Section 197: Managerial Remuneration Limits for 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. 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

• Salary vs Dividend for Director-Shareholder: Tax Comparison After Finance Act 2020
• DPT-3 Disclosure of Loans from Directors: Outstanding Balance Reporting
• Dividend Taxation in Director's Hands Post-2020: No DDT, Section 115BBDA 10% on ₹10L+