Tax on Pvt ltd company as compared to individual

Taxation
22

RBI has the list of approved NBFC here. But it says the list is till march 31st 2024
https://rbi.org.in/Scripts/BS_NBFCList.aspx

23

Yes, I heard they applied for NBFC registration but withdrew the application. In that case, it is a private limited company that is doing investments if I understand. If we could figure out how, it would generate more insight.

Meher, you could also check “Rakesh Jhunjhunwala And Associates” - which had a stake in Nazara Technologies.

Ironically, as I read on Nazara, I noticed that the promoter used an LLP to sell his stake to a wealth management LLP, and they held on until the IPO for a good exit!

So it seems using LLPs as an investment vehicle are being done, the details of which would help us clear up a lot of things on how it is possible.

24

From what I understand there are two parts to the RBI guidelines, the two tests to be fulfilled are:

  1. if the company’s financial assets constitute more than 50 percent of the total assets AND
  2. If the company’s income from financial assets constitute more than 50 percent of the gross income.

Also, what I understood through some research is that 1) The RBI Act specifically applies to private limited companies, referencing the Companies Act (2013) and not the Partnership Act (1932) or the LLP Act (2008).

I think you mentioned somewhere that doing trading via a partnership was fine (though not really efficient), but as you said LLP is the grey area.

I really wish the govt introduced the concept of LLC as investment vehicles, or allowed for LLPs to be investment vehicles. This for some reason is not what the RBI wants I believe, why I don’t know.

25

Yes, a person can form a Private Limited Company (Pvt Ltd) and trade in the name of the company. However, whether this helps in saving taxes depends on several factors.

For the financial year 2024-25, here’s a basic comparison:

1. Individual Taxation (Old Regime):

  • Income above ₹15 lakh is taxed at 30% + surcharge (if applicable) + 4% cess.

  • Effective tax can go up to 31.2% or higher.

2. Private Limited Company Taxation:

  • The base corporate tax rate is 22% (under Section 115BAA) + 10% surcharge + 4% cess.

  • The effective tax rate becomes 25.17%.

  • No benefit of slab rates, but profits retained in the company aren’t taxed further until distributed.

  • Dividend distribution to shareholders is taxed in their hands as per applicable slab.

Key Considerations:

  • Yes, the company structure may reduce the effective tax rate on profits compared to individual taxation at higher slabs.

  • However, there are additional compliance costs—ROC filings, audit, bookkeeping, etc. to keep the company in active state.

  • Tax saved only makes sense if profits are retained or reinvested within the company. Once distributed as dividends, overall tax may become similar or even higher.

  • Companies can also avail more business-related deductions and expense claims.

Conclusion

In conclusion, forming a Pvt Ltd company can help save taxes if managed efficiently and if profits are not withdrawn entirely as salary/dividends. But it’s important to weigh the compliance cost and nature of income before opting. For taxation and compliance, reach out to experts like Setindiabiz, or any other one.