DIRECTOR REMUNERATION UNDER COMPANIES ACT, 2013
Director remuneration refers to fees or compensation received by the director for their services, duties, responsibilities, overseeing the company’s management, and making strategic decisions. This includes salary, bonus, commission, stock option, and other benefits as provided by the company. Directors play a crucial role in the management and operations of the company, and remuneration should reflect and acknowledge their role and efforts. Compensation/remuneration of the director of the company ensures that it is fair, transparent, and in line with the company’s financial health, and the corporate governance structure also ensures accountability towards stakeholders. Provision of the Companies Act, 2013 related to directors’ remuneration aims to prevent the misuse of stakeholder funds.
The act defines limits on remuneration, requires approval of members in certain cases, requires disclosure under the Board Report, etc. to promote transparency. To balance the director, remuneration is necessary to safeguard shareholder interest, prevent misuse of corporate funds, ensure transparency, and retain talent in the company.
The Companies Act, 2013 brings in stricter regulation on director remuneration, specifically for public companies because general public interest is involved in the same. The Act sets limits on the total remuneration by imposing an 11% cap on director remuneration from a company’s net profits. The Act also ensures that a company’s profitability is not unduly impacted by high payouts to directors.
The Act also introduces mechanisms to regulate remuneration when a company has inadequate or no profits, requiring companies to adhere to Schedule V or seek approvals from the central government.
Limit on Remuneration:
1. Overall Limit on Director Remuneration (Section 197- Managerial Remuneration)
| Category | Limit on Remuneration |
| Overall limit as per Companies Act, 2013 | Overall limit on managerial remuneration payable to all directors including the managing director (MD), whole-time director (WTD), and manager, in any financial year should not exceed 11% of the net profits of the company. |
| Single Managerial Person | If company has only Managerial Person i.e. managing director or whole-time director or manager maximum remuneration payable 5% of net profits of company. |
| More than one Managerial Person | If company has more than one Managerial Person i.e. managing director or whole-time director or manager maximum remuneration payable 10% of net profits of company. |
- Shareholders’ Approval: If a company intends to pay directors beyond the 11% limit, it must obtain approval from its members through a special resolution.
- Sec 197 of Companies Act, 2013 not applicable to Private Limited Companies subject to the provisions of Schedule V of Companies Act, 2013.
- Company may pay sitting fees to Director for attending meeting of Board and Committee, which shall not exceed 1 lakh per meeting.
- Insurance Premium shall not be treated as part of Managerial Remuneration.
2. Schedule V- Remuneration in Case of Inadequate or No Profits
In cases where the company has inadequate profits or no profits, the directors’ remuneration cannot be linked to net profits as specify above.
| Capital | Limit of yearly remuneration payable shall not exceed in case of managerial person | Limit of yearly remuneration payable shall not exceed in case of other Director |
| up to ₹5 crore | 60 lakh | 12 lakh |
| ₹5 crore and above but less than ₹100 crore | 84 lakh | 17 lakh |
| ₹100 crore and above but less than ₹250 crore | 120 lakh | 24 lakh |
| ₹250 crore and above | 120 lakh + 0.01% of capital in excess of 250 crore | 24 lakh + 0.01% of capital in excess of 250 crore |
3. Independent Directors
- Independent directors are not entitled to any stock options and can only be paid sitting fees and profit-linked commission within the overall cap of 11% of net profits.
- Sitting fees payable to independent directors as per Companies Act for attending board meetings are capped at ₹1 lakh per meeting.
Disclosure in Board Report
The Companies Act, 2013 emphasizes transparency in corporate governance standards, including disclosure of remuneration. Especially public companies, are required to provide detailed information about director remuneration to ensure accountability as well as to protect shareholders’ interests. Provisions for disclosure of directors’ remuneration under the Act are in Section 197, Section 134, Schedule V, and Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
- The company must disclose the remuneration in its Board’s Report, as per Section 197 & Section 134 which is part of the annual report. This is applies to both public and private companies.
- Companies shall also disclose director remuneration as part of the notes to financial statements. This also includes the breakup of various components like salary, commission, bonus, perquisites and other benefits.
GST and TDS applicability on Directors Remuneration
If Whole Time Director are part of employer- employee relationship, then remuneration subject to TDS u/s 192 of Income Tax Act and then GST is not applicable on their remuneration.
If Whole Time Director’s services treated as professional services, then remuneration subject to TDS u/s 194J of Income Tax Act and then GST is 18% applies under RCM (Reverse Charge Mechanism).
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