Business Laws and Ethics · Directors - Role, Responsibilities, Qualification, Appointment, Removal, Remuneration and Powers

Managerial Remuneration under Section 197 Companies Act 2013

Updated 10 October 2026 · Fact-checked

Under section 197, a public company's total managerial remuneration cannot exceed 11% of net profits, computed under section 198. Within that, one MD, WTD or manager gets up to 5%, and non-executive directors get up to 1% or 3%. Higher payment needs a special resolution. Without adequate profits, Schedule V applies.

Understand Remuneration of Directors and Managerial Personnel

Section 197 controls how much a company can pay its directors and managers. The idea is simple: directors run the company with shareholders' money, so the law caps what they can take out and decides who must approve it.

The main cap is on the total managerial remuneration of a public company. It covers all directors (including managing director, whole-time director) and the manager. It cannot exceed 11% of net profits for the financial year. Net profits are computed as laid down in section 198. One special point: the directors' remuneration is not deducted while arriving at the gross profits.

There are two layers inside this. First, a managing director, whole-time director or manager can be paid up to 5% of net profits, or 10% together if there is more than one such person. Second, directors who are neither managing nor whole-time can be paid up to 1% if the company has an MD, WTD or manager, and 3% in any other case. Paying more than these individual limits needs the approval of the company in general meeting by a special resolution.

The 11% overall cap works differently. The company in general meeting may authorise payment above 11% of net profits, subject to Schedule V. Do not mix the two: a special resolution is the route for the 5%, 10%, 1% and 3% limits, while the 11% cap can be crossed only by general meeting authorisation subject to Schedule V.

If the company has defaulted in paying dues to any bank, public financial institution, non-convertible debenture holders or any other secured creditor, it must first get that creditor's prior approval before it seeks the approval of the general meeting.

Where the company has no profits or inadequate profits, it cannot pay remuneration to directors (including any other non-executive or independent director) except in accordance with Schedule V. Sitting fees under sub-section (5) are outside these percentages.

If a director receives more than allowed, or without the approval required, he must refund the excess within two years (or a shorter period allowed by the company) and hold it in trust for the company until then. The auditor must also report on whether remuneration complies with the section.

Key rules to remember

Overall cap (public company): Total managerial remuneration ≤ 11% of net profits; Net profits computed under section 198. Directors' remuneration is not deducted from gross profits. A general meeting may authorise more, subject to Schedule V.
MD / WTD / manager limit: One such person ≤ 5% of net profits; more than one ≤ 10% in total; Exceeding needs approval of the company in general meeting by a special resolution. If the company is in default on dues to a bank, public financial institution, debenture holders or other secured creditor, their prior approval is needed first.
Other directors' limit: Neither MD nor WTD: ≤ 1% of net profits if there is an MD, WTD or manager; ≤ 3% in any other case; Exceeding needs approval of the company in general meeting by a special resolution, with the same prior creditor approval if the company is in default on secured dues.
Sitting fees: Fees under section 197(5) are outside the percentage limits; Board decides the fee, but it cannot exceed the prescribed amount. Different fees may be prescribed for classes of companies and for independent directors.
No or inadequate profits: Pay only as per Schedule V; Applies to all directors, including non-executive and independent directors, apart from sitting fees.
Excess received: Refund within 2 years (or lesser period allowed); hold in trust meanwhile; Waiver of recovery needs a special resolution within two years from the date the sum becomes refundable.
Penalty for default: Person in default: ₹1,00,000; company: ₹5,00,000; Under section 197(15).

How to solve Remuneration of Directors and Managerial Personnel questions

Use the same sequence for any question on managerial remuneration, whether theory or numerical.

1Identify the type of company and whether it has adequate profits. If profits are absent or inadequate, go to Schedule V.
2Find net profits as per section 198 (the question usually gives it). Remember that directors' remuneration is not deducted from gross profits.
3Classify each person: MD, WTD, manager, or a director who is neither MD nor WTD.
4Apply the limits: 11% overall, 5% for one MD/WTD/manager (10% if more than one), and 1% or 3% for other directors.
5Check whether sitting fees are in the question. Keep them outside the percentages.
6Decide the approval needed: a special resolution in general meeting for exceeding the 5%, 10%, 1% or 3% limits; general meeting authorisation, subject to Schedule V, for exceeding 11%. If the company has defaulted on dues to a bank, public financial institution, debenture holders or other secured creditor, get their prior approval before the general meeting.
7State the consequence of excess: refund within two years, held in trust, with penalty for default.
8Write the conclusion clearly: payable amount, excess and required approval.

Quickest way: Percentage ladder check

When to use it: Use for numerical questions or MCQs asking the maximum remuneration payable.

Write net profits at the top and compute 11%, 5%, 10%, 1% and 3% of it at once.
Pick the right rung: single MD/WTD/manager is 5%; several is 10% shared; other directors are 1% (if MD/WTD/manager exists) or 3% (if not).
Compare the proposed payment with the right rung. Anything above needs a special resolution.
Add all categories and compare with 11%.
Ignore sitting fees in all these comparisons.

Common mistakes in Remuneration of Directors and Managerial Personnel

Including sitting fees inside the 11%, 1% or 3% limits.
Students treat all payments to directors as one pool.
Fix: Remember that section 197(2) says the percentages are exclusive of fees under sub-section (5).
Using 1% for non-executive directors when the company has no MD, WTD or manager.
Students memorise 1% and forget the condition.
Fix: Use 1% only if there is an MD, WTD or manager. In any other case the limit is 3%.
Deducting directors' remuneration from gross profits to get net profits.
Normal profit calculations deduct all expenses.
Fix: For this section, the remuneration of directors is not deducted from gross profits, as section 197(1) states.
Saying an ordinary resolution is enough to exceed the 5%, 10%, 1% or 3% limits, or treating a special resolution as the route for exceeding 11%.
Confusion with routine general meeting approvals, and blurring the individual limits with the overall cap.
Fix: Write that exceeding the 5%, 10%, 1% or 3% limits needs a special resolution in general meeting. Exceeding 11% needs general meeting authorisation subject to Schedule V. If the company has defaulted on dues to banks or secured creditors, their prior approval comes first.
Forgetting Schedule V when profits are inadequate.
Students apply percentage limits even when there are no profits.
Fix: First check profits. If none or inadequate, remuneration is payable only in accordance with Schedule V.
Stating that excess remuneration can simply be kept.
Students miss the recovery provisions.
Fix: State that the director refunds it within two years or a lesser period allowed, holding it in trust meanwhile.

Worked examples

Example 1

Moonlight Industries Ltd., a public company, has net profits of ₹10,00,00,000 (₹10 crore) as per section 198. It has one managing director and three non-executive directors. Compute the maximum remuneration payable without a special resolution to the MD, to the non-executive directors together, and the overall cap.

Show the solution

Overall cap = 11% of ₹10,00,00,000 = ₹1,10,00,000.
One managing director: limit is 5% of ₹10,00,00,000 = ₹50,00,000.
The company has an MD, so non-executive directors' limit is 1% of ₹10,00,00,000 = ₹10,00,000 in total.
Check: ₹50,00,000 + ₹10,00,000 = ₹60,00,000, which is within ₹1,10,00,000.
Sitting fees are extra and not counted in these figures.

Answer: MD: ₹50,00,000; non-executive directors together: ₹10,00,000; overall cap: ₹1,10,00,000. Sitting fees are excluded.

Example 2

Sunrise Textiles Ltd., a public company, has net profits of ₹4,00,00,000. It has no managing director, whole-time director or manager. It has only two non-executive directors. The board proposes to pay them ₹15,00,000 in total as commission, plus sitting fees. Is the proposal permissible without further approval?

Show the solution

There is no MD, WTD or manager, so the limit for non-executive directors is 3% of net profits.
3% of ₹4,00,00,000 = ₹12,00,000.
Proposed commission of ₹15,00,000 exceeds ₹12,00,000 by ₹3,00,000.
Sitting fees are outside the percentage, so they do not affect this comparison.
To pay beyond 3%, the company needs approval of the general meeting by a special resolution.

Answer: Not permissible as proposed. The maximum without further approval is ₹12,00,000. The excess of ₹3,00,000 needs a special resolution in general meeting.

Exam tips

In MCQs, watch the condition word: MD/WTD/manager present means 1%, absent means 3%.
Always state the section number 197 and the word 'special resolution' in written answers to earn step marks.
In numericals, show a small table of limits first, then compare, then conclude.
Mention that percentages are exclusive of sitting fees and that net profits are computed under section 198.
If the question says losses or inadequate profits, lead with Schedule V and not the percentages.

Practice questions from Directors - Role, Responsibilities, Qualification, Appointment, Removal, Remuneration and Powers

Remuneration of Directors and Managerial Personnel in other exams

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

Remuneration of Directors and Managerial Personnel: frequently asked questions

What is the maximum managerial remuneration under section 197?

For a public company, total managerial remuneration to directors and the manager cannot exceed 11% of net profits computed under section 198. The company in general meeting may authorise more, subject to Schedule V.

Are sitting fees included in the 11% limit?

No. Section 197(2) says the percentages are exclusive of fees payable to directors under sub-section (5). The Board decides the fees, but they cannot exceed the prescribed amount.

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

The company cannot pay remuneration to its directors, including any managing or whole-time director, manager, or non-executive or independent director, except in accordance with Schedule V. Sitting fees are separate.

What if a director receives more than the permitted remuneration?

He must refund the excess to the company within two years or a lesser period allowed by the company. Until then he holds it in trust for the company. Waiver of recovery needs a special resolution within two years.

Does the auditor have any role?

Yes. The auditor's report under section 143 must state whether remuneration paid to directors is in accordance with section 197 and whether any director was paid in excess of the limit.