An arithmetic ceiling cannot authorise a prohibited payment
Section 202 of the Companies Act, 2013 permits the stated compensation population to include a managing director, whole-time director or manager, not any other director. Subsection (2) then prohibits payment in specified circumstances. Checked on 28 October 2026, this guide develops the eligibility and monetary-cap working. It is distinct from section 198 profit calculations and from a general director-remuneration limit review. ICSI statutory e-book: Companies Act, 2013, section 202.
Resolve the cessation circumstances first
The exclusions cover the stated reconstruction/amalgamation resignation with a new appointment, other resignation, section 167(1) vacation, winding-up attributable to the director's negligence/default, the specified fraud/breach-of-trust/gross-negligence or mismanagement grounds, and involvement in bringing about termination. Match actual facts and documents to each exclusion. Do not convert a resignation into a qualifying removal merely by changing the settlement description. The examples assume eligibility unless they expressly demonstrate an exclusion. ICSI statutory e-book: Companies Act, 2013, section 202.
Establish actual historical remuneration
Subsection (3) uses average remuneration actually earned over the immediately preceding three years, or the shorter period in office. Reconcile service dates, remuneration records and the relevant period, including variable amounts on their supported basis. A final monthly salary multiplied by twelve is not automatically the historical average. The models use evenly measured full months or full years and already established remuneration totals, without prescribing treatment of disputed entitlements. ICSI statutory e-book: Companies Act, 2013, section 202.
Compare the remaining term with three years
Apply the average rate to the shorter period. Identify the unexpired contractual term and actual cessation date; do not use a proposed extension as though already earned. This is an upper bound, not an automatic entitlement to the maximum. Compare the proposed payment with the cap and preserve any separate contractual and approval analysis. The illustrations contain no tax withholding, actuarial valuation or statutory payment entitlement beyond the stated assumptions. ICSI statutory e-book: Companies Act, 2013, section 202.
Test the winding-up safeguard independently
The subsection (3) proviso prevents the stated payment where winding up commences before or within twelve months after cessation and assets after winding-up expenses are insufficient to repay contributed share capital, including premiums. A compensation amount below the remuneration cap does not bypass that safeguard. Obtain the relevant financial and legal evidence rather than using net assets from an unrelated date or excluding the premium population without analysis. ICSI statutory e-book: Companies Act, 2013, section 202.
Separate other-capacity services and the closing settlement
Subsection (4) addresses remuneration for services in another capacity. Identify genuine services and supported amounts separately; it is not a licence to relabel prohibited loss-of-office compensation. Retain the appointment and cessation record, exclusion checklist, remuneration average, term comparison, winding-up assessment and proposed-versus-maximum calculation. Complete the separate approval, tax, disclosure and payment review applicable to the actual company. ICSI statutory e-book: Companies Act, 2013, section 202.
Applicable primary references
ICSI statutory e-book: Companies Act, 2013, section 202
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Two years remaining
Assume an eligible managing director actually earned ₹24, ₹30 and ₹36 lakh in the preceding three full years. Average annual remuneration is ₹30 lakh. With two years of the valid term remaining, the isolated cap is ₹60 lakh.
Illustrative example 2: Three-year ceiling limits a longer term
Use independently established average annual remuneration ₹30 lakh and four years remaining. The shorter period is three years, giving ₹90 lakh, not ₹120 lakh.
Illustrative example 3: Less than three years' service
Assume eligible service of eighteen full months with total remuneration actually earned ₹27 lakh, measured evenly for the model. Average monthly remuneration is ₹1.50 lakh, or ₹18 lakh annually. Two years remaining gives a ₹36 lakh ceiling.
Illustrative example 4: Compare the proposed settlement
Assume supported average annual remuneration ₹24 lakh, three years remaining and proposed compensation ₹100 lakh. The monetary ceiling is ₹72 lakh and the proposal exceeds it by ₹28 lakh, before the independent eligibility and other-condition review.
Illustrative example 5: An ordinary director does not enter this payment population
Assume a director who is neither managing nor whole-time director nor manager is proposed to receive ₹25 lakh loss-of-office compensation under subsection (1). That ₹25 lakh is outside the stated permitted recipient population; computing a historical salary average does not authorise it.
Illustrative example 6: Winding-up safeguard
Assume the proviso's timing and other conditions apply, with assets after winding-up expenses ₹80 lakh and contributed share capital including premiums ₹90 lakh. The repayment shortfall is ₹10 lakh, so the proviso bars the stated compensation payment even if a separate remuneration-cap calculation produced a positive figure.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the recipient's office | MD, whole-time director or manager versus other director |
| 2 | Establish cessation facts | Dates, reason and actual documents |
| 3 | Check subsection (2) exclusions | Resignation, vacation, conduct and termination involvement |
| 4 | Confirm the historical period | Three preceding years or shorter actual service |
| 5 | Reconcile actual remuneration | Earned amounts and supporting records |
| 6 | Calculate the average rate | Consistent annual/monthly basis |
| 7 | Verify the remaining valid term | Appointment terms and cessation date |
| 8 | Apply the shorter-period ceiling | Remaining term or three years and proposed excess |
| 9 | Test winding-up and other-capacity issues | Proviso evidence and separately genuine services |
| 10 | Complete the settlement review | Approvals, tax, disclosure and actual payment evidence |
Sixteen practitioner FAQs
1. Does section 202 cover every director?
No. Its stated payment population excludes directors outside the specified offices.
2. Is the cap itself permission to pay?
No. First test the recipient and prohibited circumstances.
3. Does an ordinary resignation automatically qualify?
No. Subsection (2)'s resignation exclusions require careful review.
4. Can section 167 vacation affect the conclusion?
Yes. Subsection (2)(c) addresses the specified vacation of office.
5. Can involvement in bringing about termination matter?
Yes. The stated exclusion must be screened against actual facts.
6. Is the last salary the automatic average?
No. Reconcile remuneration actually earned over the relevant historical period.
7. What is the ordinary historical period?
Three years immediately preceding cessation, subject to the shorter-service provision.
8. What if service lasted less than three years?
Use the applicable shorter period, with a consistent rate calculation.
9. Is the remaining term always the compensation period?
No. Use the shorter of that term and three years.
10. Can a proposed future extension increase the cap automatically?
No. Establish the actual valid term and legal entitlement.
11. Must the company pay the calculated maximum?
No. It is a ceiling, not an automatic entitlement.
12. Can a prohibited case be cured by reducing compensation?
Not merely by bringing the amount within the numerical ceiling.
13. Does contributed share premium matter in the winding-up test?
The stated proviso includes premiums in the relevant contributed capital population.
14. Can a below-cap payment still fail the winding-up safeguard?
Yes. That safeguard is an independent restriction.
15. Does subsection (4) allow invented service descriptions?
No. Establish genuine other-capacity services and their separate remuneration.
16. Does this calculation settle tax and disclosure requirements?
No. Complete the independently applicable tax, approval and disclosure review.
Conclusion
Screen prohibited payments before calculating the shorter of the remaining term and three years using remuneration actually earned over the applicable historical period.