The 11% of net profits ceiling under s.197 CA 2013 binds public companies and private companies that are subsidiaries of a public company — a standalone private limited company sits outside it and can pay its directors whatever its articles and resolutions authorise. Where profits are inadequate, Schedule V CA 2013 slab limits based on effective capital (₹60 lakh to ₹120 lakh+ per annum) come into play, and exceeding statutory limits without approval triggers a refund obligation on the director plus penalties.
What the law actually requires
Section 197(1) CA 2013 fixes the ceiling on "managerial remuneration" — the salary, perquisites, commission, and profit-linked pay drawn by managing directors, whole-time directors, and managers. The ceiling is 11% of net profits for the financial year, with sub-limits:
"Net profit" for this test is not the P&L figure — s.198 CA 2013 prescribes the computation, adding back managerial remuneration itself, certain provisions, and capital receipts, and excluding capital profits and some receipts. Getting the s.198 computation wrong is how a public company breaches the ceiling without noticing.
The private company carve-out — the second proviso to s.197(1) provides that the section does not apply to a private company unless it is a subsidiary of a public company. So the operative position is:
Schedule V: when profits are inadequate or absent
Where a company to which s.197 applies has no profits or inadequate profits, remuneration is payable only within the Schedule V Part II slabs, keyed to effective capital (paid-up capital + free reserves + securities premium − accumulated losses − deferred revenue expenditure). The slabs, as amended:
With a special resolution of shareholders, the limits may be exceeded up to double in the specified cases [VERIFY current Schedule V slab figures with CA before publish]. Schedule V also carries eligibility conditions: the director must not have been convicted of an offence, must not be a wilful defaulter, and the company must not be in default of repayment of deposits or interest. A founder appointing herself as whole-time director of a loss-making company should check these before fixing pay.
Central Government approval
Where remuneration exceeds the limits under s.197/Schedule V, s.197(4) requires the excess to be authorised by a special resolution and, where the Act so provides, prior approval of the Central Government (Form MR-1/MR-2 route via MCA21). For a public company, paying above the Schedule V ceiling without that approval means the director must refund the excess (s.197(9)) and hold it in trust until repaid; the company can waive recovery only by special resolution within two years. For a standalone private company, the s.197 ceiling is not the constraint — but an unapproved payment is still recoverable under the articles and is a red flag in any due diligence.
Worked example: Meera and Bloom Foods Pvt Ltd
Meera is the managing director of Bloom Foods Pvt Ltd, a standalone private company (not a subsidiary of any public company). The board fixes her remuneration at ₹24 lakh per annum by resolution; the articles permit the board to do so without shareholder approval.
- Does s.197(1)'s 11% ceiling apply? No. Bloom Foods is a private company that is not a subsidiary of a public company, so the second proviso to s.197(1) excludes it. Her ₹24 lakh salary is not capped by 11% of net profits — even if net profit is only ₹1 crore (11% = ₹11 lakh, well below ₹24 lakh).
- What does govern it? The articles and the board resolution. The quantum must still be reasonable for the Income Tax Act — an inflated salary invites disallowance under s.40A(2) ITA 1961, and the company must deduct TDS under s.192 ITA 1961 and disclose the remuneration in the financial statements and annual return.
- Contrast: if Bloom Foods were a subsidiary of a listed public company, Meera's ₹24 lakh against ₹1 crore net profit would breach the 11% ceiling, and the excess would have to be refunded under s.197(9) unless a special resolution and, where applicable, Central Government approval regularised it.
Practical implications
- The private-company exemption is from the ceiling, not from process. Exemption from s.197's cap does not remove the need for a board resolution, DIR-12 for an MD/WTD appointment, TDS, and disclosure. The missing paper trail is what gets flagged, not the quantum.
- s.197(15) penalties target the public-company breach: a defaulting director is liable to a penalty of up to ₹1,00,000 and the company up to ₹5,00,000 (post-2020 decriminalisation, adjudicated by the ROC through MCA21 v3's e-adjudication module).
- MCA21 v3 cross-references pay. Managerial remuneration appears in the financial statements (Schedule III), the Board's Report (s.197(12)/Rule 5 of the 2014 Rules), and MGT-7/MGT-7A. A remuneration figure that does not reconcile across those forms — or a whole-time director with no DIR-12 on record — is the kind of mismatch v3 surfaces during any other filing.
- CCFS-2026 is the amnesty window. The Companies Compliance Facilitation Scheme 2026 offers one-time fee relief for belated filings; it closes 31 August 2026. Companies that underpaid or mis-disclosed director remuneration in earlier years can correct the record before the standard per-day additional-fee regime resumes.
Changed FY 2025-26: No amendment altered the 11% ceiling this year. The operative change for private companies is enforcement, not law: MCA21 v3 now auto-reconciles remuneration disclosures across AOC-4, MGT-7A and DIR-12, and the CCFS-2026 amnesty (closing 31 Aug 2026) is the last cheap window to fix historic director-pay filings. Schedule V's exact applicability to a standalone private company remains an open question —.
Step-by-step: what to do
- Classify your company. Standalone private company, or private company that is a subsidiary of a public company? This single fact decides whether the 11% ceiling binds.
- Check the articles. If the AOA require shareholder approval for director remuneration, pass the resolution at a general meeting; if silent, amend or take approval anyway.
- Fix pay by board resolution for every MD/WTD, with the salary broken into components (basic, allowances, perquisites) and a one-line basis for the quantum — your s.40A(2) defence, created contemporaneously.
- File DIR-12 within 30 days for any MD/WTD appointment.
- If profits are inadequate, confirm Schedule V applicability to your company type and benchmark pay against the effective-capital slab [VERIFY].
- Deduct TDS u/s 192, disclose remuneration in the Board's Report, and reconcile the figure with MGT-7A before filing.
FAQ
Does the 11% of net profits ceiling apply to a private limited company?
Only if the private company is a subsidiary of a public company. A standalone private company is outside the s.197(1) ceiling by the second proviso. Its pay is governed by the articles and board/shareholder resolutions instead.
What is "net profit" for the 11% test?
The s.198 CA 2013 figure — not the P&L profit. s.198 adds back managerial remuneration and certain provisions and excludes capital profits. Using the wrong base is how public companies breach the limit unknowingly.
Can a private company pay remuneration when it has no profits?
Generally yes, because the s.197/Schedule V machinery (which constrains public companies with inadequate profits) is inapplicable to a standalone private company. But the payment must be authorised and reasonable, and Schedule V treatment should be confirmed —.
What if a public company exceeds the limit without approval?
The director must refund the excess (s.197(9)) and hold it in trust; recovery can be waived only by special resolution within two years. Penalties under s.197(15) — up to ₹1 lakh on the director and ₹5 lakh on the company — can follow via ROC adjudication.
Does an inflated director salary get taxed or disallowed?
The company still deducts TDS u/s 192, but the quantum can be disallowed under s.40A(2) ITA 1961 as excessive or unreasonable relative to fair market value, triggering tax, interest and penalty on the disallowed amount.
Sources
- Companies Act 2013, s.197 (11% ceiling, sub-limits, second proviso for private companies), s.197(4) Central Government approval, s.197(9)-(10) refund, s.197(15) penalty
- Companies Act 2013, s.198 — net profit computation for managerial remuneration
- Companies Act 2013, Schedule V Part II — remuneration slabs by effective capital
- Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 — Rule 5 disclosure, Form MR-1/MR-2
- Income Tax Act 1961, s.40A(2), s.192
- Companies Compliance Facilitation Scheme, 2026 (CCFS-2026) — amnesty window closing 31 Aug 2026
For a compliance audit of your company, visit pvtltd.co
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See Also
Frequently asked questions
Does the 11% net profits ceiling under Section 197 apply to private limited companies?
The 11% of net profits ceiling under s.197 CA 2013 binds public companies and private companies that are subsidiaries of a public company. A standalone private limited company sits outside it and can pay its directors whatever its articles and resolutions authorise.
What happens when profits are inadequate for director remuneration?
Where profits are inadequate, Schedule V CA 2013 slab limits based on effective capital (₹60 lakh to ₹120 lakh+ per annum) come into play.
What is the penalty for exceeding statutory remuneration limits?
Exceeding statutory limits without approval triggers a refund obligation on the director plus penalties.
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