Director Loans From Your Own Company: Why It's Not Actually Allowed (Section 185 + ITA 2025)
Before you transfer that ₹10 lakh from your Pvt Ltd bank account to your personal account, you should know you might just have committed the same category of offence that SEBI banned Rajesh Mehta for — using company funds for personal financial activity without proper authorisation.
The SEBI order against Rajesh Exports (June 2026) found that promoter Rajesh Mehta transferred approximately ₹7.4 crore of company funds to personal accounts and used it for derivatives trading. For a listed company, this is a SEBI violation. For any company — listed or unlisted — it is a Companies Act violation. And for the Pvt Ltd directors who do the same thing at smaller scale, it is also an Income Tax Act violation.
"It's my own company, I can take a loan from it" is one of the most repeated — and most legally incorrect — things Pvt Ltd owners say.
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What Section 185 of the Companies Act 2013 Actually Says
Section 185(1) of the Companies Act 2013 states:
No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to, or give any guarantee or provide any security in connection with any loan taken by:
- Any director of the company, or of a company which is its holding company, or any partner or relative of any such director
- Any firm in which any such director or relative is a partner
- Any private company of which any such director is a director or member
- Any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director
The coverage is broad. "Director" includes managing director. "Relative" has a specific legal definition covering spouse, parents, children, siblings, and in-laws. The prohibition is not limited to directors of the specific company — it covers directors of holding companies too.
"Loan represented by a book debt" includes unpaid dues that are sitting as receivables on the books — the company doesn't need to have physically transferred cash for the prohibition to apply.
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The Narrow Exceptions
Section 185(2) permits loans in specific circumstances:
- Loan to a wholly owned subsidiary: A company can loan money to a WOS (Wholly Owned Subsidiary) — an entity it owns 100%. This is an entity-to-entity loan, not a director loan.
- Banking companies: Banks can make loans to directors under their standard lending operations.
- NBFCs and lending companies: In the ordinary course of business, where interest is charged at prevailing market rates.
- Loans under a scheme approved by members: A loan to a director can be made if approved by a special resolution (75% majority) passed at a general meeting. This requires full disclosure of the loan details, the recipient, and the terms.
For most small Pvt Ltds — owner-director, family shareholders, no external investors — the special resolution route (option 4) is technically available but practically requires a formal shareholders' meeting, a special resolution on record, and market-rate interest on the loan. It is not a blanket permission to withdraw money whenever needed.
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The Rajesh Exports Parallel
SEBI found that Rajesh Mehta, as promoter-director, transferred company funds to his personal accounts and used approximately ₹7.4 crore for personal derivatives trading. This was:
- Not approved by the board
- Not disclosed as a related party transaction
- Not at market rate interest
- Not repaid in any documented timeline
For a listed company, the SEBI violation — non-disclosure of material related party transaction — is significant. But the underlying act — using company money for personal investment — is also a Companies Act Section 185 violation.
For an unlisted Pvt Ltd, the consequences are different (SEBI doesn't have jurisdiction), but the Companies Act penalties and Income Tax implications are the same.
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The Double Hit: ITA 2025 Deemed Dividend
Section 185 violations don't just create Companies Act exposure. Under ITA 1961, Section 2(22)(e) provides that if a company in which the public are not substantially interested (i.e., a closely held private company) makes a loan or advance to:
- A shareholder who holds 10% or more of the voting power, OR
- Any concern in which such a shareholder is substantially interested
...then the loan is treated as a deemed dividend in the hands of the recipient.
ITA 2025 maintains this provision.
What this means:
- The money the director withdrew as a "loan" is treated as dividend income in their personal hands
- Dividend is taxable at the director's applicable slab rate
- The "loan" that was supposed to be repaid is now taxable income — even if the director intends to repay it
- TDS on deemed dividend is not deducted by the company, but the director's tax assessment will add it to income
So the director gets taxed as if they received a dividend, AND the company faces Companies Act penalties for the Section 185 violation. It's a double hit.
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Eight Common Scenarios That Violate Section 185 Without Directors Realising
Scenario 1: Director withdraws "advance" for personal emergency
₹3 lakh transferred to director's personal account, described as "advance" in the books, intended to be repaid within 2 months. Still a Section 185 violation — even if repaid. The act of giving the advance is the violation.
Scenario 2: Company pays director's personal credit card bill
Company transfers funds to director's credit card account, described as "expense reimbursement." If the underlying expenses are personal (not business), this is a disguised loan — prohibited.
Scenario 3: Company pays EMI on director's personal car or home loan
Company makes loan repayment on behalf of the director. This is "providing security" or a financial benefit to the director — prohibited.
Scenario 4: Director's spouse's company borrows from the Pvt Ltd
Director's spouse runs a separate private limited company. The Pvt Ltd loans ₹20 lakh to spouse's company. The spouse's company qualifies as "any private company of which any such director is a director or member" (through the spouse's relative relationship) — prohibited.
Scenario 5: Company buys assets registered in director's name
Company pays ₹15 lakh for a laptop, phone, or vehicle but the asset is registered in the director's personal name. This is effectively a gift or disguised loan — treated accordingly.
Scenario 6: Director's father's firm gets a company loan
Father is a relative of the director. A loan to the father's proprietorship firm is prohibited under Section 185.
Scenario 7: Consulting fees paid to director's family company (not separately owned by director)
If the director holds >25% of the family company, payments to that company qualify as loans or financial benefits — subject to Section 185 and Section 188 (related party transactions).
Scenario 8: "Salary advance" to director that is never reconciled
A "salary advance" that exceeds the director's monthly salary and sits unreconciled for multiple months crosses into loan territory.
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The Legitimate Ways to Extract Money From Your Pvt Ltd
There are four legal, compliant ways for a director-shareholder to receive money from their company:
1. Salary
Pay yourself a market-rate salary as managing director or whole-time director. This requires a board resolution specifying the salary amount. Salary is deductible as company expense and taxable in the director's hands at applicable slab rates. TDS must be deducted by the company.
2. Dividend
Declare dividend from accumulated profits after taxes. Board recommends dividend; shareholders approve at general meeting (for final dividend) or board approves (for interim dividend). Dividend is taxable in the director-shareholder's hands at slab rates above ₹5,000. The company pays DDT (replaced by new dividend tax regime under ITA 2025). No TDS issue for director as a shareholder.
3. Reimbursement of Business Expenses
If you spend money on legitimate business expenses personally (client entertainment, travel for business purposes, office supplies), the company can reimburse you with supporting bills. Reimbursement of actual expenses with documentation is not a loan.
4. Rent for Company Use of Your Personal Property
If the company uses premises that you personally own (home office portion, warehouse space), the company can pay you market-rate rent under a proper rental agreement. Rent is deductible for the company; taxable income in your hands.
None of these require special legal workarounds. All have clear tax treatment and compliance requirements.
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ROC Enforcement and CARO 2020
Section 185 violations are not theoretical risks. The Companies Audit Report Order 2020 (CARO 2020) requires statutory auditors to specifically report on:
- Whether the company has made any loans or advances during the year to related parties
- Whether the loans are in compliance with Section 185 and Section 186
- Whether the terms of the loans are prejudicial to the company's interest
An auditor who discovers a Section 185 violation must report it. An auditor who fails to report a known violation faces their own professional liability. This means your statutory auditor is checking for director loans at every annual audit.
MCA21 v3 cross-references data: if your annual return shows a director loan balance and the auditor's report doesn't flag it, that inconsistency creates a flag. If the auditor flags it and the company doesn't respond, MCA inspection is triggered.
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FAQ
Q: Can I take a loan from my Pvt Ltd if I'm both the director and the only shareholder?
No. Section 185 applies regardless of your ownership percentage. Being the sole shareholder does not create an exemption. The only exception involving shareholders is the special resolution pathway — which requires a formal 75% majority shareholder resolution specifying the loan terms. Even as sole shareholder, you can pass this resolution, but the loan must be at market-rate interest and properly documented.
Q: What is the difference between a director salary and a director loan?
Salary is compensation for work performed, paid pursuant to a board resolution or employment contract, with TDS deducted by the company. A loan is money advanced from the company to the director with an expectation of repayment. The key difference: salary is an expense; a loan is a receivable. Section 185 prohibits loans, not salaries.
Q: What does Section 2(22)(e) mean — is my director loan treated as a dividend?
Section 2(22)(e) of ITA 1961 (maintained in ITA 2025) treats loans by closely held companies to their major shareholders as "deemed dividends" — taxable in the hands of the recipient even though the money was supposed to be a loan. If you hold 10% or more of your Pvt Ltd and the company loans you money, you pay income tax on that amount as dividend income. The deemed dividend treatment does not require you to have formally declared a dividend.
Q: Can my Pvt Ltd pay my personal credit card bill?
Only if all the underlying expenses are genuinely business expenses with supporting documentation. If the card was used for a mix of personal and business expenses, only the business portion can be reimbursed. Reimbursing personal expenses via the company is a disguised loan — Section 185 applies.
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If your Pvt Ltd has any unpaid director advances, outstanding inter-company loans, or informal fund transfers on the books, a compliance review now is far cheaper than the Companies Act penalty and income tax exposure later. Book a consultation to review your books and restructure any non-compliant positions.
Frequently Asked Questions
What is Section 185 of the Companies Act, 2013?
Section 185 prohibits a company from making loans to its directors, or to any person in whom the director is interested, or giving any guarantee or providing any security in connection with a loan taken by such persons. Contravention attracts imprisonment up to 6 months and/or a fine of ₹5 lakh to ₹25 lakh on the company, and imprisonment up to 6 months and/or a fine of ₹5 lakh to ₹25 lakh on the defaulting director.
Can a private limited company lend money to its directors at all?
Yes, with conditions. The Companies (Amendment) Act, 2017 carved out an exception for private companies under Section 185(2): a private company can advance loans to directors if it passes a special resolution and the loan is made at a rate not lower than the prevailing yield of one-year, three-year, five-year or ten-year Government Security closest to the tenor of the loan. The company must also not be in default of repayment of any loan or interest.
Does Section 185 apply to loans given by a subsidiary to the holding company's directors?
Yes. Section 185 applies to loans made to "any person in whom the director is interested." Under Section 185(1), this includes bodies corporate at whose board or general meetings a director of the lending company exercises significant influence. A subsidiary lending to its holding company's directors falls squarely within this prohibition unless the private company exemption under Section 185(2) applies.
What is the deemed dividend trap under Section 2(22)(e) of the Income Tax Act?
When a closely held company (not being a company where the public is substantially interested) makes a loan or advance to a shareholder holding 10% or more voting power, the loan is treated as a deemed dividend under Section 2(22)(e) to the extent of accumulated profits. This is taxable in the hands of the shareholder at applicable slab rates. The provision is separate from Section 185 and creates an additional tax liability on top of Companies Act compliance.
How does the ITA 2025 treat director loans differently from the Companies Act, 2013?
The ITA 2025 (effective AY 2026-27) retains the deemed dividend provisions from the 1961 Act. The key difference is jurisdictional: the Companies Act regulates the legality of the loan (can the company make it?), while the Income Tax Act determines the tax treatment (is it a deemed dividend?). A loan can be legally valid under Section 185(2) but still trigger deemed dividend taxation under Section 2(22)(e) if the accumulated profits condition is met.
I'm CA Harun Raaj, Visakhapatnam. If any of this affects you or your business, reach out — I'd be glad to help.
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