Director Remuneration in India: Complete Guide to Limits, Tax Treatment & Compliance (FY 2026-27)

Director remuneration in India changes based on whether a director is an employee or a professional, and that single distinction decides the applicable tax section, the GST treatment, and even which ITR form applies.

Section 197 sets the limit. What comes after matters just as much, TDS under 194J versus 192, GST under reverse charge, and the 2018 change that removed Central Government approval.

In this article, we cover director types, calculation methods, tax treatment under TDS, and the compliance filings that follow.

What is Director Remuneration?

Director remuneration is any money, or its equivalent, that a company pays a director for services rendered, including perquisites. It covers a broader range of payments than salary alone, sitting fees, commission, and non-cash benefits all count.

Section 2(78) of Companies Act 2013: Legal Definition

Section 2(78) defines remuneration as any money or its equivalent given to a person for services rendered, and this includes perquisites as defined under the Income Tax Act, 1961. That’s the full legal text, and it applies to anyone the company pays for services, not just directors.

Director Remuneration vs Employee Salary: Key Differences

What a director’s remuneration actually means in practice depends entirely on the director’s relationship with the company.

Employee director: Someone appointed under a contract of service like an executive or whole-time director, gets remuneration that includes provident fund, gratuity, and leave encashment.

Non-employee director: Someone who is independent or non-executive and not under the company’s day-to-day control. Their fees or commission count as income from business or profession under Section 28 of the Income Tax Act, and TDS falls under Section 194J(1)(ba) instead.

Next, the different director types the Companies Act recognises, and how each one’s remuneration structure differs.

Types of Directors and Their Remuneration Structure

The Companies Act splits directors into five types, each with its own remuneration rules.

1. Managing Director and Whole-time Director Remuneration

A Board of Directors includes several types: managing director, whole-time director, executive director, non-executive director, and independent director. Managerial remuneration covers pay for those running the company day to day, primarily the MD, WTD, and manager.

Companies get some flexibility within statutory limits based on financial position and qualifications, but pay beyond those limits needs a special resolution from shareholders. Pay beyond those limits needs a special resolution from shareholders.

2. Non-Executive Director Remuneration

Before the Companies (Amendment) Act, 2020, independent directors could only earn profit-linked commission, and only when the company turned a profit.

The 2020 amendment allows NEDs and IDs to be paid even when profits are inadequate or absent. Sitting fees, though, were never tied to that restriction.

3. Independent Director Fees and Sitting Fees

Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 caps sitting fees at one lakh rupees per meeting. Independent and women directors get floor protection too.

Independent directors can also earn Board-approved profit-linked commission and meeting reimbursements, but not ESOPs.

4. Nominee Director and Small Shareholder Director

A nominee director is appointed via a nominating arrangement, not for independent status, perSection 161(3).Section 149(6) excludes them from being independent directors.

A small shareholder director, appointed underSection 151, can be one per listed company. They qualify as independent only by meetingSection 149(6) conditions and filing theSection 149(7) declaration.

Director type decides eligibility and structure, but not the total payout cap. That’s governed separately, under Section 197.

Director Remuneration Limit Under Section 197 of Companies Act 2013

Director type sets the structure, but Section 197 decides how much a company can actually pay. It’s where the numbers are real, the part most compliance teams check first.

Overall Managerial Remuneration Cap: 11% of Net Profits

Section 197(1) caps total managerial remuneration, directors, managing director, whole-time director, and manager combined, at 11% of net profits for that year. This number is computed under Section 198, and remuneration is not deducted from gross profits when arriving at the number.

Companies can exceed this limit only with shareholder authorisation at a general meeting, subject to Schedule V’s conditions.

Individual Director Limits: 5% and 10% Rules

Within that overall 11% limit, individual caps apply. A single managing or whole-time director can draw up to 5% of net profits without further approval. With more than one, the combined limit rises to 10%, not 5% each.

Before 2018, exceeding 11% needed both a special resolution and Central Government approval. That government approval requirement is gone now, a special resolution from shareholders is enough on its own.

Non-Executive Director Commission: 1% and 3% Limits

Directors who are neither managing nor whole-time directors, meaning non-executive and independent directors, fall under a separate cap.

If the company already has a managing or whole-time director or manager, non-executive directors can collectively draw up to 1% of net profits. If the company has none of those roles, that ceiling rises to 3%.

How Net Profits Are Calculated Under Section 198

Profit before tax comes first. The company then adds back certain credits, deducts working charges, directors’ remuneration, and depreciation under Section 123, and excludes items like capital losses and income tax payable.

This isolates regular, recurring profit so the remuneration limit tracks real business performance, not a one-off anomaly.

Loss-Making Companies: Schedule V Snapshot

When a company has no profits or inadequate profits, Schedule V sets alternate limits tied to effective capital:

• Negative profit or under ₹5 crore: up to ₹60 lakh
• ₹5 crore to ₹100 crore: up to ₹84 lakh
• ₹100 crore to ₹250 crore: up to ₹120 lakh
• Above ₹250 crore: ₹120 lakh plus 0.01% of effective capital beyond that

Director Remuneration Formula and Calculation Method

Here’s how to calculate director remuneration in practice.

Step-by-Step Calculation of Permissible Remuneration

Step 1: Calculate net profit under Section 198, starting from profit before tax and applying the specified additions and deductions.

Step 2: Apply the Section 197 percentage limits, 11% overall, 5%/10% for MD/WTD, 1%/3% for non-executive directors.

Step 3: Determine individual director caps within that overall limit.

Step 4: Adjust for profit status, applying Schedule V slabs if profits are inadequate or absent that year.

Components Included in Remuneration Calculation

Here are the components that’s included:

• Salary, dearness allowance, perquisites, commission, and other allowances
• Any benefit given free of charge or at a concessional rate
• Expenditure covering the director’s personal liability
• Life insurance premiums paid for the director, spouse, or child
• Commission on profit, whether paid monthly, as a percentage of net profit, or a combination of both

Excluded from the ceiling (per Schedule V):

• Provident fund and superannuation contributions that aren’t taxable under the Income Tax Act
• Gratuity, up to half a month’s salary per year of service
• Leave encashment at the end of tenure
• Interest on loans taken from directors
• Reimbursement of actual expenses

Section 197(6) confirms directors can be paid by monthly payment, a fixed percentage of net profits, or a mix of both, giving companies flexibility in how they structure the payout within these rules.

Once the permissible amount is worked out, the next question is what gets deducted from it before it reaches the director. That’s where TDS under Section 194J comes in.

Recommended reading: How to make TDS flat deduction for contractual employees?

TDS on Director Remuneration Under Section 194J

Section 192 or 194J applies depending entirely on the director’s employment status.

Section 194J(1)(ba): TDS Rate on Director Fees (FY 2026-27)

The Income Tax Department confirms that any payment to a director as sitting fees, remuneration, or any sum not covered under Section 192, attracts TDS at 10% under Section 194J, with no threshold limit. TDS applies from the first rupee.

This is where a lot of practitioner content gets it wrong. Some sources cite a ₹30,000 or ₹50,000 threshold, but that applies to other categories under 194J, professional fees, royalty payments, not director remuneration.

Resident directors are taxed at a flat 10%. Non-resident directors follow their applicable DTAA rate instead.

When TDS Applies: Employee Director vs Professional Director

A simple test decides whether Section 192 or 194J applies, based on how much control the company has over the director’s work:

• Executive directors, involved in daily operations, typically work under an employer-employee relationship and fall under Section 192
• Non-executive directors, who provide oversight rather than daily management, are compensated through sitting fees or commission, and generally fall under 194J(1)(ba)

TDS Compliance: Due Dates, Challan, and Form 16A

Director remuneration is taxable at the point of payment, and the company has two separate deadlines to track once TDS is deducted.

• TDS challan payment is due by the 7th of the month following deduction
• Form 16A, not Form 16, is issued quarterly: 15th August, 15th November, 15th February, and 15th June
• Missing the Form 16A deadline carries a ₹500-per-day penalty under Section 272A

TDS handles the income tax side. For non-executive and independent directors, there’s a second tax layer to account for: GST.

GST on Director Remuneration: Applicability and RCM

TDS decides how much income tax gets withheld. GST is a separate question entirely, and whether it applies depends on the same employee-versus-professional distinction, just under a different law.

GST on Executive Director (MD/WTD) Remuneration

Schedule III of the CGST Act excludes services by an employee to an employer, in the course of employment, from the definition of supply altogether. No supply means no GST.

Central Board of Indirect Taxes and Customs’s (CBIC) Circular 140/2020 spells out how to tell if a director qualifies as an employee for this purpose. Three grounds matter:

• A contract of service exists
• Remuneration is disclosed as salary in the company’s accounts
• TDS is deducted under Section 192

GST on Non-Executive and Independent Director Fees

Director services to a company fall under reverse charge by default. Non-executive and independent director fees sit squarely here, since these directors aren’t employees to begin with. GST applies, and the company pays it, not the director.

GST Rate and Reverse Charge Mechanism (RCM) Compliance

The GST rate on director fees is 18%, paid by the company under RCM as per Notification 13/2017. Since the director is not GST-registered in most cases, the company issues a self-invoice and a payment voucher under Rule 52 of the CGST Rules to document the transaction.

Who Approves Director Remuneration, and How It’s Filed

Calculating and taxing remuneration correctly is only half the job. Someone has to approve it first, and the company has to report it afterward.

Approval Process

The Nomination and Remuneration Committee recommends remuneration for directors, KMPs, and senior management, but that’s as far as its authority goes. It can’t approve anything on its own.

The actual approval chain runs like this:

• NRC recommendation, covering fixed and variable pay components
• Board resolution, formally adopting the NRC’s recommendation
• Shareholders’ approval at the AGM, with a special resolution required if the proposed remuneration exceeds statutory limits

Central Government approval was removed in 2018, and a special resolution now covers it. Shareholders holding majority voting rights ultimately decide the outcome, and they aren’t bound by whatever the NRC recommends.

Filing and Disclosure

Rule 3 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 requires filing Form MR-1 within 60 days of appointing a managing director, whole-time director, or manager. The filing needs:

• A certified Board resolution
• The shareholders’ resolution, where applicable
• A consent letter from the appointee
• An NRC certificate, if one exists

Listed companies also disclose the ratio of each director’s remuneration to the median employee’s remuneration in the Board’s Report, per Section 197(12).

Reporting on the director’s side depends on employment status:

• Employee directors file ITR-1 or ITR-2, under Income from Salaries
• Non-employee directors file ITR-3, under Profits and Gains from Business or Profession

Approval, tax treatment, and filing all come back to one classification, employee or professional.

Getting Your Director Remuneration Structure Compliance-Ready with Keka

Director remuneration in India runs on three connected pillars: Companies Act limits under Sections 197 and 198, tax compliance through TDS under 194J and GST under RCM, and filing requirements like Form MR-1 and ITR disclosure.

None of these apply the same way across director types. An executive director’s pay stays outside GST, while a non-executive or independent director’s fees attract 18% GST on reverse charge and follow a different ITR form. Getting the classification right decides which rules apply downstream.

Regulatory positions shift too, the 2018 removal of Central Government approval being one example. It’s worth checking with a professional before finalising the package.

If your team is still tracking this across spreadsheets, book a free demo to see how Keka handles it in one place.

Frequently Asked Questions

1. Is GST applicable on director remuneration?

GST doesn’t apply to executive directors who qualify as employees. It applies to non-executive and independent director fees under reverse charge mechanism, at 18%, paid by the company.

2. Is director remuneration the same as salary?

No. Director remuneration is broader than salary, it includes salary, allowances, perquisites, commission, and other benefits. Salary is just one component of total remuneration for executive directors.

3. Is director remuneration taxable under salary?

Only if the director is an employee. Employee directors are taxed under “Salaries” with TDS under Section 192. Non-employee directors’ fees are taxed as “Profits and Gains from Business or Profession” with TDS under Section 194J.

4. Where to show director remuneration in ITR?

Employee directors show remuneration under “Income from Salaries” in ITR-1 or ITR-2. Non-employee directors show professional fees under “Profits and Gains from Business or Profession” in ITR-3, never ITR-4.