A public company can pay its directors and manager, taken together, up to 11% of its net profits for the year. Inside that figure sit smaller limits: 5% for a single managing director, whole-time director or manager, 10% where there are two or more of them, and 1% or 3% for the non-executive directors. These managerial remuneration limits come from section 197 of the Companies Act, 2013. Crossing them is allowed, but only with the right shareholder resolution. In a loss year, or when profits are too thin to cover the package, the ceiling moves to Schedule V and is set by the company's effective capital instead of its profits.
The rules below are taken from the text of section 197 of the Companies Act, 2013 as amended by the Companies (Amendment) Act, 2017, and from Schedule V as last substituted on 18 March 2021. Both were checked as on 14 November 2026.
Which companies the limits bind
Sub-section (1) of section 197 speaks of the total managerial remuneration payable by a public company. The ICSI's company law note on managerial remuneration reads the section as applying only to public companies and states that a private company has no statutory cap on what it pays its directors. A private company still needs the approvals its own articles demand, and the payments still run through its accounts and related party disclosures, but the percentage ceilings do not apply to it.
For a public company, the limits cover every director, including the managing director (MD) and whole-time directors (WTDs), and the manager. Salaries of employees who are not directors or the manager, such as a CFO who is not on the board, are outside section 197.
The percentage limits when the company has adequate profits
| Who is paid | Limit without special approval | Approval needed to exceed it |
|---|---|---|
| All directors and the manager together | 11% of net profits | Resolution in general meeting, subject to Schedule V (first proviso) |
| Any one MD, WTD or manager | 5% of net profits | Special resolution (second proviso, clause (i)) |
| All MDs, WTDs and the manager, where there is more than one | 10% of net profits together | Special resolution (second proviso, clause (i)) |
| Non-executive directors, where the company has an MD, WTD or manager | 1% of net profits | Special resolution (second proviso, clause (ii)(A)) |
| Non-executive directors, in any other case | 3% of net profits | Special resolution (second proviso, clause (ii)(B)) |
Before 12 September 2018, going above these limits needed Central Government approval. The 2017 amendment replaced that with shareholder approval, and sub-section (17) made pending applications to the government abate, with companies given one year to get the shareholder approval instead.
A company that has defaulted on dues to a bank, a public financial institution, non-convertible debenture holders or any other secured creditor has one more step. Under the third proviso, it must obtain that lender's prior approval before it goes to the general meeting.
What sits outside the percentages
Sitting fees are excluded. Sub-section (2) makes the percentages exclusive of the fees paid under sub-section (5) for attending board or committee meetings. The ICSI note records the prescribed ceiling for those fees under Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 as ₹1 lakh per meeting. An independent director or woman director cannot be paid less than other directors.
Fees for professional services can also stay outside. Under the proviso to sub-section (4), a director's fee for services in another capacity is not counted if the services are of a professional nature. The second condition is that the Nomination and Remuneration Committee (or the board, where no committee is required) must be of the opinion that the director holds the qualification needed to practise that profession. A chartered accountant on the board who also handles the company's tax matters is the usual example.
Directors' and officers' liability insurance is the third item. Sub-section (13) keeps the premium on insurance taken for the MD, WTD, manager, CEO, CFO or company secretary out of their remuneration, unless the person is later proved guilty.
Working out net profits under section 198
The percentages are applied to net profits computed under section 198 of the Companies Act, 2013, not to the profit before tax in the statement of profit and loss. Sub-section (1) of section 197 adds one twist: for the 11% test, the remuneration of the directors is not deducted from the gross profits.
Section 198 starts from the profit and makes adjustments on both sides:
- Not credited: premium on shares or debentures (unless the company is an investment company), profit on sale of forfeited shares and profits of a capital nature. Profit on sale of immovable property or capital fixed assets is also left out, as are fair value changes taken to reserves and unrealised or notional gains.
- Allowed as a deduction: working charges, interest on debentures, secured and unsecured loans, repairs that are not capital in nature, depreciation under section 123, bad debts written off, legal compensation and the insurance against it, and any excess of expenditure over income from earlier years not yet set off.
- Not deducted: income-tax, voluntary compensation, capital losses and fair value changes.
Depreciation is taken as computed under section 123, which in turn follows Schedule II, so the figures from the Schedule II depreciation calculation feed straight into this working. For a fixed asset sold, the proviso to section 198(3)(d) lets the company credit the excess of sale price over written-down value, but only up to the depreciation already charged (original cost less written-down value). Land is never depreciated, so a profit on selling it adds nothing.
Illustration: testing a package against the 11% and individual limits
Sunrise Packaging Ltd is an unlisted public company. For FY 2025-26 its profit before tax is ₹9,40,00,000. That figure is after charging ₹1,20,00,000 of directors' remuneration and after including ₹60,00,000 profit on sale of a plot of land and an unrealised fair value gain of ₹15,00,000 on mutual fund units.
| Step | Amount |
|---|---|
| Profit before tax | ₹9,40,00,000 |
| Add back directors' remuneration (section 197(1)) | ₹1,20,00,000 |
| Less profit on sale of land (section 198(3)(d)) | ₹60,00,000 |
| Less unrealised fair value gain (section 198(3)(f)) | ₹15,00,000 |
| Net profits for section 197 | ₹9,85,00,000 |
On ₹9,85,00,000 the limits work out to ₹1,08,35,000 overall (11%), ₹49,25,000 for any one MD or WTD (5%), ₹98,50,000 for the MD and WTD together (10%) and ₹9,85,000 for the non-executive directors (1%, because the company has an MD). The board proposes ₹72 lakh for the MD, ₹30 lakh for the WTD and a commission of ₹6 lakh each to two independent directors, plus ₹4 lakh of sitting fees.
Leaving out the sitting fees, the package totals ₹1,14,00,000, which is above the 11% ceiling. The MD alone is above 5%, the two executives together at ₹1,02,00,000 are above 10%, and the ₹12 lakh commission is above 1%. Every element therefore needs a special resolution, and if Sunrise is in default on its term loan, the bank's prior approval comes first. A special resolution is one of the resolutions that must be filed with the Registrar, so the MGT-14 filing under section 117 follows within 30 days.
When profits are absent or inadequate: Schedule V
Sub-section (3) of section 197 says that if a company has no profits or inadequate profits in a financial year, it cannot pay its directors, including non-executive and independent directors, anything beyond sitting fees except in accordance with Schedule V. Section I of Part II of Schedule V to the Companies Act, 2013 lets a profitable company pay up to the section 197 limits. Section II applies to the rest and sets a yearly cap linked to effective capital.
| Effective capital | Yearly limit for a managerial person | Yearly limit for other directors |
|---|---|---|
| Negative or less than ₹5 crore | ₹60 lakh | ₹12 lakh |
| ₹5 crore to less than ₹100 crore | ₹84 lakh | ₹17 lakh |
| ₹100 crore to less than ₹250 crore | ₹120 lakh | ₹24 lakh |
| ₹250 crore and above | ₹120 lakh plus 0.01% of effective capital above ₹250 crore | ₹24 lakh plus 0.01% of effective capital above ₹250 crore |
The column for other directors was added from 18 March 2021, when non-executive and independent directors were first allowed to be paid in a loss year. Where a director serves for less than a year, the limits are pro-rated. A special resolution allows payment above the table.
Payment under Section II also has conditions attached:
- a board resolution, plus the Nomination and Remuneration Committee's approval where section 178(1) applies;
- no default to banks, financial institutions, debenture holders or secured creditors, unless they have given prior approval;
- a general meeting resolution valid for not more than three years;
- a statement with the notice of the meeting giving shareholders the information Schedule V prescribes.
How effective capital is measured
Explanation I to Part II defines effective capital as the total of paid-up share capital (excluding share application money), share premium, reserves and surplus (excluding revaluation reserve) and long-term loans and deposits repayable after one year. From that total the company deducts its investments, accumulated losses and preliminary expenses not written off. Explanation II fixes the date. If the appointment is made in the year of incorporation, effective capital is taken on the date of appointment; otherwise it is taken as on the last day of the financial year before the year of appointment.
Illustration. Kaveri Textiles Ltd makes a loss in FY 2025-26 and appoints an MD from 1 April 2025. On 31 March 2025 it had paid-up capital of ₹10 crore, share premium of ₹8 crore, a general reserve of ₹20 crore and long-term borrowings of ₹15 crore. It held investments of ₹5 crore and had a debit balance of ₹6 crore in profit and loss. Effective capital is ₹10 + ₹8 + ₹20 + ₹15 − ₹5 − ₹6 = ₹42 crore, which falls in the ₹5 crore to ₹100 crore band. The MD can be paid up to ₹84 lakh a year and each other director up to ₹17 lakh without a special resolution.
Payments that Schedule V leaves out of the cap
Section IV of Part II excludes three items from the ceiling:
- the company's contribution to provident fund, superannuation or annuity funds, to the extent not taxable under the Income-tax Act;
- gratuity at up to half a month's salary for each completed year of service;
- leave encashment at the end of the tenure.
If Kaveri's MD has a package of ₹88 lakh that includes ₹4.3 lakh of non-taxable provident fund contribution, only ₹83.7 lakh is tested against the ₹84 lakh limit, and the ordinary resolution is enough. Remuneration for this purpose includes any reimbursement of the director's direct taxes.
Section III relaxes the cap for a newly incorporated company for seven years from incorporation, and for five years after a revival scheme or an NCLT-approved resolution plan under the Insolvency and Bankruptcy Code, 2016. Section V lets a person who is a managerial person in two companies draw from either or both, but the total cannot exceed the higher maximum limit admissible from any one of them.
Excess payments, refunds and penalties
A director who draws more than the section allows, or draws it without the approval the section requires, must refund the excess to the company within two years or any shorter period the company allows. Until it is refunded, sub-section (9) says the director holds the money in trust for the company. Sub-section (10) lets the company waive the recovery only by a special resolution passed within two years from the date the sum became refundable, again with the prior approval of any lender in default.
The penalty under sub-section (15) is ₹1 lakh on any person in default and ₹5 lakh on the company. The statutory auditor must also report on it. Under sub-section (16), the audit report under section 143 states whether the remuneration paid to directors complies with section 197 and whether any director has been paid above the limit.
Listed companies have an extra disclosure. Sub-section (12) requires the Board's report under section 134 to show the ratio of each director's remuneration to the median employee's remuneration. Sub-section (14) requires disclosure in the same report when an MD or WTD who receives commission from the company also receives remuneration or commission from its holding or subsidiary company.
Paying independent directors
An independent director's pay is usually a mix of sitting fees and profit-linked commission approved by members. Since 18 March 2021, section 197(3) and Schedule V also allow independent and other non-executive directors to be paid in a year without adequate profits, within the "other directors" column. Whether the company needs independent directors under the Companies Act thresholds decides who falls into the "other directors" column in the first place. When fixing their commission, test it against the 1% or 3% limit and against the ₹12 lakh to ₹24 lakh Schedule V band for any year that may turn out to be a loss year.
Part III of Schedule V adds one more filing point for loss-year appointments. The appointment and remuneration must be approved at a general meeting, and the company's auditor or company secretary (or a practising company secretary where the company has none) must certify that the Schedule V requirements are met. That certificate goes with the return filed under section 196(4).
