Corporate and Economic Laws · Board of Directors and Key Managerial Personnel

Managerial Remuneration under Section 197: Limits and Approvals

Updated 11 October 2026 · Fact-checked

Managerial remuneration is the pay a company gives its directors, managing director, whole-time director or manager. Section 197 caps the total for a public company at 11% of net profits (computed under section 198). Higher individual limits need a special resolution. In loss or inadequate profit years, you apply Schedule V.

Understand Managerial Remuneration

Directors run a company for its owners. Pay to them is a conflict of interest, because they influence what they earn. Section 197 limits that risk with caps linked to profit and with shareholder approval.

The starting point is the overall limit. A public company's total remuneration to all its directors (including the managing director and whole-time directors) and its manager, for a financial year, cannot exceed 11% of net profits. Net profit is computed as per section 198, except that directors' remuneration is not deducted from gross profits. The company in general meeting may authorise more than 11%, subject to Schedule V.

Then come the individual limits. Unless the company approves by a special resolution, one managing director, whole-time director or manager can get at most 5% of net profits. If there is more than one such person, they get at most 10% taken together. Directors who are neither managing nor whole-time (non-executive directors) get at most 1% if the company has a managing director, whole-time director or manager, and 3% in any other case.

These percentages are exclusive of sitting fees under section 197(5). Sitting fees for Board or committee meetings are decided by the Board, but cannot exceed the prescribed amount.

When a company has no profits or inadequate profits, section 197(3) says it cannot pay any director, including a non-executive or independent director, any remuneration (other than sitting fees) except in accordance with Schedule V. Also, if a company has defaulted in dues to a bank, public financial institution, non-convertible debenture holders or another secured creditor, it must first get that creditor's prior approval before going to the general meeting for the higher limits.

Key rules to remember

Overall limit (public company): Total managerial remuneration ≤ 11% of net profits (section 198 basis); Covers directors, MD, WTD and manager. Remuneration of directors is not deducted while computing profit for this purpose. Can be exceeded by general meeting approval subject to Schedule V.
One MD / WTD / manager: ≤ 5% of net profits; Without special resolution. Applies to any one such person.
More than one MD / WTD / manager: ≤ 10% of net profits to all together; Without special resolution. Manager is included in the group.
Non-executive directors (MD/WTD/manager exists): ≤ 1% of net profits; Without special resolution.
Non-executive directors (no MD/WTD/manager): ≤ 3% of net profits; Without special resolution.
Sitting fees: Outside the percentage limits; fee ≤ prescribed amount; Section 197(2) and (5). Fee amount is set by the Board within the prescribed ceiling.
No or inadequate profits: Pay only as per Schedule V; Section 197(3). Applies to all directors, including non-executive and independent directors, other than sitting fees.
Excess remuneration: Refund within 2 years (or lesser period allowed by company); hold in trust until refunded; Section 197(9). Waiver of recovery needs a special resolution within two years (section 197(10)).
Penalty for default: Person ₹1,00,000; company ₹5,00,000; Section 197(15).
MD/WTD/manager appointment (section 196): Term ≤ 5 years; age 21 to below 70; no MD and manager together; Appointment at age 70 or more needs a special resolution with justification in the explanatory statement. Re-appointment not earlier than one year before term expiry.

How to solve Managerial Remuneration questions

Use this order for any question on managerial remuneration, numerical or theory.

1Identify the company type. The 11% overall limit in section 197(1) is for a public company.
2Check profits for the year. If there are no profits or they are inadequate, go straight to section 197(3) and Schedule V.
3If profits are adequate, compute net profit as per section 198 (the question usually gives it). Do not deduct directors' remuneration.
4Compute each limit: 11% overall, then 5% for one MD/WTD/manager or 10% for several, then 1% or 3% for non-executive directors.
5Keep sitting fees outside the percentages. Do not add them when testing limits.
6Check approvals: excess over 5%, 10%, 1% or 3% needs a special resolution; excess over 11% needs general meeting authorisation subject to Schedule V. Check for secured creditor default and get prior creditor approval.
7State the consequence of excess: refund to the company, hold in trust, waiver only by special resolution, and the penalty.
8Close with a clear conclusion in one line: payable or not, and what approval is needed.

Quickest way: Percentage ladder for numerical questions

When to use it: Use in MCQs and short numerical questions where net profit is given and you must test whether a payment is within limits.

Write 11, 5, 10, 1, 3 in a row and tag each: overall, one MD, many MD, NED with MD, NED without MD.
Multiply net profit by the right percentages and compare with the payments given.
Treat sitting fees as separate.
If the payment exceeds the limit, add the line: special resolution needed, or refund if not approved.

Common mistakes in Managerial Remuneration

Deducting directors' remuneration before applying 11%
Students apply the usual rule that expenses reduce profit.
Fix: Remember the exception in section 197(1): directors' remuneration is not deducted from gross profits for this computation.
Including sitting fees inside the 1% or 3% limit
Students treat all payments to non-executive directors as one pool.
Fix: Section 197(2) says the percentages are exclusive of sitting fees. Test the commission or profit-linked pay against the cap and leave fees out.
Applying 5% to the total of all executive directors
Confusion between 'any one' and 'all taken together'.
Fix: 5% is for any one MD, WTD or manager. If there are more than one, 10% is the combined ceiling, manager included.
Saying independent directors can be paid freely in a loss year
Students think the Schedule V restriction covers only executive directors.
Fix: Section 197(3) now covers any other non-executive director, including an independent director, apart from sitting fees.
Thinking excess pay is simply void or the company can waive refund by board resolution
Mixing up the refund and waiver rules.
Fix: The director refunds within two years and holds the sum in trust meanwhile. Waiver needs a special resolution within two years, and prior secured creditor approval if the company is in default.
Mixing up age and term rules of section 196 with section 197 limits
Both deal with MD, WTD and manager.
Fix: Section 196 is about appointment: five-year term, age 21 to below 70 (special resolution to appoint at 70 or more). Section 197 is about pay.

Worked examples

Example 1

A public company, Kaveri Industries Ltd, has net profits of ₹20,00,00,000 (₹20 crore) for the year computed under section 198. It has one managing director and two non-executive directors. Compute the maximum remuneration without a special resolution for (a) the managing director, (b) the non-executive directors together, (c) the overall total.

Show the solution

Net profit = ₹20,00,00,000.
(a) One managing director: 5% × ₹20,00,00,000 = ₹1,00,00,000.
(b) Non-executive directors, with an MD in office: 1% × ₹20,00,00,000 = ₹20,00,000 in total.
(c) Overall limit for all: 11% × ₹20,00,00,000 = ₹2,20,00,000.
Sitting fees are outside these limits.
Excess over (a) or (b) needs a special resolution; excess over (c) needs general meeting authorisation subject to Schedule V.

Answer: MD: ₹1,00,00,000; non-executive directors together: ₹20,00,000; overall: ₹2,20,00,000. Sitting fees are extra.

Example 2

Meghdoot Ltd, a public company, has two whole-time directors and no manager. Net profit under section 198 is ₹10,00,00,000. The company wants to pay each whole-time director ₹70,00,000. The shareholders have passed only an ordinary resolution. Examine whether the payment is valid.

Show the solution

Compute the limits on ₹10,00,00,000. The 5% limit of ₹50,00,000 is for one managing director, whole-time director or manager. Here there are two whole-time directors, so the limit for both taken together is 10% = ₹1,00,00,000 (section 197(1), second proviso, clause (i)). The overall limit for all directors and the manager together is 11% = ₹1,10,00,000.
Total proposed: 2 × ₹70,00,000 = ₹1,40,00,000.
Compare with the 10% limit for the two whole-time directors together: ₹1,40,00,000 exceeds ₹1,00,00,000 by ₹40,00,000.
Compare with the 11% overall limit: ₹1,40,00,000 also exceeds ₹1,10,00,000 by ₹30,00,000. The 11% cap covers the pay of all directors and the manager together, so any pay to other directors would add to the total and make the excess larger.
Exceeding the 10% limit needs approval of the company in general meeting by a special resolution. Exceeding the 11% limit needs authorisation by the company in general meeting, subject to Schedule V.
An ordinary resolution is not enough. If the amount is paid without the required approval, section 197(9) requires the director to refund the excess, holding it in trust until it is refunded.

Answer: The payment is not valid as proposed. With two whole-time directors, the combined limit is 10% of net profits, which is ₹1,00,00,000. The proposed total of ₹1,40,00,000 exceeds it, and it also exceeds the 11% overall limit of ₹1,10,00,000. The company needs a special resolution for the excess over 10%, and general meeting authorisation subject to Schedule V to go beyond 11%. An ordinary resolution is not enough. Otherwise the excess must be refunded within two years.

Exam tips

In MCQs, memorise the five percentages (11, 5, 10, 1, 3) and the condition attached to each, especially 1% versus 3%.
Write the section number with the rule: 197(1) for limits, 197(3) for no profits, 197(9) for refund, 197(15) for penalty.
In case scenarios, check first whether profits are adequate. If not, answer through Schedule V and do not apply percentage caps.
Always state the approval needed (special resolution, general meeting, creditor approval) along with the numerical answer.
Keep sections 196 and 197 separate: appointment conditions versus pay limits.

Practice questions from Board of Directors and Key Managerial Personnel

Managerial Remuneration in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Managerial Remuneration: frequently asked questions

What is the overall limit of managerial remuneration under Section 197?

For a public company it is 11% of net profits computed as per section 198. Directors' remuneration is not deducted from gross profits for this. The company in general meeting can authorise more, subject to Schedule V.

What happens if a company has no profits or inadequate profits?

Section 197(3) says the company cannot pay directors, including non-executive and independent directors, any remuneration except as per Schedule V. Sitting fees are outside this restriction.

Are sitting fees part of the 11% limit?

No. Section 197(2) says the percentages are exclusive of fees payable under section 197(5). The Board decides the fee, but it cannot exceed the prescribed amount.

What is the difference between a managing director and a whole-time director?

A managing director is entrusted with substantial powers of management of the company's affairs, subject to the Board's control. A whole-time director is in the whole-time employment of the company. Both come under the same sections 196 and 197 limits, and both may be appointed for up to five years at a time.

What if a director receives more than the permitted remuneration?

He must refund the excess within two years or a shorter period allowed by the company, and hold it in trust meanwhile. The company can waive recovery only by special resolution within two years. Default attracts a penalty of ₹1,00,000 on the person and ₹5,00,000 on the company.