Paying Directors: What the Companies Act Actually Requires for Sitting Fees vs. Remuneration

Paying Directors: What the Companies Act Actually Requires for Sitting Fees vs. Remuneration

A founder pays himself and his co-founder ₹1.5 lakh each "for attending the board meeting," books it as sitting fees, and moves on. Another startup pays its non-executive investor-nominee director a flat ₹50,000 monthly "consulting retainer" with no board resolution behind it. Both think they are being tidy. Both have quietly created a compliance problem that surfaces later — in a due-diligence data room, in a tax scrutiny notice, or in an ROC query — because sitting fees and remuneration are two legally distinct things governed by different sections, different limits, and different approval routes. Confusing them is one of the most common and most avoidable errors in Indian corporate governance.

What the law actually requires

The starting point is that a director is not automatically entitled to be paid anything. Under the Companies Act 2013, any payment to a director must have a clear legal basis — either the articles of association, a board or shareholder resolution, or a specific statutory provision. Payments broadly fall into two buckets.

Sitting fees are governed by Section 197(5) read with Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. A company may pay a director a fee for attending meetings of the board or its committees. Rule 4 caps this at ₹1,00,000 per meeting. The fee is fixed by the board, and — this is the point most founders miss — sitting fees are not counted within the overall managerial remuneration ceiling. They sit outside it. Crucially, sitting fees are payable per meeting attended; you cannot pay a "monthly sitting fee" divorced from actual meetings, and you cannot pay sitting fees to a director who did not attend.

Remuneration is everything else — salary, perquisites, commission, and any profit-linked payment to a managing director, whole-time director, or manager. This is governed by Section 197 (overall limits), Section 198 (how "net profit" is computed for this purpose), and Schedule V (what you may pay when profits are inadequate or absent). For a public company, total managerial remuneration cannot exceed 11% of net profits in a financial year, with sub-limits: 5% of net profits to a single managing/whole-time director, 10% if there is more than one, and 1% (or 3% where there is no managing director) to directors who are neither MD nor whole-time.

The single most important distinction for the readers of this site: the 11% ceiling under Section 197 does not apply to a private limited company. A private company can pay its directors whatever it chooses, provided the payment is authorised by its articles and the appropriate board or shareholder approval. That freedom is real — but it does not remove the disclosure, approval, and tax obligations described below, and it is exactly the freedom that gets abused when founders relabel salary as "sitting fees."

For independent directors and non-executive directors, Section 149(9) is the controlling provision. An independent director may receive sitting fees under Section 197(5), reimbursement of expenses for attending meetings, and profit-related commission approved by shareholders — but no stock options (Section 197(7)). Paying ESOPs to an independent director is a straight violation, however common it is in practice.

Two further pieces complete the framework. First, "net profit" for the 11% test is not the profit in your P&L — it is computed the specific way Section 198 prescribes, adding back items such as managerial remuneration itself and excluding capital profits and certain provisions. Getting this computation wrong is how public companies breach the ceiling without realising it. Second, when a company has no profit or inadequate profit, it cannot simply stop paying its executive directors; it must fall back on Schedule V, which sets slab-based maximum remuneration keyed to the company's effective capital (for example, the schedule permits defined annual caps that rise with capital band), and payment beyond those slabs needs a special resolution and, in some cases, was historically subject to Central Government approval before the 2018 amendment liberalised it. Schedule V also lays down eligibility conditions — the director must not have been convicted of an offence or be a defaulter — that a founder appointing themselves as whole-time director should confirm.

Practical implications — what actually happens when this is ignored

The penalties are specific, not theoretical.

If a director draws remuneration in excess of what Section 197 permits without the required approval, Section 197(9) requires the director to refund the excess to the company and hold it in trust until repaid, and Section 197(15) imposes a penalty of ₹1,00,000 on the defaulting director and ₹5,00,000 on the company. The company cannot even waive recovery of the excess except by special resolution and only within two years.

Mislabelling salary as sitting fees creates a second, tax-side exposure. Sitting fees and director remuneration are both subject to TDS under Section 194J of the Income Tax Act at 10%, and — unlike professional fees — there is no minimum threshold for director payments; TDS applies from the first rupee. If you have been paying "sitting fees" without deducting TDS, you have a Section 194J default, attracting interest under Section 201 and disallowance of the expense under Section 40(a)(ia).

There is also a GST reverse-charge trap. Under Notification No. 13/2017-Central Tax (Rate) as amended by Notification No. 29/2019, sitting fees and remuneration paid to a non-executive or independent director attract GST at 18% under reverse charge — the company must self-assess and pay it. Remuneration to a whole-time/executive director treated as an employee (with TDS under Section 192, i.e. "salary") is outside GST. So the salary-vs-sitting-fee label directly changes your GST liability, and getting it wrong means either an unpaid RCM liability or an incorrect credit claim — both of which surface in a GST audit.

Finally, MCA21 v3 has made the disclosure side far less forgiving. Managerial remuneration is reported in the MGT-7/MGT-7A annual return and detailed in the Board's Report under Section 197(12) and Rule 5 of the 2014 Rules. For a listed company, Rule 5(1) demands granular disclosure — the ratio of each director's remuneration to the median employee's remuneration, the percentage increase in remuneration of each director, KMP and the median, and a statement that remuneration is as per the company's policy. Private companies escape most of Rule 5(1)'s ratio disclosures, but they do not escape the core obligation to disclose director remuneration in the Board's Report and to have it reconcile with the annual return. The v3 system cross-references figures across forms, so a remuneration figure in your financials that does not reconcile with your annual return, or a payment with no traceable board resolution, is exactly the kind of inconsistency that gets auto-flagged for scrutiny. With the Companies Compliance Facilitation Scheme, 2026 (CCFS-2026) closing on 15 July 2026, this is the moment to correct historic filings that misclassified director payments before the amnesty window shuts and the standard additional-fee regime (₹100 per day of delay, with no ceiling, for most forms) resumes.

A third payment type sits between the two buckets and is routinely mishandled: commission. A company may pay a non-executive or independent director a commission linked to net profits, but only if authorised by the articles and approved by shareholders, and — for a public company — only within the 1%/3% sub-limits of Section 197. Founders sometimes pay a "success fee" or "advisory commission" to an investor-nominee director without any shareholder resolution, which is both an unauthorised payment recoverable under Section 197(9) and, depending on the arrangement, a potential related-party transaction under Section 188. If a director is providing genuine professional services in a professional capacity (for example, a director who is also a practising architect providing architectural services), Section 197(4) read with the proviso allows separate professional remuneration — but the Nomination and Remuneration Committee, where applicable, must be satisfied the director possesses the requisite professional qualification. Document that basis; do not assume it.

Step-by-step: what to do

• Classify every director first. Executive/whole-time and managing directors are paid remuneration (salary, treated under Section 192 TDS, outside GST). Non-executive and independent directors are paid sitting fees and/or commission (Section 194J TDS, GST under reverse charge). Write this classification down — it drives everything else.
• Check your articles of association. Payment to directors must be authorised by the articles or by a resolution. If the articles are silent, amend them or pass the enabling resolution before any payment.
• Fix sitting fees by board resolution, capped at ₹1,00,000 per meeting. Record the amount, confirm it applies per meeting attended, and never pay it to an absent director. Keep the attendance register aligned with the payment.
• Approve remuneration correctly. For a whole-time/managing director, pass a board resolution and, where the articles or Section 197/Schedule V require it, a shareholder resolution. Even though private companies are outside the 11% ceiling, the approval trail must exist.
• Deduct TDS every time. 10% under Section 194J on sitting fees and non-employee director payments (no threshold); Section 192 on executive-director salary. Deposit and file the returns on time.
• Handle GST reverse charge. For every payment to a non-executive/independent director, self-assess GST at 18% under RCM, pay it, and claim credit where eligible. Build this into your monthly close.
• Disclose in the Board's Report and annual return. Report remuneration under Section 197(12)/Rule 5 and ensure the figure reconciles with MGT-7/MGT-7A and the financial statements. Reconcile before you file, not after MCA21 flags it.

FAQ

Can a private limited company pay its directors any amount it wants?
Broadly yes — the 11% net-profit ceiling in Section 197 applies only to public companies. But the payment still needs authorisation in the articles and a board/shareholder resolution, and it still attracts TDS, GST reverse charge (for non-executive directors), and full disclosure.

What is the maximum sitting fee?
₹1,00,000 per meeting of the board or a committee, under Rule 4 of the 2014 Rules. The board sets the actual figure up to that cap, and it can differ for board versus committee meetings.

Can we pay an independent director in stock options?
No. Section 197(7) expressly bars stock options for independent directors. They may receive sitting fees, expense reimbursement, and shareholder-approved commission only. This is one of the most frequently violated rules in startup cap tables.

Do we deduct TDS on sitting fees even if the amount is small?
Yes. Section 194J applies to director payments with no minimum threshold, so 10% TDS is due from the first rupee — unlike ordinary professional fees, which have a ₹30,000 threshold.

Our company has no profits this year — can we still pay our founder-director a salary?
Yes, but a public company must stay within the Schedule V slabs tied to its effective capital, and any excess needs a special resolution. A private company is not bound by the Section 197/Schedule V ceilings, but the salary must still be authorised by the articles and a resolution, subjected to TDS under Section 192, and disclosed in the Board's Report.

For a compliance audit of your company, visit pvtltd.co

If you are not certain whether your director payments are correctly classified, approved, taxed, and disclosed, that uncertainty is itself the risk — it is what a buyer's due-diligence team or a scrutiny officer looks for first. For a compliance audit of your company, visit pvtltd.co.

Need help with this?

Our team handles the paperwork. You focus on your business.