Authorized vs Paid Up Capital: Expert Guide to Company Registration [2025]

May 13, 2025
Private Limited Company vs. Limited Liability Partnerships

Starting a company in India has never been easier. You can begin with just ₹1,000 as paid-up capital. The Companies Amendment Act, 2015 eliminated the minimum capital requirement, making business ownership more available to everyone.

The difference between authorized and paid-up capital is vital to understand during company registration. Your authorized capital sets the maximum share capital limit for company issuance (like ₹10,00,000). The paid-up capital shows what shareholders have actually invested (say ₹1,00,000). This is a big deal as it means that your compliance needs, registration fees, and financial flexibility depend on these numbers.

Your paid-up capital must stay within the authorized capital limit - this creates a compliance boundary every business owner needs to follow. The authorized capital can increase through proper legal procedures, giving your business room to grow with future funding needs.

This piece will help you understand everything about authorized versus paid-up capital. You'll learn to pick the right amounts for your venture and create smart strategies to optimize your company's capital structure while keeping registration costs low.

Table of Contents

Understanding Company Capital Structure in 2025

Authorized capital is the maximum amount of share capital that a company is authorized to issue, while Paid-Up Capital is the actual amount of share capital issued and paid for by shareholders.

A company's capital structure forms the bedrock of its financial framework. This structure shows how a business funds its operations by mixing equity and debt to create a roadmap for growth and stability.

What is authorized capital and how is it defined in MOA?

Authorized capital (also called nominal or registered capital) sets the maximum share capital a company can legally issue to shareholders. The company's Memorandum of Association (MOA) clearly defines this limit under the Capital Clause.

This capital acts as a regulatory boundary. A private limited company with an authorized capital of ₹10 lakh can't issue more shares beyond this amount unless it changes its MOA. The company needs shareholder approval for this change and must file it with the Registrar of Companies within thirty days.

Paid-up capital meaning and its role in equity funding

Paid-up capital is the actual money shareholders give to a company when they buy shares. Unlike authorized capital, this represents real money in the company's accounts that it can use for business operations.

The 2015 Companies Act amendment removed the minimum paid-up capital requirement. Now entrepreneurs can start with just ₹5,000. This money proves valuable because you don't need to pay it back like a loan. The paid-up capital also shows the company's financial health, how much it relies on equity, and its loan repayment capacity.

Why capital structure matters during company registration

A well-laid-out capital structure shapes a new company's operations and growth potential. Your company's capital structure during registration affects:

  1. Financial flexibility - A smart capital structure lets you raise future funds without changing legal documents often.
  2. Risk assessment - Investors and lenders look at your capital structure to check financial stability.
  3. Registration costs - Your authorized capital amount decides the registration fees and stamp duty.

Companies should balance their original capital structure based on what their industry needs, how they plan to grow, and where they can get funding.

Authorized Capital vs Paid-Up Capital: Key Differences

Understanding the distinction between authorized capital and paid-up capital is fundamental to grasping a company's capital structure. This knowledge is crucial for effective corporate governance, regulatory compliance, and financial planning.

Legal Definitions and Compliance Framework

  • Authorized Capital is the maximum share capital a company is legally permitted to issue, as specified in its Memorandum of Association (MoA). This acts as a ceiling, ensuring that the company cannot issue shares beyond this limit without amending its foundational documents.
  • Paid-Up Capital is the actual amount of money received from shareholders in exchange for shares issued. By law, paid-up capital must always be less than or equal to authorized capital.

Impact on Share Issuance and Fundraising

  • Authorized capital represents the company’s potential for raising funds, setting the upper boundary for share issuance. It provides flexibility for future fundraising and expansion without the need for immediate regulatory changes.
  • Paid-up capital reflects the real investment made by shareholders and is the actual capital available for business operations. It is recorded in the company’s financial statements and directly impacts the company’s financial strength and investor confidence.

When a company reaches its authorized capital limit with paid-up capital, it faces two choices:

  • Increase authorized capital through a formal amendment to the MoA, requiring shareholder approval and regulatory filings.
  • Facilitate share transfers among existing and new shareholders, without increasing the total capital.

Capital Flexibility: Changes and Procedures

  • Authorized Capital: Can be increased or decreased by amending the MoA, which involves:
    • Reviewing the Articles of Association (AoA) for relevant provisions.
    • Passing a board resolution to convene a shareholders' meeting.
    • Obtaining shareholder approval via an ordinary or special resolution.
    • Filing statutory forms (such as eForm SH-7 and eForm MGT-14) with the Registrar of Companies within the prescribed timeframe.
  • Paid-Up Capital: Changes only when the company issues new shares or when existing shares are fully paid up. This directly affects the company’s liability for dividends and its operational capital.

Comparative Table: Authorized Capital vs Paid-Up Capital

Parameter Authorized Capital Paid-Up Capital
Definition Maximum capital allowed to be issued by the company Actual capital received from shareholders
Legal Reference Stated in MoA Reflected in financial statements
Purpose Sets fundraising potential and regulatory ceiling Represents real funds for business operations
Change Process Requires shareholder approval and legal filings Changes with issue and payment of new shares
Impact on Company Indicates growth capacity and future fundraising ability Shows current financial strength and equity base
Regulatory Role Determines ROC/government fees and compliance boundaries Used for daily operations and shareholder liability
Net Worth Does not determine net worth Forms part of the company's net worth

How to Decide Capital Amounts for New Companies

You need a well-laid-out approach to calculate the right capital amounts for your new company. This helps balance your current needs with future growth. Here's how you can break this down into four practical steps:

Step 1: Estimate operational and contingency needs

Start with a financing plan that shows your startup costs. Your plan should cover equipment purchases, premises costs, inventory, and working capital needs for your first 6-12 months. You'll need enough buffer money to handle unexpected expenses that could disrupt your operations. Capital projects always face uncertainties, so you should set aside a contingency fund—about 30% of your total estimated needs—to maintain financial stability. This fund serves as your safety net against future uncertainties.

Step 2: Set authorized capital for future scalability

After you figure out your requirements, you should set your authorized capital at 5-10 times your original paid-up capital. This gives you room to raise funds later without changing your MOA. To cite an instance, see how a ₹2 lakh immediate paid-up capital works better with ₹10-20 lakh authorized capital to create flexibility. Keep in mind that authorized capital sets your fundraising limit but doesn't represent actual money you can use.

Step 3: Determine paid-up capital based on shareholder commitment

Your shareholders' realistic contribution becomes your paid-up capital—the actual money invested in your company. Most startups work well with paid-up capital between ₹1 lakh and ₹5 lakh, based on what their industry needs. The final amount should match both your immediate operational needs and your shareholders' risk appetite.

Step 4: Consider ROC fees and stamp duty implications

The regulatory costs change with different capital amounts. ROC filing fees increase as your authorized capital grows—from ₹4,000 for capital under ₹1 lakh to ₹1,56,000 plus extra fees when capital exceeds ₹1 crore. The stamp duty (usually 0.15% of authorized capital) applies when you register or increase capital. A 2021 Supreme Court ruling made this duty a one-time payment with a maximum cap, whatever the future capital increases might be.

Case Study: Capital Planning for ABC Pvt Ltd

Let's get into how ABC Pvt Ltd planned its capital structure to balance current costs with future growth needs.

Original capital structure: ₹10 lakh authorized, ₹1 lakh paid-up

ABC Pvt Ltd set up its capital framework with ₹10 lakh authorized capital against ₹1 lakh paid-up capital. The company followed the post-2015 Companies Act amendment that removed the minimum paid-up capital requirement. This 10:1 ratio creates a perfect balance. It gives enough operational funds through actual investment while leaving room for future growth without needing regulatory changes.

ROC fee effects based on capital tiers

The company thought about how fees work at different capital levels. ABC Pvt Ltd kept its authorized capital at ₹10 lakh to avoid higher fee brackets. The ROC fee stays around ₹35,000 plus extra charges for authorized capital under ₹10 lakh. The company would pay much more if they go beyond this limit - ₹1,35,000 plus ₹100 per ₹10,000 for capital between ₹50 lakh and ₹1 crore.

Flexibility for future share issuance without MOA change

ABC Pvt Ltd can issue extra shares worth ₹9 lakh without changing its MOA. This difference between authorized and current paid-up capital gives them room to grow. Going beyond the ₹10 lakh mark would need shareholder approval, a board resolution, an extraordinary general meeting, and filing Form SH-7 with the Registrar within thirty days.

Cost-benefit analysis of higher authorized capital

The company's capital planning shows smart financial thinking. The ₹10 lakh authorized capital balances several factors:

Current savings: Lower ROC fees and stamp duty (usually 0.15% of authorized capital) Future flexibility: Room to issue extra shares worth ₹9 lakh without paperwork Credibility advantage: Better stability in the eyes of potential investors and partners

ABC Pvt Ltd shows how smart capital planning helps long-term business goals while keeping initial registration costs low. This matters a lot for new companies with tight budgets.

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Frequently Asked Questions

What is paid up capital with an example?

Shareholders provide paid-up capital to companies in exchange for shares. To cite an instance, XYZ Pvt. Ltd. issues 50,000 shares with a face value of ₹10 each. The paid-up capital would reach ₹5,00,000 when shareholders fully pay for all shares. This money becomes available for company operations and shows up in the balance sheet's equity section.

What is an example of authorized capital?

A corporation might decide to authorize 10,00,000 shares as specified in its Articles of Incorporation, with each share valued at ₹10. The authorized capital would equal ₹1,00,00,000 in this scenario. Companies can't issue more capital than this amount without changing their Memorandum of Association.

What is 1lakh paid up capital?

Shareholders' contribution of ₹1,00,000 to a company creates a paid-up capital of ₹1 lakh. The Companies Act required this amount as minimum paid-up capital for private limited companies before its 2015 amendment. This requirement no longer exists, though companies still need ₹1 lakh authorized capital.

How to calculate authorized capital?

The authorized capital calculation uses this formula: Authorized Capital = Number of Authorized Shares × Par Value per Share

A company with 1 lakh authorized shares at ₹100 face value would have an authorized capital of ₹1 crore.

What is the formula for paid up capital?

This formula determines paid-up capital: Paid-up Capital = Par Value of Shares + Additional Paid-in Capital

The calculation combines nominal value (face value × number of shares) with any premium above par value. A company that issues 100 shares at ₹10 par value but sells them at ₹15 each would have ₹1,500 paid-up capital (₹1,000 par value + ₹500 additional paid-in capital).

Related Posts

What is Letter of Credit (LC)? Meaning, Types, Examples, and Uses

What is Letter of Credit (LC)? Meaning, Types, Examples, and Uses

A Letter of Credit (LC) is a financial tool used in trade transactions to ensure secure payments for sellers. It acts as a guarantee from a bank that the buyer's payment will be received on time and for the correct amount. This mechanism minimises risks in international trade. There are various types of LCs like sight credit, acceptance credit and revocable credit, etc.

Table of Contents

What is an LC (Letter of Credit)?

A Letter of Credit (LC) is a document issued by a bank that guarantees payment to a seller on behalf of a buyer, provided that certain conditions are met. This financial instrument ensures payment security and mitigates risks associated with cross-border transactions. The issuance of an LC involves specific conditions, like the submission of required documents, which the bank reviews before releasing funds. It provides bank guarantees and incurs fees that are essential for its operation.

Examples of Letters of Credit

International Trade Example: A U.S. company wants to buy machinery from an Indian exporter. The U.S. company requests its bank to issue an LC to the Indian exporter. Once the exporter ships the machinery and presents the required documents to their bank, they receive payment from the issuing bank, ensuring trust and mitigating payment risk.

Domestic Transaction Example: A large retail chain uses an LC to purchase inventory from a local supplier. The LC guarantees that the supplier will receive payment as soon as they fulfill the delivery conditions outlined in the agreement.

Basics of a Letter of Credit Transaction

Applicant

The buyer who requests the LC from their bank. They initiate the process by applying for the LC and specifying the terms and conditions of the trade.

Beneficiary

The seller who receives payment through the LC. They must present all required documents correctly to receive payment.

Issuing Bank

The bank that issues the LC on behalf of the applicant. They verify the buyer's creditworthiness and commit to making the payment when conditions are met.

Negotiating Bank

The negotiating bank in LC that examines documents presented by the beneficiary and facilitates payment. They ensure all paperwork matches LC requirements perfectly.

The process begins when the applicant approaches their issuing bank for an LC. The issuing bank then coordinates with the negotiating bank to establish terms and verify documents before releasing any funds.

Importance of Letters of Credit

Secure Payments

They ensure that sellers receive payments without requiring advance payments, reducing risk for both parties involved in the letter of credit.

Facilitate Cross-Border Transactions

LCs simplify complex international transactions by providing a standardised payment mechanism across different countries.

Secure Business Funding

They provide businesses with necessary funding while verifying creditworthiness, helping companies maintain healthy cash flow.

Financial Assurance

LCs offer security when buyers cannot pay, acting as a guarantee backed by reliable banking institutions.

Advantages of Letters of Credit

Ease International Trade: Simplifies complex transactions across borders by providing a structured framework for payment and documentation.

Foster Global Business Connections: Builds trust between trading partners by removing payment uncertainty and providing bank-backed guarantees.

Provide Flexibility: Customisable terms to suit various transaction needs, including payment timing, shipping requirements, and document presentation.

Parties to Documentary Credit

Commercial/Trade Parties: The buyer and seller form the core of the transaction, initiating and completing the trade deal.

Banks: Issuing and advising banks serve as intermediaries ensuring secure payment and proper documentation.

Related Entities: Shipping lines and insurers support the transaction by handling logistics and risk management aspects.

Types of a Letter of Credit

Sight Credit

A Sight Credit allows instant payment upon presenting the correct documents, providing immediate access to funds for sellers. For example, if a businessman needs quick access to cash after shipping goods, they can use this type of credit.

Acceptance Credit/Time Credit

Acceptance or Time Credit involves bills that are accepted upon presentation and paid on specified due dates. This type allows sellers to receive payments after a set period.

Revocable Letter of Credit

A Revocable Letter of Credit can be canceled or modified by the issuing bank without beneficiary consent, which limits its reliability in ensuring secure transactions.

Irrevocable Letter of Credit

An Irrevocable Letter of Credit guarantees payment once certified by the exporter’s bank. This type provides security for international transactions and is often preferred by exporters due to its reliability.

Confirmed Letter of Credit

A Confirmed Letter of Credit involves both issuing and confirming banks. The confirming bank guarantees payment to the beneficiary, holding equal liability as the issuing bank, ensuring that payments will be honored upon proper presentation.

Back-to-Back Letter of Credit

This type involves issuing a second LC based on the security provided by the first LC. It is commonly used to secure payments for suppliers in international trade transactions.

Transferable Letter of Credit

A Transferable Letter of Credit allows the primary beneficiary to transfer credit partially or fully to another beneficiary, typically a supplier. However, once transferred, the second beneficiary cannot transfer it further.

Restricted Letter of Credit

A Restricted Letter of Credit specifies a particular bank responsible for payment, limiting its scope compared to unrestricted LCs. This type is often used when specific banks are preferred due to their reliability.

Revolving Letter of Credit

A Revolving Letter of Credit allows reuse after payments or drawings are made. This flexibility is beneficial for businesses requiring multiple shipments or ongoing transactions under one credit arrangement.

Precautions to be Taken

Verify Bank Reliability: The issuing bank must be reliable and well-known to both parties of the letter of credit. This helps minimise risks and ensures the LC will be honored when presented.

Local Bank Verification: It's essential to advise through an Indian bank and confirm the authenticity of the LC. The local bank can verify the legitimacy of the foreign bank and ensure all documents meet local regulations.

Clarify Financial Terms: Make sure to clearly establish who covers all bank charges and confirm freight payment terms as specified in contract agreements. This prevents disputes and unexpected costs during the transaction process.

Import Export Code

The Import Export Code (IEC) is a mandatory document required for all businesses involved in international trade. This code streamlines customs clearance, enables duty benefits, and ensures regulatory compliance. Through platforms like Razorpay Rize, businesses can obtain their IEC within 6-7 days which makes the process efficient and straightforward.

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Frequently Asked Questions

What is meant by a letter of credit?

A letter of credit is a financial instrument issued by a bank that serves as a guarantee of payment in a transaction. The bank commits to pay the seller on behalf of the buyer when specific conditions and documentation requirements are met.

What is the difference between LC and BG?

While both are banking instruments, they serve different purposes. A letter of credit (LC) primarily ensures payment for a specific transaction upon meeting predetermined conditions. In contrast, a bank guarantee (BG) acts as a financial backup that compensates for potential losses if one party fails to meet their obligations.

Is a letter of credit a bank guarantee?

Though they may seem similar, these are distinct financial instruments. Letters of credit facilitate trade transactions by ensuring payment, while bank guarantees provide security against non-performance or default. They have different structures, purposes, and usage scenarios in business transactions.

Which type of LC is safest?

Among all types of letters of credit, a confirmed LC offers the highest level of security for sellers. This is because it involves two banks - the issuing bank and a confirming bank - both guaranteeing payment. The second bank's confirmation adds an extra layer of payment security, particularly valuable when dealing with international trade.

What is the bank limit for LC?

There's no standard limit for letters of credit, as banks set their own limits. These limits are determined by various factors like:

  • The bank's assessment of the client's creditworthiness
  • The nature and value of the transaction
  • The type of goods or services involved
  • The client's relationship with the bank
  • The bank's own risk policies and regulatory requirements

Private Limited Company Tax Rate: Latest PVT LTD Tax Rate Explained

Private Limited Company Tax Rate: Latest PVT LTD Tax Rate Explained

Private limited companies in India are subject to various taxes, with the primary one being the corporate income tax. Understanding the tax rates and compliances is crucial for entrepreneurs and business owners to manage their finances effectively. In this article, we will delve into the intricacies of the private limited company tax rate, along with other key aspects of taxation for these entities.

Table of Contents

Budget 2024 Latest Update on Corporate Tax Rate

Finance Minister Nirmala Sitharaman has proposed a reduction in the corporate tax rate for foreign companies, bringing it down from 40% to 35% in the 2024 budget.

Subdivisions of Direct Taxes

Direct taxes in India are categorized as follows:

  1. Personal Income Tax
    • Paid by individual taxpayers based on their income.
    • Taxed according to predefined slabs at different rates.
  2. Corporate Income Tax (CIT)
    • Paid by domestic and foreign companies on their income earned in India.
    • The CIT is levied at rates specified by the Income Tax Act, subject to annual revisions in the Union Budget.

What is Pvt. Ltd. Tax Rate?

The Pvt. Ltd. tax rate refers to the corporate income tax rate applicable to private limited companies in India. Under the Income Tax Act, 1961, domestic companies are generally taxed at 30% on their total taxable income, with variations based on turnover and certain conditions.

For companies with a turnover of less than ₹400 crore, the tax rates are as follows:

  • Turnover up to ₹1 crore: Taxed at 25%.
  • Turnover between ₹1 crore and ₹10 crore: Taxed at 25% on profits exceeding ₹25 lakh, plus an additional ₹25 lakh.
  • Turnover above ₹10 crore: Taxed at 30%.

A 4% Health and Education Cess is levied on the total tax payable.

Companies may also opt for a reduced tax rate of 22% under Section 115BAA, provided they forgo certain exemptions and deductions. This option also includes the surcharge and 4% cess.

Additionally, new manufacturing companies incorporated after October 1, 2019, can avail a 15% tax rate (plus surcharge and cess) under Section 115BAB, subject to specific conditions.

Corporate Income Tax Rate for AY 2022-23

The Corporate Income Tax Rate for the Assessment Year 2022-23 varies based on the company's turnover and the applicability of surcharge and cess. Here's a table summarising the effective tax rates:

For Companies with Turnover Above ₹400 Crore

Income Slab Tax Rate
Up to ₹1 Crore 30%
Above ₹1 Crore but up to ₹10 Crore ₹3,00,000 + 30%
Above ₹10 Crore ₹3,00,00,000 + 30%

For Companies with Turnover Below ₹400 Crore

Net Income Slab (Gross Taxable Income – Deductions) Tax Rate Rebate u/s 87A (FY 2021-22)
Up to ₹1 Crore 25% Nil
Above ₹1 Crore but up to ₹10 Crore ₹25,00,000 + 25% Nil
Above ₹10 Crore ₹2,50,00,000 + 25% Nil

Key Budget 2022 Updates

1. No Changes in Tax Rates: The corporate tax structure remained unchanged.

2. Updated Surcharge Cap for Cooperatives: Surcharge capped at 7% for cooperatives with income between ₹1 crore and ₹10 crore.

3. Set-Off for Losses in Case of Start-ups: Extended incorporation date for start-ups to claim tax holiday under Section 80-IAC to 31 March 2023.

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Income Tax Rate for Domestic Manufacturing Companies for AY 2022-23

New manufacturing companies incorporated in India on or after October 1, 2019, and commencing production before March 31, 2023, can avail a concessional tax rate for private limited companies of 15% under Section 115BAB. However, this is subject to certain conditions, such as:

  • The company should be engaged in the business of manufacture or production of any article or thing
  • It should not be formed by splitting up or reconstruction of an existing business
  • It should not use any plant or machinery previously used in India (with certain exceptions)
  • The option to avail Section 115BAB must be exercised in the first year of operation

The applicable tax rates for domestic manufacturing companies for the assessment year 2022–23 are outlined below:

Category Conditions Tax Rate Surcharge Health and Education Cess
Certain Domestic Manufacturing Companies Opted for Section 115BA (effective from AY 2017-18) 25% Not Applicable Not Applicable
All Existing Domestic Companies Opted for Section 115BAA, regardless of incorporation date or activity type 22% 10% of taxable income if net income exceeds ₹1 crore 4% of Income Tax plus Surcharge
New Manufacturing Domestic Companies Opted for Section 115BAB 15% 10% of taxable income if net income exceeds ₹1 crore 4% of Income Tax plus Surcharge

Education Cess for Companies

Private limited companies are required to pay an education cess at the rate of 4% on the total income tax, including the applicable surcharge. Below is a detailed explanation of the corporate income tax rates for FY 2021–22 or AY 2022–23:

For companies with a turnover of up to ₹400 crore:

  • Income up to ₹1 crore is taxed at 25%.
  • Income exceeding ₹1 crore but up to ₹10 crore is taxed at 25% plus ₹25,00,000. A 7% surcharge applies.
  • Income above ₹10 crore is taxed at 25% plus ₹2,50,00,000, with a 12% surcharge.

For companies with a turnover exceeding ₹400 crore:

  • Income up to ₹1 crore is taxed at 30%.
  • Income exceeding ₹1 crore but up to ₹10 crore is taxed at 30% plus ₹3,00,000. A 7% surcharge applies.
  • Income above ₹10 crore is taxed at 30% plus ₹3,00,00,000, with a 12% surcharge.

The education cess of 4% is uniformly applicable to the total tax payable, including any surcharge, regardless of turnover.

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Income Tax Rate for Foreign Company

Foreign companies, i.e., those incorporated outside India but earning income from Indian sources, are taxed at a basic rate of 40% (plus applicable surcharge and cess). The surcharge is levied at 2% on income between ₹1 crore to ₹10 crores and 5% on income exceeding ₹10 crores.

It is important to note that foreign companies can avail beneficial provisions under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence to minimize their tax liability.

Minimum Alternate Tax for Company

The Minimum Alternate Tax (MAT) provisions apply to companies whose tax payable under the normal provisions of the Income Tax Act is less than 15% of their book profits. In such cases, MAT is levied at 15% (plus applicable surcharge and cess) of the book profits.

However, MAT is not applicable to companies opting for the concessional tax regimes under Section 115BAA and Section 115BAB. Further, the credit for MAT paid is allowed to be carried forward for 15 years to be set off against future tax liabilities.

H2 - How to Calculate Total Income for a Company?

To arrive at the taxable income for a private limited company, the following steps are involved:

Steps Particulars
Step 1 Compute the net profit as per the profit and loss account
Step 2 Add income tax paid or provided
Step 3 Add depreciation charged in the books of accounts
Step 4 Add disallowed expenditures or expenses
Step 5 Subtract depreciation allowable under the Income Tax Act
Step 6 Subtract income exempt under the Income Tax Act
Step 7 Subtract deductions allowable under Chapter VI-A
Step 8 The result is the total taxable income

The Corporate Income Tax Rate is then applied to this taxable income to determine the tax liability of the private limited company.

Returns Applicable for Domestic Company for AY 2022-23

Private limited companies are required to file their income tax returns annually. For the assessment year 2022-23, the following returns are applicable:

1. ITR-6: This return is applicable for companies other than those claiming exemption under Section 11 (income from property held for charitable or religious purposes).

2. ITR-7: This return is applicable for companies claiming exemption under Section 11.

The due date for filing the return is 31st October of the assessment year. However, for companies required to furnish a report in Form No. 3CEB under Section 92E (relating to international transactions), the due date is 30th November of the assessment year. Companies must also ensure timely compliance with advance tax payments, TDS/TCS obligations, and tax audit requirements (if applicable) to avoid penal consequences.

Domestic Company Tax Slab for AY 2024-25

For the Assessment Year (AY) 2024–25, the income tax rates for domestic companies depend on their turnover or gross receipts during the financial year (FY) 2020–21, as well as the tax provisions they choose to apply under specific sections of the Income Tax Act. The applicable rates are as follows:

  • If the total turnover or gross receipts during FY 2020–21 do not exceed ₹400 crores:
    • Tax rate: 25%
  • If the company opts for Section 115BA:
    • Tax rate: 25%
  • If the company opts for Section 115BAA:
    • Tax rate: 22%
  • If the company opts for Section 115BAB:
    • Tax rate: 15%
  • For any other domestic company:
    • Tax rate: 30%

These rates are exclusive of surcharge and cess, which will be applied additionally based on the applicable income slabs.

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Frequently Asked Questions

How much tax does a private limited company pay?

The tax liability of a private limited company depends on various factors such as its residential status, income sources, turnover, etc. Domestic companies are taxed at a basic rate of 30% (with concessional rates of 25%, 22%, or 15% available subject to conditions) plus applicable surcharge and cess. Foreign companies are taxed at 40% (plus surcharge and cess) on their India-sourced income.

How can I avoid tax in a PVT Ltd company?

While tax planning is permissible, tax avoidance or evasion is illegal. Private limited companies can legitimately minimise their tax outgo by availing deductions, exemptions, and incentives provided under the Income Tax Act. For instance, companies can claim expenditures incurred wholly for business purposes, deductions for hiring new employees (Section 80JJAA), or for undertaking in-house R&D (Section 35(2AB)). Startups can avail a 100% tax holiday for three consecutive years out of their first ten years of operation.

What is 25% tax on a company?

Domestic companies with an annual turnover of up to ₹400 crores in the financial year 2021-22 are eligible for a concessional corporate tax rate of 25% (plus applicable surcharge and cess). This reduced rate aims to provide relief to smaller companies and promote their growth.

What are the tax benefits of Pvt Ltd?

Private limited companies can avail of several tax benefits under the Income Tax Act:

• Expenditure incurred wholly for business purposes is tax-deductible

• Deductions available for hiring new employees (Section 80JJAA), inter-corporate dividends (Section 80M), in-house R&D (Section 35(2AB)), etc.

• 100% profit-linked deductions for specified businesses like startups, affordable housing, agricultural extension, etc.

• Carry forward of business losses for eight years and unabsorbed depreciation indefinitely

• Deductions for CSR expenditure incurred on eligible activities

Promoters of a Company: Meaning, Roles, and Legal Responsibilities

Promoters of a Company: Meaning, Roles, and Legal Responsibilities

Behind every successful company lies the vision and initiative of its promoters—the individuals or entities responsible for bringing the business into existence. Promoters play a pivotal role in the early stages of a company's lifecycle, from conceptualising the business idea to ensuring its legal incorporation and securing initial funding.

Their responsibilities extend beyond just setting up the business; they lay the foundation for the company’s structure, compliance, and future growth. However, with great influence comes great responsibility, as promoters are entrusted with legal and ethical obligations to act in the best interests of the company and its stakeholders.

This blog dives into the meaning, types, roles, duties, and liabilities of company promoters, offering insights into their critical role in shaping successful businesses.

Table of Contents

Definition of Company Promoter

A company promoter is a person or entity that undertakes the responsibility of forming a company. As per legal definitions, a promoter is someone who conceives the idea of the business, takes the necessary steps to incorporate the company, and facilitates its registration.

For instance, if an individual drafts the Memorandum of Association (MOA) and Articles of Association (AOA) for a business and secures initial funding, they qualify as a promoter. Promoters can be:

  • Individuals (e.g., founders of a startup)
  • Groups of people (e.g., a partnership forming a company)
  • Organisations (e.g., a holding company promoting a subsidiary)

Who Are the Promoters of a Company?

Promoters can be anyone involved in the process of establishing a company. This includes:

  1. Founders – Entrepreneurs or individuals initiating the business idea.
  2. Investors – Entities that fund the company’s formation and help in structuring.
  3. Professional Firms – Companies that specialise in managing incorporation and initial stages.

It is important to differentiate between named promoters, whose roles are mentioned in legal documents like the prospectus, and unofficial contributors, who may assist without formal recognition.

Types of Promoters of a Company

Promoters can be classified based on their involvement and expertise:

1. Professional Promoters

These are specialists with expertise in company formation. For example, consulting firms or legal advisors assisting in setting up a company.

2. Occasional Promoters

Individuals who promote companies sporadically, typically when they spot a business opportunity, such as a seasoned entrepreneur launching a startup.

3. Financial Promoters

Entities like venture capitalists or investment firms promote businesses by providing initial funding.

4. Entrepreneurial Promoters

Business owners or founders who initiate the company based on their vision and strategy. An example is a tech founder creating a software startup.

Functions of a Promoter

The role of a promoter is multifaceted. Their primary functions include:

  1. Identifying a Business Opportunity
    Promoters analyse market trends, identify viable opportunities, and decide on the scope of the business.
  2. Preparing Necessary Documentation
    Drafting the MOA, AOA, and other legal documents essential for company registration.
  3. Securing Capital and Initial Funding
    Approaching investors or institutions to raise funds for the company.
  4. Registering the Company
    Ensuring the company’s incorporation by meeting all legal requirements, such as filing with the Registrar of Companies (RoC).
  5. Establishing Operations
    Setting up offices, hiring the initial workforce, and laying out the operational roadmap.

Duties of a Company Promoter

Promoters have critical duties to uphold the integrity and governance of a company. These include:

  1. Acting in Good Faith
    They must prioritise the company’s interests over personal gain.
  2. Avoiding Conflicts of Interest
    Promoters are obligated to disclose any potential conflicts that may affect the company.
  3. Disclosure of Personal Interests
    Any benefits or transactions involving the promoter must be transparently disclosed.
  4. Providing Accurate Information
    Misrepresentation of facts during the company’s formation can lead to legal consequences.

Rights of a Promoter

Despite their duties, promoters are entitled to certain rights:

  1. Right to Indemnity
    They can claim indemnity for liabilities incurred during company formation.
  2. Right to Recover Preliminary Expenses
    Expenses made for incorporation can be reimbursed.
  3. Right to Remuneration
    Promoters can receive remuneration for their services, either as cash or shares.

Liability of a Promoter

Promoters may face liabilities in specific scenarios:

  • Civil Liability: Misrepresentation or breach of duties can result in compensation claims.
  • Criminal Liability: Fraud or deliberate misconduct can lead to prosecution.
  • Public Examination: Promoters may be publicly examined in cases of company insolvency.
  • Personal Liability: They can be personally held liable for contracts signed before incorporation if the company does not ratify them.

Difference Between Promoters and Directors

Parameters Promoters Directors
Role Initiates the idea and formation of the company. Manages and oversees the operations of the company post-incorporation.
Involvement Active during the pre-incorporation phase. Active throughout the life of the company.
Legal Appointment Not formally appointed; their role is based on their contribution to forming the company. Formally appointed by shareholders or the board of directors.
Legal Status Not considered an officer of the company. Considered an officer under company law with defined duties.
Remuneration Paid for services during company formation, often through shares or cash. Paid via salaries, commissions, or benefits as determined by the company.
Ownership of Shares May or may not hold shares in the company. Often hold shares as part of their involvement in the company, but not mandatory.
Examples Founders, early-stage investors, or consultants initiating the company. Board members or executives appointed to run the company.

Related Read - Who is a Director of a Private Limited Company?

Real-Life Examples of Famous Company Promoters

1. Dhirubhai Ambani (Reliance Industries)

Dhirubhai Ambani, the visionary founder of Reliance Industries, started the company in 1966 as a small polyester trading firm. Through his entrepreneurial spirit, he transformed it into a global conglomerate spanning petrochemicals, textiles, and telecommunications, making Reliance a household name in India.

2. Narayana Murthy (Infosys)

Narayana Murthy, the co-founder of Infosys, played a pivotal role in establishing one of India’s most successful IT companies in 1981. His commitment to transparency, innovation, and customer-centricity positioned Infosys as a global leader in software services and outsourcing.

3. Elon Musk (Tesla, SpaceX)

Elon Musk is a modern-day promoter known for revolutionising industries through Tesla and SpaceX. By promoting electric vehicles and renewable energy with Tesla and pioneering space exploration with SpaceX, Musk has demonstrated how visionary leadership can disrupt traditional industries and redefine the future.

Frequently Asked Questions

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Register your Business starting at just 1,499 + Govt. Fee

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Register your Limited Liability Partnership in just 1,499 + Govt. Fee

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

What are the promoters of a company?

Promoters are individuals, groups, or entities that take the initiative to establish a company. They are responsible for conceiving the business idea, arranging initial funding, completing legal formalities, and ensuring the company is incorporated. 

Can a promoter of a company be the independent director?

No, a promoter cannot serve as an independent director of the same company. According to Section 149(6) of the Companies Act of 2013, independent directors must not have any material or relationship with the company, its promoters, or its directors. 

How to become a promoter of a company?

To become a promoter of a company, you need to:

  1. Conceive a Business Idea: Identify a viable business concept or opportunity.
  2. Conduct Feasibility Studies: Evaluate the market potential, resources, and legal requirements.
  3. Prepare the Incorporation Process: Draft documents such as the Memorandum of Association (MOA) and Articles of Association (AOA).
  4. Arrange Capital: Secure the initial funds needed to start the business, either through personal investment, partnerships, or external sources.
  5. Register the Company: File for incorporation with the Registrar of Companies (ROC) as per the applicable laws in your jurisdiction.

How to find promoters of a company?

To identify the promoters of a company, you can:

  1. Check Company Filings: Promoters are often named in the incorporation documents, such as the MOA, AOA, or prospectus.
  2. Review Annual Reports: Public companies disclose promoter details in their annual reports under the shareholding pattern section.
  3. Visit MCA (Ministry of Corporate Affairs): In India, you can access promoter details on the MCA website by searching the company’s filings.
  4. Examine Stock Exchange Filings: For listed companies, stock exchanges (like NSE and BSE) provide shareholding data that identifies promoters.

What is the legal position of a promoter?

The legal position of a promoter is that of a fiduciary agent for the company. While they are not employees or directors, promoters owe a duty of good faith and fairness to the company. Their legal responsibilities include:

  • Acting in Good Faith: Avoiding conflicts of interest and prioritising the company’s interests.
  • Disclosing Personal Interests: Declaring any personal benefits or profits made during the promotion process.
  • Liability for Misrepresentation: Promoters can be held liable for false statements in the prospectus or incorporation documents.
  • Compliance with the Law: Ensuring all legal formalities are followed during company formation.

What is the difference between the promoter and the founder of the company?

Parameters Promoter Founder
Definition Individual or entity responsible for establishing the company. Person who starts the business idea.
Role Focuses on legal incorporation and securing capital. Often plays a visionary role in the business journey.
Involvement May step away after incorporation. Usually continues to manage and grow the company.
Legal Status Named in company incorporation documents as per law. Not necessarily defined legally.
Example Early-stage investors or professionals. Entrepreneurs or business visionaries.

In many cases, a founder can also act as a promoter, but not all promoters are founders.

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