Company Law and Practice · Key Managerial Personnel and their Remuneration

Remuneration of Managerial Personnel under Section 197 and Schedule V

Updated 11 October 2026 · Fact-checked

Managerial remuneration is what a public company pays its directors, managing director, whole-time director and manager. Section 197 caps the total at 11% of net profits, with 5%, 10%, 1% and 3% sub-limits needing a special resolution to exceed. If profits are absent or inadequate, you must follow Schedule V.

Understand Remuneration of Managerial Personnel

A company is run by people who are paid. The law wants that pay to be fair to shareholders, so section 197 of the Companies Act, 2013 sets limits. The limits are tied to the company's net profits, computed as section 198 lays down. One twist: the directors' own remuneration is not deducted from gross profits while computing net profits for this purpose.

The overall limit applies to a public company. Total managerial remuneration to its directors (including managing director and whole-time director) and its manager must not exceed 11% of net profits for the financial year. The company in general meeting may authorise more than 11%, subject to Schedule V. Earlier, Central Government approval was needed. That requirement was removed by the 2017 Amendment Act (in force from 12 September 2018).

Inside the 11%, there are 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, all of them together can get at most 10%. Directors who are neither managing nor whole-time directors can get 1% if the company has a managing or whole-time director or manager, and 3% in any other case.

When a company has no profits or inadequate profits, sub-sections (1) and (2) do not help. Under section 197(3), the company can pay remuneration only in accordance with Schedule V. This now covers any other non-executive director, including an independent director, too. Sitting fees under section 197(5) are outside these percentages.

The Nomination and Remuneration Committee (NRC) under section 178 sits behind all this. It recommends the remuneration policy to the Board. Think of it in layers: the NRC recommends, the Board and the members approve, and the auditor reports on compliance.

Key rules to remember

Overall ceiling (public company): Total managerial remuneration ≤ 11% of net profits; Covers directors including MD and WTD, and manager. Net profits computed under section 198. More than 11% needs general meeting approval, subject to Schedule V.
MD / WTD / manager limit: One such person ≤ 5% of net profits; more than one, all together ≤ 10%; Exceeding these needs a special resolution of the company.
Non-executive directors' limit: ≤ 1% of net profits if there is an MD, WTD or manager; ≤ 3% otherwise; Applies to directors who are neither MD nor WTD. Exceeding needs a special resolution.
Sitting fees: Fees under section 197(5) are in addition to the percentages; The amount is as prescribed; it is decided by the Board.
No or inadequate profits: Pay only as per Schedule V; Section 197(3). Any increase must also be in line with Schedule V (section 197(11)).
Excess remuneration: Refund within 2 years (or lesser period allowed by the company); hold in trust until refunded; Section 197(9). Waiver needs a special resolution within 2 years of the sum becoming refundable (section 197(10)).
Penalty for default: Person: ₹1 lakh; company: ₹5 lakh; Section 197(15).

How to solve Remuneration of Managerial Personnel questions

Use this order for any question on managerial remuneration, whether it is a calculation or a case-based question.

1Identify the company: a public company (section 197(1) limits apply) and check whether it has profits for the year.
2Compute net profits as per section 198. Do not deduct directors' remuneration from gross profits for this purpose. If the question gives net profits, use them directly.
3If profits are adequate, apply the 11% overall cap. Then apply the 5%, 10%, 1% or 3% limits depending on who is being paid.
4Check who must approve. Within limits, the articles or an ordinary resolution (or special resolution if the articles say so) fixes the pay under section 197(4). Above the individual limits, a special resolution is needed.
5Check for defaults to banks, public financial institutions, debenture holders or secured creditors. If any, their prior approval is needed before the general meeting.
6If profits are nil or inadequate, state that section 197(3) sends you to Schedule V and test the pay against it.
7Add sitting fees separately and mention the NRC's role under section 178 and the auditor's report under section 197(16).
8Conclude clearly: permissible or not, what approval is needed, and the consequence of excess (refund and penalty).

Quickest way: Four-line check for percentage questions

When to use it: Use when the question gives net profits and asks for the maximum remuneration for named directors.

Write net profits first. Then 11% of it as the overall ceiling.
Write the individual limit: 5% for one MD, WTD or manager, 10% for several together.
Write the non-executive limit: 1% if an MD, WTD or manager exists, else 3%.
Add a line: sitting fees are extra; higher amounts need a special resolution; profits inadequate means Schedule V.

Common mistakes in Remuneration of Managerial Personnel

Applying the 11% cap to a private company.
Students remember the percentage but forget the opening words of section 197(1).
Fix: Start every answer by stating that section 197(1) applies to a public company.
Deducting directors' remuneration from gross profits before computing net profits.
Normal accounting deducts all expenses.
Fix: Remember the exception in section 197(1): directors' remuneration is not deducted from gross profits. Then follow section 198.
Writing that Central Government approval is needed to exceed 11%.
Old notes and the pre-2018 law still circulate.
Fix: State that the company in general meeting authorises it, subject to Schedule V. The Central Government approval was removed with effect from 12 September 2018.
Confusing the 1% and 3% limit for non-executive directors.
Both numbers look alike and the condition is easy to flip.
Fix: 1% applies when there is an MD, WTD or manager. 3% applies in every other case.
Including sitting fees within the percentage limits.
Students treat all payments to a director as one pool.
Fix: Section 197(2) says the percentages exclude fees under section 197(5). Keep them separate.
Forgetting the consequences of excess pay.
The answer stops at the limit.
Fix: Add the refund within two years, holding in trust, the special resolution for waiver, and the penalties of ₹1 lakh and ₹5 lakh.

Worked examples

Example 1

Sunrise Textiles Ltd, a public company, has net profits of ₹10 crore for the year, computed under section 198. It has one managing director and three non-executive directors. What are the maximum amounts payable without a special resolution, as percentages under section 197 (excluding sitting fees)?

Show the solution

Overall ceiling: 11% of ₹10,00,00,000 = ₹1,10,00,000.
Managing director (only one): 5% of ₹10,00,00,000 = ₹50,00,000.
Non-executive directors: the company has a managing director, so the limit is 1% of ₹10,00,00,000 = ₹10,00,000 in total.
Check the total: ₹50,00,000 + ₹10,00,000 = ₹60,00,000, which is within ₹1,10,00,000.
Sitting fees are payable additionally under section 197(5).

Answer: The MD can receive up to ₹50,00,000 and the non-executive directors together up to ₹10,00,000, within the overall cap of ₹1,10,00,000. Sitting fees are extra. Higher amounts need a special resolution.

Example 2

Gangotri Foods Ltd, a public company with a loss for the year, proposes to pay its whole-time director a monthly salary under a contract that raises his pay by a clause in the articles. Advise the company.

Show the solution

Provision: under section 197(3), if a company has no profits or inadequate profits, it cannot pay remuneration to its directors, including a whole-time director, except in accordance with Schedule V.
Analysis: the percentage limits of sub-section (1) do not decide the matter in a loss year. Schedule V conditions must be met.
Under section 197(11), a provision in the articles, an agreement or a resolution that increases remuneration has no effect unless the increase is in accordance with Schedule V.
The increase clause in the articles therefore cannot override Schedule V.
If the company has defaulted in dues to a bank, public financial institution, debenture holders or secured creditors, their prior approval is needed before the general meeting approval under the provisos.
Any amount paid beyond the permitted limit must be refunded within two years and held in trust until then (section 197(9)). Default attracts penalty under section 197(15).

Answer: The company can pay the whole-time director only as Schedule V permits. The increase in the articles has no effect unless it complies with Schedule V. Excess pay must be refunded, and default attracts a penalty of ₹5 lakh on the company and ₹1 lakh on the person in default.

Exam tips

Write the section number with each rule: 197(1) for the 11% cap, 197(3) for Schedule V, 197(9) for refund, 197(15) for penalty.
For a calculation, show net profits, each percentage and the total check. Marks follow the working.
In case questions, structure your answer in ICSI style: provision, application to the facts, conclusion.
Mention the NRC under section 178 when the question is about the remuneration policy or KMP pay.
Give the penalty and the refund rule in the closing lines of every answer on excess remuneration.

Practice questions from Key Managerial Personnel and their Remuneration

Remuneration of 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 Managerial Personnel: frequently asked questions

What is the maximum remuneration payable to directors under the Companies Act, 2013?

For a public company, total managerial remuneration cannot exceed 11% of net profits under section 197(1). The company in general meeting may authorise more, subject to Schedule V. Individual limits of 5%, 10%, 1% and 3% also apply unless a special resolution approves more.

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

Section 197(3) says the company can pay its directors, including non-executive and independent directors, only in accordance with Schedule V. Any provision increasing remuneration has no effect unless it complies with Schedule V.

Are sitting fees included in the 11% limit?

No. Section 197(2) says the percentages are exclusive of fees under section 197(5). The Board decides sitting fees, subject to the prescribed maximum.

What is the role of the Nomination and Remuneration Committee?

Under section 178, the NRC recommends to the Board a remuneration policy for directors, key managerial personnel and other employees. It must ensure the pay is reasonable, linked to performance and balanced between fixed and incentive pay. It consists of three or more non-executive directors, at least half of them independent.

What if a director receives more than the permitted remuneration?

He must refund the excess to the company within two years, or any lesser period allowed by the company, and hold it in trust until then. The company cannot waive recovery without a special resolution passed within two years.