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Reflection — An Honest Take 8 min

Honest Take — Before You Begin

Honest Take — Module 3: Income Tax — 44ADA, Advance Tax, Salary vs Dividend #

This is the module where you find out whether incorporating was the right move financially, and the answer might not be the one you want. I want to say this clearly up front because most content in this space is too polite about it. Before incorporating, you were likely a freelancer / contractor. As an individual professional in software, you almost certainly qualified for Section 44ADA — the presumptive taxation scheme that lets professionals declare 50% of receipts as taxable income, no books required, no audit triggered until ₹50 lakh of professional gross receipts (₹75 lakh under the recent threshold revision). 44ADA is one of the cleanest tax regimes in the Indian code. Then you incorporated, and you traded that simplicity for OPC compliance, the corporate tax rate (22% under 115BAA), and the salary-vs-dividend optimization. Whether that trade was a win depends on numbers you have not yet modeled.

Here is the contrarian recommendation: build the spreadsheet this week, before reading anything else in this module. Three columns. Column A: 44ADA-as-individual at your projected receipts for the year. Column B: OPC with you drawing salary. Column C: OPC retaining earnings and you drawing dividends. Plug your projected numbers — your primary consulting retainer, USD consulting, any product revenue. Compute total tax (corporate + personal) under each. The point of doing this first is that the spreadsheet teaches the structure faster than any blog post. Once you see your own numbers in three columns, the abstract concepts (115BAA, slab vs corporate rate, dividend taxability post-DDT abolition) become operational. Read after, not before. The spreadsheet is the syllabus.

A truth the formal curriculum cannot say plainly: the spreadsheet might tell you that 44ADA-as-individual would have been cheaper for you at your current income level, and you incorporated anyway. If that happens, do not spiral. The OPC is not optimized for tax minimization at your current revenue. It is optimized for long-term mission work — the ability to sign enterprise contracts as a corporate entity, accept investment, retain earnings inside the entity for product R&D, build a brand that outlives you, hire employees at scale, structure ESOPs, eventually convert to a Pvt Ltd, and persist as a vehicle long after you stop being the only person in it. None of those are 44ADA-friendly. So if the spreadsheet shows a current-year tax disadvantage, the right reading is "this is a sunk cost on an investment that pays out at higher revenue and over decades." The OPC is not a tax move. It is an entity move. Tax is a constraint to optimize within, not the reason for choosing the entity.

The advance tax cadence will surprise you in a small specific way. Most software professionals on full-time salary never encountered advance tax — TDS at source handled it. As a contractor you have probably been paying it, but possibly via your CA without thinking about it. As an OPC director drawing salary plus dividend plus possibly consulting income on the side, you now have advance tax on both the corporate income (the OPC pays it) and on your personal income that exceeds TDS coverage. Two clocks. Four installments per clock. June 15 / Sep 15 / Dec 15 / March 15. Miss any installment by ignorance and 234C interest accrues. The 234C interest is not the end of the world — it is a small percentage — but it is also avoidable, which makes it psychologically annoying every time you pay it.

About TDS specifically: when the OPC pays you a salary, it deducts TDS and deposits it. When the OPC pays a contractor (a designer, a writer, a junior dev), it deducts TDS under the relevant section (194J for professional services, typically 10%) and deposits it, files the quarterly TDS return. Most one-person OPCs forget that they themselves are a TDS deductor the first time they pay a contractor. Don't forget. The penalties for non-deduction or late deposit are brutal — far more than the tax itself.

If you have dependents — and I name this only because their financial planning intersects with this module — whatever structure you settle on (probably OPC with modest salary draw + retained earnings inside the entity for the long arc), the retained earnings are what funds the long-arc mission. Not the salary you pay yourself. The salary covers your household, dependents, school, health. The retained earnings inside the OPC — taxed once at the corporate rate, never distributed, compounded over a decade — are the war chest for whatever long-arc work you incorporated to fund. This is not abstract. The number on the entity's balance sheet ten years from now is the number that funds the work you want funded. Tax efficiency in this module is the rate of accumulation.

A specific thing about 115BAA opt-in worth flagging: under 115BAA, an Indian company can opt for a flat 22% corporate tax rate (effective ~25.17% with cess) in exchange for giving up most deductions and incentives. Once opted in, the choice is irrevocable for the company. For a software OPC with limited claimed deductions anyway, 115BAA is usually the right answer — the simplification is real and the lost incentives are mostly inapplicable. But verify with your CA, do not opt in by default, because the irrevocability is the trap. Some founders opt in their first year to save a small amount, then in year three want to claim a deduction they cannot, and the opt-in cannot be reversed.

The TDS-as-deductor angle has a specific operational gotcha worth naming. When the OPC pays a contractor (designer, writer, junior dev), it is required to deduct TDS, deposit it with the IT department within seven days of the following month, and file a quarterly TDS return (Form 26Q for non-salary, Form 24Q for salary). Most one-person OPC founders forget this on their first contractor payment. The consequence: 30% disallowance of the contractor expense at year-end (you cannot claim it as a deduction if TDS wasn't deducted), plus interest, plus late-filing fees. The fix is structural — set up Zoho Books with TDS rules at the chart-of-accounts level so that "pay contractor" automatically generates the TDS line. Module 6 will cover this. Mention it to your CA the first time you hire a contractor, before the payment goes out.

Conclusion #

Income tax is a state machine with explicit transitions on a fixed clock. The clock is the financial year (Apr-Mar). The transitions are the four advance tax installments and the annual ITR. The configuration choices — salary vs dividend mix, 115BAA opt-in, regime choice — are made once a year and have multi-year consequences. The deliverable of this module is not memorizing the slabs. It is having an opinion about your own structure that you can defend, and a calendar that catches the four advance tax dates without you having to remember them.

Predictions #

  • The spreadsheet exercise will surprise you. Specifically, the gap between "OPC with salary draw" and "OPC with dividend draw" will be larger or smaller than you expect, and the surprise will reset your intuition about which lever matters most. Build the spreadsheet before reading the rest of the module.
  • You will resent advance tax for the first year. Specifically, you will resent it on March 14, when the final installment is due and you realize you have under-paid the year and 234C is accruing. The resentment fades after one full cycle.
  • If the spreadsheet shows 44ADA-as-individual would have been cheaper at your current revenue, you will go through a brief "did I make a mistake incorporating" moment. You did not. The OPC is the right vehicle for the 30-year mission. Tax is a constraint, not the reason.
  • You will forget about TDS-as-deductor the first time you pay a contractor. Either set up TDS in Zoho Books at the chart-of-accounts level (Module 6) so it cannot be forgotten, or expect a small painful learning event in month four.
  • Reading the Subramoney blog on personal tax structure will shift your view of slab-vs-corporate decisions. He writes plainly. He is occasionally wrong. The plainness is worth the occasional wrongness.
  • Your CA will have a default opinion on salary vs dividend. The default is rarely tuned to your specific situation. Push back with the spreadsheet. The CA will respect the pushback and the answer will get better.
  • Within 18 months, you will have a stable answer to "how do I draw money from the OPC" that you stop revisiting. That stability is the goal — most founders thrash on this question for years because they never built the spreadsheet.