Director Remuneration in Private Limited Company: Rules and Limits

Every founder of a private limited company eventually faces a critical question: how much salary can you legally pay yourself as a director? The answer is not a single number. Director remuneration in a private limited company involves a mix of salary, sitting fees, commission, and perquisites, each governed by different provisions of the Companies Act, 2013, the Income Tax Act, 1961, and GST law. Get the structure wrong, and you risk TDS non-compliance, disallowed expenses, or penalties from the Registrar of Companies (RoC). This guide covers the complete legal framework, tax treatment, and practical structuring of director remuneration for Indian private limited companies in FY 2025-26.

What Is Director Remuneration? Definition and Legal Framework

Director remuneration is any payment made by a company to its directors in exchange for services rendered. It includes salary, commission, sitting fees for attending board meetings, perquisites such as rent-free accommodation, and contributions to provident fund and superannuation fund. Under Section 2(78) of the Companies Act, 2013, "remuneration" means any money or its equivalent given or passed to any person for services rendered, and includes perquisites as defined under Section 17(2) of the Income Tax Act, 1961. The scope is deliberately wide: if the company spends money on or for a director, it counts as remuneration unless specifically excluded. This broad definition ensures that hidden benefits, informal arrangements, and non-cash perquisites are all captured within the regulatory framework. For founders running their own companies, understanding this definition is the first step toward structuring a compliant and tax-efficient compensation package.

Section 197 and Private Limited Companies: What Actually Applies

Here is where most articles get it wrong: Section 197 of the Companies Act, 2013 imposes the famous 11% net profit cap on managerial remuneration, but this provision applies only to public limited companies. Private limited companies are exempt from Section 197's percentage restrictions. That single distinction changes the entire remuneration planning strategy for private companies.

So what does govern private company director pay? Three things: the company's Articles of Association (AoA), board resolutions, and shareholder approvals (if the AoA mandates them). The AoA is the private company's constitution for remuneration matters. If the AoA specifies a remuneration cap or approval process, the company must follow it. If the AoA is silent, the board of directors can fix remuneration through a board resolution under Section 196.

This flexibility is one reason private limited companies are the preferred structure for startups. Founders can decide their own salary without the rigid percentage limits that public companies face. However, this freedom is not unlimited. The Income Tax Act, 1961 requires that remuneration be "reasonable" and for services actually rendered. If the Assessing Officer finds the remuneration excessive or unreasonable under Section 40A(2), the excess amount can be disallowed as a business expense and added back to the company's taxable income.

Types of Director Remuneration: Salary, Fees, and Commission

Director remuneration is not a monolithic concept. The Companies Act recognises distinct forms of compensation, and each has different tax and compliance implications. Understanding these categories helps you design a compensation structure that is both legally compliant and financially efficient.

Monthly Salary (Managing Director and Whole-Time Director)

A managing director (MD) or whole-time director (WTD) is a full-time employee of the company and receives a regular monthly salary. This salary can include basic pay, dearness allowance, house rent allowance, special allowance, and other fixed components. The MD/WTD is treated as an employee for income tax purposes, and TDS is deducted under Section 192 based on the applicable income tax slab rates. The salary is disclosed in Form AOC-4 and MGT-7 filed with the RoC annually.

Sitting Fees for Board and Committee Meetings

Non-executive directors, including independent directors, receive sitting fees for each board meeting or committee meeting they attend. Under Section 197(5) of the Companies Act, 2013, the maximum sitting fee is ₹1 lakh per meeting of the Board of Directors and ₹1 lakh per meeting of any committee. The actual amount is decided by the board through a resolution. Sitting fees are a common way to compensate directors who are not involved in day-to-day operations but contribute through governance and strategic oversight.

Commission on Profits

Directors can receive a commission based on the company's net profits. For public companies, Section 197 limits the total commission to 1% of net profits for a single MD/WTD and 3% for other directors. Private companies, being exempt from Section 197's caps, can set commission rates as per their AoA. Commission aligns director incentives with company performance and is particularly useful for non-executive directors who do not draw a regular salary.

Perquisites and Benefits in Kind

Perquisites include rent-free housing, company car, medical reimbursement, club memberships, leave travel allowance, and similar benefits. Under Section 17(2) of the Income Tax Act, these benefits are taxable as part of the director's income. The company must calculate the perquisite value as per Income Tax Rules and include it in the director's Form 16. For remuneration planning, perquisites offer tax efficiency because certain benefits like employer's contribution to provident fund (up to 12% of salary) and NPS (up to 10% of salary) are exempt from tax within specified limits.

TDS on Director Remuneration: Section 192 vs Section 194J

The TDS treatment of director remuneration depends on the nature of the payment and the director's relationship with the company. This distinction trips up many companies, and incorrect TDS deduction leads to interest charges and penalties from the Income Tax Department. Here is the definitive breakdown.

Section 192: Salary to Employee-Directors

When a managing director or whole-time director receives a monthly salary as an employee of the company, TDS is deducted under Section 192 based on the director's income tax slab rates. The company must issue Form 16 at the end of the financial year. This treatment applies when the director has an employer-employee relationship with the company, which is the case for MDs and WTDs who work full-time and are on the company's payroll.

Section 194J: Fees to Non-Employee Directors

Sitting fees, commission, and professional fees paid to directors who are not employees of the company attract TDS under Section 194J at 10%. The threshold for TDS deduction is ₹30,000 per annum. This means if total director fees paid to a single director in a financial year exceed ₹30,000, the company must deduct TDS at 10% on the entire amount. The company issues Form 16A for such payments.

GST on Director Remuneration: Reverse Charge Mechanism

GST on director services is one of the most debated compliance areas, and the rules have evolved through multiple circulars and clarifications. Here is what you need to know as of FY 2025-26.

Under Notification 13/2017-Central Tax (Rate), services supplied by a director to the company are covered under the Reverse Charge Mechanism (RCM). This means the company, not the director, is liable to pay GST on director services. The applicable rate is 18% GST (9% CGST + 9% SGST for intra-state, or 18% IGST for inter-state).

When GST Applies

GST under RCM applies to sitting fees, commission, and professional fees paid to directors. The company must self-assess and pay GST on these amounts, file the details in GSTR-3B, and can claim Input Tax Credit (ITC) on the GST paid, provided the company is registered under GST and uses the services for business purposes.

When GST Does Not Apply

The CBIC issued Circular No. 140/10/2020-GST clarifying that salary paid to a whole-time director or managing director in their capacity as an employee of the company is not subject to GST. The key test is whether an employer-employee relationship exists. If the director is on the company's payroll, receives a regular salary, and the company deducts TDS under Section 192, the payment is treated as employment income and falls outside the scope of GST.

This distinction is critical for private limited companies where founders often serve as managing directors. Your monthly salary as an MD is not subject to GST. But if you also receive a separate consultancy fee or professional fee from the same company, that fee attracts 18% GST under RCM.

Director Remuneration vs Dividend: Which Is More Tax-Efficient?

Founders of private limited companies often debate whether to take money out of the company as salary (remuneration) or as dividends. Both have distinct tax implications, and the optimal choice depends on your income level, the company's profitability, and your long-term financial goals. Let us compare them head to head.

The math is straightforward. If your company pays ₹10 lakh as director salary, it saves ₹2.5 lakh in corporate tax (at 25% rate) because the salary is a deductible expense. The same ₹10 lakh paid as dividend first gets taxed at the corporate level, and then again in the director's hands at slab rates, resulting in double taxation. For most founder-directors in the 30% tax bracket, a combination of salary (up to the 30% slab threshold) plus dividend (for amounts above that) offers the best tax outcome. Work with your Expert to find your specific breakeven point.

Schedule V: Remuneration When Profits Are Inadequate

What happens when a company makes no profit or its profits are insufficient to support managerial remuneration? Schedule V of the Companies Act, 2013 addresses this scenario. While Schedule V's mandatory limits apply primarily to public companies, understanding these limits is useful for private companies planning to convert to public status, seeking institutional investment, or benchmarking their compensation practices.

Schedule V sets maximum annual remuneration based on the company's effective capital (paid-up share capital plus free reserves minus certain deductions):

A company with inadequate profits can pay up to 200% of the amounts listed above if shareholders approve through a special resolution. For private companies, these limits serve as useful benchmarks, even though they are not mandatory. Paying remuneration that significantly exceeds Schedule V limits can attract scrutiny from auditors, investors, and the Income Tax Department.

How to Fix Director Remuneration: Step-by-Step Process

Setting director remuneration in a private limited company is not just about deciding a number. It requires specific corporate actions, documentation, and compliance steps. Here is the complete process, from boardroom to filing cabinet.

1. Review the Articles of Association: Check if the AoA contains provisions for director remuneration, including any caps, approval requirements, or formulae. If the AoA is silent, the board can fix remuneration through a resolution
2. Obtain Form MBP-1 from the director: Every director must disclose their interest in other entities at the first board meeting of each financial year using Form MBP-1 under Section 184. This ensures transparency in related-party remuneration
3. Pass a board resolution: The board must pass a resolution specifying the remuneration amount, components (salary, HRA, commission, perquisites), tenure, and terms. Record the resolution in the minutes book under Section 118
4. Obtain shareholder approval (if required): If the AoA requires shareholder approval for director remuneration, pass an ordinary resolution at a general meeting. Special resolution is needed only in specific cases (e.g., remuneration exceeding Schedule V limits for public companies)
5. Execute the appointment letter: Issue a formal appointment letter to the director specifying all terms of remuneration, notice period, non-compete clauses, and grounds for termination. Both parties must sign the letter
6. Set up TDS compliance: Configure TDS deduction under the correct section (192 for employee-directors, 194J for non-employee directors). File TDS returns quarterly using Form 24Q or 26Q
7. Register for GST RCM (if applicable): If the company pays sitting fees, commission, or professional fees to directors, account for 18% GST under RCM in monthly GSTR-3B returns
8. Disclose in annual filings: Include director remuneration details in Form AOC-4 (financial statements) and Form MGT-7 (annual return) filed with the RoC

Director Remuneration in Startups: Practical Considerations

Startup founders face a unique version of the remuneration question. You want to pay yourself enough to cover living expenses, but you also need to conserve cash, show lean operations to investors, and avoid triggering unreasonable-expense flags with the Income Tax Department. Here is how to think about it practically.

Early Stage (Pre-Revenue)

Many founders draw zero or minimal salary in the first year. This is legally permissible since a director can waive remuneration by giving written notice to the board. If you do pay yourself, keep it modest, typically ₹25,000 to ₹50,000 per month, and ensure it is proportionate to the company's funding and cash position. Angel investors reviewing your cap table will scrutinise founder salaries during due diligence.

Growth Stage (Post-Funding)

After raising seed or Series A funding, founders typically increase their remuneration to ₹1 lakh to ₹3 lakh per month. Most term sheets include a founder salary cap that investors negotiate. A common investor expectation is that founder salary should not exceed 5% to 8% of the total funding raised, at least until the company reaches profitability. Structure the salary with a mix of basic pay, HRA, and reimbursements to maximise take-home pay while minimising tax outflow.

Profitable Stage

Once the company is profitable, founders can optimise their compensation by combining salary (up to the optimal tax slab), commission on profits, and dividends. At this stage, the salary vs dividend analysis becomes crucial. An Expert can model different scenarios to find the mix that minimises the combined corporate and personal tax burden. Many profitable private limited companies also introduce director performance bonuses tied to revenue or EBITDA milestones.

Compliance Requirements and Annual Disclosures

Paying director remuneration creates ongoing compliance obligations that private companies must meet every financial year. Missing any of these filings can result in penalties from the RoC or the Income Tax Department.

ROC Filings

Every private limited company must disclose director remuneration details in the Directors' Report, which forms part of the annual return filed with the RoC. The financial statements (Form AOC-4) must include a separate note on managerial remuneration, and Form MGT-7 captures director-wise remuneration data. If a director's remuneration changes during the year, the company must file the relevant event-based form with the RoC within 30 days of the board resolution.

Income Tax Filings

The company files TDS returns quarterly (Form 24Q for salary TDS, Form 26Q for non-salary TDS). At year end, it issues Form 16 to employee-directors and Form 16A to non-employee directors. The company's income tax return (ITR-6) must separately disclose payments to directors under the head "Amounts Debited to Profit and Loss Account." Directors must report their remuneration in their personal income tax returns.

GST Filings

GST paid on director fees under RCM must be reported in GSTR-3B. The Input Tax Credit (ITC) claimed on RCM payments should be reflected in GSTR-2A/2B. Companies filing GSTR-9 annual returns must reconcile RCM amounts separately. Failure to discharge RCM liability on time attracts interest at 18% per annum.

Statutory Audit Disclosure

The statutory auditor must report on director remuneration in the audit report under CARO 2020 (Companies Auditor's Report Order). The auditor checks whether remuneration paid is within permissible limits (for public companies) and whether proper approvals exist. For private companies, the auditor verifies that remuneration is approved by the board and complies with the AoA.

Common Mistakes in Director Remuneration Planning

After handling thousands of private company compliance cases, we have seen the same mistakes repeat year after year. Avoid these, and you will save yourself penalties, interest, and uncomfortable conversations with auditors.

1. Applying Section 197 limits to private companies: The 11% net profit cap applies only to public companies. Private companies sometimes unnecessarily restrict director pay because of this misconception, or worse, file for central government approval that they do not need
2. Deducting TDS under the wrong section: Using Section 194J for salaried managing directors instead of Section 192 results in flat 10% TDS instead of slab-based deduction. This leads to either excess or short TDS deduction, both of which create compliance headaches
3. Ignoring GST on sitting fees: Companies pay sitting fees to directors but forget the 18% RCM GST obligation. This omission surfaces during GST audits or annual return reconciliation and attracts interest and penalties
4. Not updating the AoA: The Model AoA under Table F of the Companies Act may not include specific remuneration provisions. If your company adopted Model AoA at incorporation, consider amending it to include clear director remuneration clauses
5. Missing Form MBP-1 disclosure: Directors must file interest disclosures at the start of each financial year. This is routinely overlooked and creates problems during due diligence for funding rounds or acquisitions
6. Paying excessive remuneration without documentation: The Income Tax Department can disallow disproportionate director salaries under Section 40A(2). Maintain a written rationale for remuneration levels tied to industry benchmarks, company revenue, and director responsibilities
7. Confusing remuneration with loan to directors: Under Section 185 of the Companies Act, 2013, loans to directors of public companies are restricted. Disguising remuneration as loans or vice versa can trigger both corporate law and income tax penalties

Director Remuneration and Related-Party Transactions

When a director receives remuneration from a company in which they hold a significant stake, it qualifies as a related-party transaction (RPT) under Section 188 of the Companies Act, 2013. For private companies, the RPT rules are less stringent than for public companies, but they still require attention.

If the director's remuneration exceeds the materiality threshold prescribed in the company's RPT policy (or, in the absence of a policy, the threshold in Section 188), the transaction requires approval through an ordinary resolution at a general meeting. The director concerned cannot vote on this resolution. Companies planning to raise institutional funding or list on stock exchanges should proactively establish RPT policies and ensure all director remuneration is fully disclosed and approved.

The disclosure requirements extend to the board meeting agenda, the Directors' Report, and the financial statements. Auditors specifically examine RPTs during statutory audits, and any non-disclosure can result in qualification of the audit report, which damages the company's credibility with banks, investors, and regulators.

Summary

Director remuneration in a private limited company is governed by the Articles of Association and board approvals, not the 11% net profit cap of Section 197 that applies only to public companies. Directors can receive salary, sitting fees (capped at ₹1 lakh per meeting), commission, and perquisites. TDS is deducted under Section 192 for employee-directors and Section 194J (10%) for non-employee directors. GST at 18% applies on non-salary payments under the Reverse Charge Mechanism. A well-structured remuneration package, combining salary, perquisites, and dividends, minimises the overall tax burden for both the company and the director. Keep documentation current, file TDS and GST returns on time, and disclose everything in your annual ROC filings.