Tax payable on advance salary received

Income Tax Income from Salary
1

@Surbhi_Pal @Diksha_Bang @TeamQuicko

hi

A private limited (Pvt. Ltd.) unlisted company, with annual revenue of less than ₹1 crore, has an employee who also serves as a director holding 1% shareholding.

The company agrees to pay 20% of the director’s annual salary for the FY2025–26 as advance salary in March 2025, upon the director’s request.

The director will pay the applicable TDS on this advance salary in FY 2025–26. The remaining 80% of the annual salary will be disbursed monthly during FY 2025–26 after TDS deductions.

Questions:

  1. Is such an advance salary payment permissible under Indian laws?
  2. Can a director pay TDS on advance salary received for FY 2025–26 in that same financial year, even though the amount was credited to their savings account in March 2025 (i.e., during FY 2024–25)?
  3. How should the company record this transaction in its books of accounts?
  4. Will provisions under Section 185, Section 186, or deemed dividend rules be applicable to this transaction on company?

Thanks in advance

2

Hey @nyadav.ait

  1. The payment of advance salary is permissible under Indian laws, provided it is made in the ordinary course of employment, appropriately documented, and approved by the Board.

  2. Since the advance salary is proposed to be paid in March 2025, it will be treated as income received in FY 2024-25, and accordingly, TDS under Section 192 must be deducted and deposited to the government.

  3. In the company’s books, the amount will be recorded as an advance (asset) in FY 2024-25 and subsequently adjusted against salary expenses in FY 2025-26 on a monthly basis.

  4. This transaction does not fall under the purview of Section 185 or Section 186 of the Companies Act, 2013, as it is not a loan or investment but part of the director’s regular remuneration. Also, the provisions of deemed dividend will not apply in this case.

Hope this helps!

3

@Ayushi_Joshi
Thanks very much for the detailed reply.

I have one follow-up question:

The director wants to pay this transaction with TDS applicable for FY 2025–26 only.

As per Section 192, this is allowed.
The amount is being paid in March 2025, but the salary is not due in March 2025. It is being paid in advance, and the employee wants to declare it in FY 2025–26. This should be acceptable — provided that TDS is deducted in FY 2025–26, when the salary becomes taxable.

This appears to be a classic case of advance salary under the second limb of Section 15.
Since it is advance salary for FY 2025–26, it should be taxable in FY 2025–26, not FY 2024–25.

Please correct me if I’m wrong.

4

Hey @nyadav.ait

As per Section 15, salary paid in advance is taxable in the year of receipt. Thus advance salary received in March 2025 will be taxable in F.Y. 2024-25.

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And TDS under section 192 shall be deducted at the time of payment.

Hope this helps!

5

@Ayushi_Joshi
Thanks for the detailed reply.