Exclusions from Managerial Remuneration: Understanding What Doesn’t Count

Section 197 of the Companies Act, 2013 caps how much a public company can pay its managing director, whole-time director, or manager. But the cap only applies to what actually counts as “managerial remuneration.” A surprising number of payments a director receives from the company fall outside this definition altogether, and getting this distinction wrong can mean a board thinks it has breached the 11% ceiling when it hasn’t, or worse, misses a genuine violation. Let’s unpack exactly what doesn’t count, and why.

Why the exclusion list matters 🔗

Under Section 2(78), remuneration is defined broadly as any money or its equivalent given to a person for services rendered, including perquisites under the Income-tax Act, 1961. Section 197 then caps total managerial remuneration at 11% of net profits, with a director-wise sub-limit of 5% for a single managing or whole-time director and 10% where there is more than one. Because the definition is so wide, the Act and subsequent case law have had to carve out specific carve-outs, situations where money genuinely moves from the company to a director, but isn’t treated as remuneration for the purpose of this ceiling. Missing these exclusions during compliance checks can lead a company secretary to wrongly conclude that a payout breaches the cap, triggering unnecessary shareholder resolutions or Schedule V filings.

Insurance premium paid to indemnify directors 🔗

Many companies take out directors’ and officers’ (D&O) liability insurance to protect key managerial personnel, including the CEO, CFO, and company secretary, against claims arising from negligence, breach of duty, or misfeasance in the course of their job. The premium the company pays for this cover is not treated as remuneration under Section 197(13) of the Act, since it is protection for the company’s own governance risk as much as it is a benefit to the individual.

There’s an important condition attached, though. If the insured person is later found guilty of the very negligence, breach of trust, or misfeasance the policy was meant to cover, the premium paid in respect of that person is then added back and treated as remuneration. So the exclusion holds only as long as the director’s conduct stays above board; a proven default retroactively pulls the premium into the remuneration bucket.

Remuneration for professional services rendered by a qualified director 🔗

A director isn’t necessarily wearing only one hat. Many directors are practising chartered accountants, company secretaries, cost accountants, or lawyers, and companies routinely engage them for professional work that has nothing to do with their board seat, think an audit-support assignment, a tax opinion, or drafting a commercial contract.

What the Act requires for this exclusion to apply 🔗

Section 197(4) ordinarily requires that any payment to a director for services rendered in another capacity be folded into their overall remuneration and counted against the cap. But a proviso to this sub-section carves out professional fees, provided two conditions are met together:

• Genuinely professional services: The work must be of a professional nature, not disguised management functions relabelled as consultancy.
• Requisite qualification: The Nomination and Remuneration Committee (where applicable under Section 178) or the Board must independently form the opinion that the director actually holds the qualification needed to practise that profession.

This second condition is the real safeguard. A director who merely claims expertise without the underlying qualification, or whose “professional” fee is really just management pay in disguise, cannot use this route to escape the remuneration ceiling. The exclusion exists to let companies benefit from a director’s independent professional skill set, not to create a loophole around the cap.

Guarantee commission for personal liability 🔗

Company loans, especially from banks and financial institutions, often require personal guarantees from directors before they’re sanctioned. When a director stands as a personal guarantor, pledging their own assets against the company’s borrowing, they take on real financial risk, and it’s fairly standard for the company to compensate them with a guarantee commission.

For years, the erstwhile Department of Company Affairs took the position that this commission should be counted as part of managerial remuneration. The Delhi High Court rejected that view in Sussan Textile Bearings Ltd. v. Union of India, holding that a guarantee commission compensates the director for the personal risk undertaken as a guarantor, a role entirely distinct from their role as a managerial person. The two payments arise from two different relationships between the director and the company, so bundling them together misreads what the remuneration cap is actually meant to regulate.

This distinction has practical weight even today. A finance team calculating whether a director has breached the sub-limit should strip out any guarantee commission before running the numbers.

Bonus, leave encashment, and other non-monthly payments: the Auto Lamps case 🔗

Perhaps the most cited authority on this point comes from an older but still influential ruling. In Ravindra Kumar Sanghal v. Auto Lamps Ltd., the Delhi High Court examined whether one-off or periodic payments, bonus, reimbursement for privileged leave not availed, the employer’s provident fund contribution, and reimbursement of medical expenses, should be treated as part of a director’s “monthly remuneration” for the purpose of a statutory ceiling.

The Court held that these payments are non-recurring or non-regular in nature and therefore cannot be clubbed with the fixed monthly remuneration a director draws. A bonus paid once a year, or leave encashment settled only when leave actually lapses unused, simply doesn’t behave like a monthly salary component, so it shouldn’t be measured against a monthly ceiling the same way.

The principle here generalises well beyond the specific facts of that case. It tells us that when a statutory limit is expressed in terms of a monthly or recurring figure, irregular, one-time, or contingent payments sit outside that particular yardstick, even though they may still count toward remuneration in a broader annual sense.

Other payments that typically stay outside the remuneration net 🔗

A few more categories round out the picture, and are worth knowing even though the outline above covers the headline exclusions:

• Sitting fees: Fees paid to a director for attending Board or committee meetings, capped at ₹1 lakh per meeting under the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, are expressly excluded while computing the remuneration ceiling.
• Reimbursement of genuine expenses: Money paid back to a director for actual out-of-pocket expenses incurred on company business isn’t remuneration; it’s simply restoring the director to the position they were in before spending their own money for the company.
• Certain retirement-linked perquisites: Contributions to provident fund, superannuation fund, or annuity fund, to the extent they remain non-taxable under the Income-tax Act, along with gratuity payable up to statutory limits, are treated separately from the remuneration ceiling under Schedule V of the Act.

Inclusions versus exclusions at a glance 🔗

Why this distinction is worth remembering 🔗

These exclusions aren’t loopholes; they exist because the law recognises that a director can relate to a company in more than one capacity at once, as a manager, as a guarantor, as a qualified professional, or simply as someone entitled to statutory retirement benefits like any other employee. The remuneration ceiling under Section 197 was designed to prevent management from quietly siphoning off company profits through inflated managerial pay, not to penalise a director for taking on genuine, separately compensated risk or work. Recognising what falls outside the definition is just as important as knowing what falls inside it, especially for anyone preparing board resolutions, drafting remuneration policies, or answering an exam question that hinges on this exact distinction.

What do you think? If a director-guarantor’s personal guarantee is what actually gets a company’s loan sanctioned, should the compensation for that risk really sit outside the same governance scrutiny that applies to their salary? And where would you draw the line between a director’s “professional service” fee and disguised managerial pay?

References

1. https://blog.ipleaders.in/section-197-of-the-companies-act-2013/
2. https://indiankanoon.org/doc/168868116/
3. https://taxguru.in/company-law/company-managerial-remuneration-guide-real-world-examples.html
4. https://taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5483
5. https://www.icsi.edu/media/webmodules/JULYCOMPANY_LAW_CORNER.pdf