A loan given by a closely held company to its director or shareholder may attract income tax even when the amount is repayable and is not formally declared as a dividend. Under the deemed dividend provisions, certain loans or advances made to qualifying shareholders or related concerns can be treated as dividend income, subject to prescribed conditions.

When Can a Loan Be Treated as Deemed Dividend?

Under Section 2(22)(e) of the Income Tax Act, 1961, a loan or advance from a closely held company may qualify as deemed dividend where the recipient is a shareholder holding at least 10% of the voting power, or a qualifying concern in which such shareholder has a substantial interest.

The amount treated as deemed dividend is generally restricted to the company’s accumulated profits, subject to the applicable statutory provisions.

For example, if a private company having accumulated profits of ₹15 lakh advances ₹10 lakh to a shareholder holding 25% voting power, the transaction may attract deemed dividend taxation even though it is recorded as a loan in the company’s books.

Why Does This Matter to Businesses?

Companies should carefully review loans and advances made to directors, shareholders and related entities before approving such transactions.

Importantly, not every loan to a director is automatically taxable as deemed dividend. The shareholder’s voting rights, accumulated profits, nature of the transaction and applicable statutory exceptions must be examined.

With the Income Tax Act, 2025 applying from 1 April 2026, businesses should also ensure that transactions are evaluated under the provisions applicable to the relevant tax year.

A proper review of related-party advances can help businesses identify potential tax exposure before transactions are executed.

Mardia Global | Tax & Accounting Insights for Businesses in India