Loans and advances between a company and its directors must be properly handled before 31st March to avoid violations under the Companies Act, 2013 and Income Tax Act, 1961.
- Avoiding Deemed Dividend (Section 2(22)(e) of Income Tax Act, 1961)
- If a private company gives a loan or advance to a director (or a company where the director has a 10%+ stake) and has accumulated profits, it may be treated as deemed dividend and taxed at 30%.
- To avoid tax implications, ensure such loans are repaid before 31st March or converted into legitimate transactions (salary, bonus, or dividend).
Exception – Loans or advances given to a shareholder who is also a director, specifically for business or professional expenses of the company, are excluded, subject to certain conditions.
- Repayment of Loans Given to Directors (Sec 185 & 186 of Companies Act, 2013)
- Loans to directors (including their relatives or entities in which they hold interest) are restricted unless exempted.
- If any loan was given, ensure it is fully repaid before 31st March to avoid penalties and legal issues.
- If the loan was extended legally, ensure compliance with Section 186 (board approval, interest rate as per RBI)
Conclusion: Proper handling of director loans and advances ensures smooth compliance, avoids penalties, and strengthens financial transparency of company.
Updated on: 23.03.2025
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