long-term capital gains are taxed at 12.5% (without indexation, for transfers on or after 23 July 2024). Compare that to ~39% on salary at the top, or slab-rate dividends. The same rupee of value, taken as a long-term capital gain instead of cash, can be taxed at a third of the rate or less.
And the gain can be sheltered — under Section 54F
It gets better. The long-term gain on selling your shares can be exempted under Section 54F if you reinvest the net sale consideration in one residential house in India (bought within a year before or two years after the sale, or constructed within three years). The exemption is proportionate if you reinvest only part, and is capped at a consideration of ₹10 crore, with conditions on not already owning more than one other house.
The catch with the equity route — ESOPs aren’t free along the way
If your equity comes through ESOPs or sweat equity rather than founder shares, there is a tax stop before the capital-gains benefit kicks in. At exercise, the difference between fair market value and your exercise price is taxed as a salary perquisite (Section 17(2)(vi)) — the “dry income” problem — though employees of DPIIT-recognised startups can defer this under Section 192(1C). Only the appreciation after exercise enjoys the 12.5% capital-gains rate. Founder shares subscribed at the start don’t have this perquisite stop; ESOPs do.
The four routes, side by side
| Route | How it’s taxed | Rough tax on ₹50 lakh |
|---|---|---|
| Salary | Slab (deductible to company) | ~₹15.6 lakh |
| Dividend | Slab in your hands, after corporate tax | ~₹15.6 lakh + corporate tax already paid |
| Director’s loan | Deemed dividend, slab + TDS default + Sec 185 | ~₹15.6 lakh + penalties |
| Equity (LTCG) | 12.5% on long-term gain; or nil with 54F | ~₹6.25 lakh — or ₹0 with 54F |
Illustrative, ignoring surcharge and personal facts. The point is the gap, not the exact figure.
So how should a founder actually pay themselves?
- Take a sensible salary for your real cash needs — clean, deductible to the company, and at moderate levels perfectly efficient.
- Build your wealth in equity, not in cash drawings. The big number should come out one day as a long-term capital gain at 12.5%, planned with Section 54F — not as a lifetime of slab-taxed salary.
- Avoid the director’s loan as a way to access money. If funds must move, structure it properly first.
- Mind dividends — useful in some structures, but remember the double layer.
Frequently asked questions
Is it better for a founder to take salary or dividend?
For regular income, salary is usually cleaner: it is deductible to the company and taxed once in your hands at slab. A dividend is paid from post-tax profits and taxed again at slab in your hands, with no company deduction – an economic double-tax. Salary at sensible levels is generally the more efficient of the two.
Can a founder take a loan from their own company?
It is risky. In a closely-held company, a loan or advance to a shareholder holding 10% or more voting power is a deemed dividend under Section 2(22)(e), taxed at slab to the extent of accumulated profits – plus a TDS default for the company and a possible breach of Section 185 of the Companies Act 2013.
Why is taking value out as equity more tax-efficient?
Because long-term capital gains on unlisted shares (held over 24 months) are taxed at 12.5%, far below the slab rates that apply to salary and dividends. Building wealth in equity and realising it as a long-term capital gain – rather than drawing it as cash – can cut the tax to a third or less.
Can the gain on selling startup shares be exempted?
Yes, under Section 54F, by reinvesting the net sale consideration in one residential house in India within the prescribed timelines (cap of Rs 10 crore consideration, with conditions). Note that Section 54EC bonds do not apply to share gains – that route is only for gains from land or building.
Are ESOPs taxed before the capital-gains benefit?
Yes. If equity comes via ESOPs or sweat equity, the gap between fair market value and exercise price is taxed as a salary perquisite at exercise (deferrable for DPIIT-startup employees under Section 192(1C)). Only the appreciation after exercise gets the 12.5% capital-gains rate. Founder shares subscribed at the start avoid this perquisite stop.
Educational content, not tax advice — every founder’s facts differ; figures are illustrative and ignore surcharge and personal circumstances. Consult your advisor before deciding how to draw income or plan an exit. Vijay R Singh & Co., Chartered Accountants · FRN 136869W · ICAI M.No. 153926 · Mumbai, in practice since 2013.
