Can a Section 8 Company Pay Salaries to Its Directors in India?

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Introduction

Section 8 companies occupy a unique position in India’s corporate landscape. Incorporated under the Companies Act, 2013, they are companies in the full legal sense — with directors, shareholders, a board, and statutory compliance obligations — but they are formed for charitable or non-profit purposes rather than for the generation and distribution of profit to their members.

This dual character — corporate form, non-profit purpose — creates genuine confusion about what a Section 8 company can and cannot do with its funds. One of the most frequently asked questions among founders, trustees, and professionals working with Section 8 companies is this: can the directors of a Section 8 company be paid a salary?

The answer is neither a simple yes nor a simple no. The Companies Act, 2013 and the rules made thereunder impose specific restrictions on the remuneration of directors of Section 8 companies — restrictions that are stricter than those that apply to ordinary private limited or public limited companies. But within those restrictions, there is a legally permissible framework for compensating directors who provide genuine services to the organisation.

Getting this wrong has serious consequences. Paying remuneration to directors in a manner that violates the Companies Act can result in cancellation of the Section 8 licence, conversion of the company into an ordinary company, financial penalties, and personal liability for the directors involved. On the other hand, failing to understand the permissible framework can leave organisations unable to compensate capable professional founders and managers who devote their working lives to running the organisation.

In 2026, this question has become more pressing as the Section 8 company structure has grown in popularity among social enterprises, impact organisations, NGOs, and mission-driven businesses seeking a formal corporate structure with non-profit status.

This guide explains the legal framework governing director remuneration in Section 8 companies — what is permitted, what is prohibited, under what conditions remuneration can be paid, what approvals are required, and what the consequences of non-compliance are.

What Is a Section 8 Company?

A Section 8 company is a company incorporated under Section 8 of the Companies Act, 2013 for the promotion of charitable objects — including commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any other object of public utility.

📋 A Section 8 company is licensed by the Central Government — the licence is what confers the special status and the associated benefits 📋 The company must apply its income and profits — if any — toward promoting its objects. It cannot distribute profits or dividends to its members 📋 The licence conditions require that the company’s constitution prohibit the payment of dividend to members 📋 Section 8 companies enjoy certain exemptions and concessions under the Companies Act compared to ordinary companies — reduced compliance requirements, exemptions from certain provisions — but are also subject to additional restrictions, particularly regarding the use of funds

The non-distribution constraint is the defining feature of a Section 8 company — it is what distinguishes it from an ordinary company incorporated for profit. But the non-distribution constraint does not mean the company cannot pay for services rendered to it — including services rendered by its directors.

The General Rule: No Remuneration to Directors

Section 8(1) of the Companies Act, 2013 requires, as a condition of the licence, that the company’s constitution — its Memorandum of Association and Articles of Association — must prohibit the payment of any dividend or remuneration to its members and directors, except as permitted by the Act and the licence conditions.

The Companies (Incorporation) Rules, 2014 and the Section 8 licence conditions issued by the Central Government reinforce this:

📋 A Section 8 company shall not pay any remuneration to its directors for services rendered in their capacity as directors — such as attending board meetings, exercising oversight, or performing governance functions 📋 The sitting fees that ordinary companies pay to directors for attending board meetings are generally not payable by Section 8 companies 📋 Directors cannot be paid simply for being directors — the directorship itself is a voluntary, non-remunerated role in a Section 8 company

This is the default position — and it reflects the foundational principle that a Section 8 company exists to serve its charitable objects, not to benefit its officers.

The Exception: Remuneration for Services as an Employee or Professional

The restriction on director remuneration applies to remuneration paid in the capacity of a director. It does not automatically prohibit a director from receiving payment for other services rendered to the company in a different capacity — as an employee, as a professional consultant, or in an executive role.

This distinction is critical and is recognised under the Companies Act framework:

📋 A director who is also an employee of the Section 8 company — appointed to an executive position such as Chief Executive Officer, Executive Director, Programme Director, or any other full-time role — can receive a salary for services rendered in that employment capacity 📋 A director who provides professional services to the Section 8 company — as a lawyer, accountant, doctor, architect, or other professional — in a capacity separate from their directorship can receive professional fees for those services 📋 The key condition is that the remuneration must be for genuine services rendered, at arms-length rates, and not a disguised distribution of profits to members

This distinction between the director role and the employee or professional role is well established in company law — a person can simultaneously hold both positions, provided the remuneration is paid for the service role, not the governance role.

Central Government Approval: The Mandatory Requirement

Even where remuneration to a director of a Section 8 company is otherwise permissible — because it is for services in an executive or professional capacity — it cannot simply be decided by the board and paid. A specific approval requirement applies.

Under Rule 21 of the Companies (Incorporation) Rules, 2014, a Section 8 company that wishes to pay remuneration to its directors must obtain prior approval from the Central Government — specifically from the Regional Director of the Ministry of Corporate Affairs having jurisdiction over the company’s registered office.

📋 The application for approval is filed with the Regional Director, setting out the nature of the services, the proposed remuneration, the justification for the remuneration, and the financial position of the company 📋 The Regional Director examines the application and may approve, modify, or refuse the remuneration 📋 Remuneration cannot be paid to a director until the Central Government approval is obtained — paying without approval is a violation of the licence conditions 📋 The approval, once granted, specifies the amount and conditions of remuneration — and subsequent changes to the remuneration require fresh approval

This approval requirement is a significant administrative step that many Section 8 companies are unaware of — and non-compliance is one of the most common causes of licence cancellation proceedings against Section 8 companies.

What the Law Specifically Permits

Within the framework described above, the following payments to directors of Section 8 companies are permissible subject to the conditions and approvals described:

📋 Salary for executive roles — a director who serves as a full-time executive — CEO, Managing Director, Executive Director, Programme Head — can receive a salary for that executive role, subject to Central Government approval. The salary must be reasonable and commensurate with the responsibilities of the role and the financial capacity of the organisation.

📋 Professional fees — a director who is a practising professional — lawyer, chartered accountant, doctor, engineer — and who provides professional services to the company in that professional capacity can receive fees for those services, subject to Central Government approval and provided the engagement is at arms-length commercial rates.

📋 Reimbursement of expenses — directors are entitled to reimbursement of actual expenses incurred in connection with their duties — travel, accommodation, communication, and similar out-of-pocket costs. Reimbursement of actual expenses at cost is not remuneration and does not require Central Government approval, provided it is for genuine expenses supported by documentation.

📋 Insurance — a Section 8 company can take out directors and officers liability insurance for its directors — this is not remuneration.

What Is Clearly Prohibited

📋 Sitting fees — the sitting fees that ordinary companies pay directors for attending board and committee meetings are not payable by Section 8 companies as a matter of course. The licence conditions and standard AoA of Section 8 companies typically prohibit sitting fees.

📋 Commission on profits — commission linked to the profits of the company is prohibited — it would be a form of profit distribution in a non-profit entity.

📋 Dividends or profit shares — directors as shareholders cannot receive any dividend or distribution from the profits of the company — the non-distribution constraint applies equally to directors in their capacity as members.

📋 Remuneration disguised as expenses — inflated expense reimbursements that are not supported by actual expenses and documentation, or that are intended to serve as covert remuneration, are prohibited and constitute a misuse of the company’s funds.

📋 Remuneration without Central Government approval — any remuneration paid to a director — even for legitimate executive services — without prior Central Government approval is a violation of the licence conditions, regardless of the underlying justification.

The Practical Framework: How Section 8 Companies Structure Director Compensation

In practice, Section 8 companies that need to compensate their founding directors or professional managers use the following structures — within the legal framework and with appropriate approvals:

Structure 1: Founder as Full-Time Employee

The most common structure is for the founding director to be appointed as a full-time employee of the company — as CEO, Executive Director, or in a similar executive capacity — with a formal employment agreement, a defined salary, and all applicable employment law compliances (PF, ESIC, TDS, etc.).

📋 The director holds two positions simultaneously — director (governance role, unpaid) and CEO or Executive Director (employment role, salaried) 📋 The salary is for the employment role, not the directorship 📋 Central Government approval is obtained before the salary is paid 📋 The salary is reasonable and commensurate with the responsibilities — not inflated to serve as disguised profit distribution

Structure 2: Professional Services Agreement

Where a director is a practising professional whose services the company genuinely needs, a formal professional services agreement at commercial rates — with Central Government approval — provides a legally sound basis for compensation.

📋 The engagement must be at arms-length rates — what the company would pay to any independent professional for the same services 📋 The services must be genuinely required by the company and actually rendered 📋 The director must not use the professional services arrangement as a mechanism to extract value beyond what is commensurate with services rendered

Structure 3: Voluntary Service With Expense Reimbursement

Many Section 8 companies are built on voluntary service by their directors, with the company covering actual out-of-pocket expenses. This is the simplest structure and requires no Central Government approval for the expense reimbursement component.

📋 Expenses must be actual and documented — not estimated or inflated 📋 A clear expense reimbursement policy should be adopted by the board 📋 Expenses should be approved before or after incurrence per the policy — not paid at discretion

Income Tax Implications

The income tax treatment of remuneration paid by a Section 8 company to its directors has implications both for the company and for the director:

📋 For the director — salary received from a Section 8 company is taxable as income from salary in the hands of the director, subject to TDS deduction by the company. Professional fees received are taxable as business or professional income.

📋 For the company — the Section 8 company must deduct TDS on salary payments under Section 192 of the Income Tax Act, and on professional fees under Section 194J. Failure to deduct and deposit TDS is a compliance violation with financial penalties.

📋 Impact on Section 12A/80G registration — Section 8 companies that are also registered under Section 12A of the Income Tax Act (for income tax exemption on income applied for charitable purposes) must ensure that remuneration paid to directors does not constitute an unreasonable benefit to related parties — which can jeopardise the Section 12A registration. The Income Tax department scrutinises related-party transactions in charitable organisations, and excessive or unjustified remuneration to founder-directors is a common trigger for Section 12A cancellation proceedings.

📋 Reasonable remuneration standard — both for Companies Act and Income Tax purposes, the standard is reasonableness. Remuneration that is disproportionate to the services rendered, the financial capacity of the organisation, or the market rate for comparable services is a red flag for regulators.

Consequences of Non-Compliance

Paying remuneration to directors of a Section 8 company in violation of the Companies Act or licence conditions has serious consequences:

📋 Cancellation of Section 8 licence — the Central Government can revoke the Section 8 licence if the company is found to have paid remuneration in violation of the conditions. Licence revocation means the company loses its Section 8 status and must be converted to an ordinary company or wound up.

📋 Penalty on the company — under Section 8(11) of the Companies Act, if a company makes default in complying with the requirements of Section 8, the company is liable to a penalty of up to Rs. 10 lakhs, and every officer of the company in default is liable to a penalty of up to Rs. 25 lakhs, or imprisonment of up to 3 years, or both.

📋 Loss of tax exemptions — if the company holds Section 12A or 80G registration and is found to have paid non-compliant remuneration, the Income Tax department can cancel these registrations — removing the company’s income tax exemption and donors’ ability to claim deductions for contributions.

📋 Personal liability of directors — directors who authorise or receive non-compliant remuneration can be held personally liable for the amounts paid and for the penalties imposed.

Common Mistakes Made by Section 8 Companies

Paying salaries without Central Government approval: Many Section 8 companies pay their founder-directors a salary from inception, treating it as a purely internal decision. This is a violation — Central Government approval must be obtained before any remuneration is paid to a director.

Treating all director payments as prohibited: Some Section 8 companies, overcautious about the restrictions, refuse to pay their executive founders anything — leading to talent drain and unsustainable operations. The legal framework does permit reasonable executive remuneration with proper approvals.

Failing to distinguish between directorship and employment: The failure to formally document the dual role — director for governance, employee or consultant for services — creates ambiguity that can be problematic in a regulatory inquiry or audit.

Inflating expense reimbursements: Using expense reimbursements as a substitute for salary — without documentation — is a common workaround that regulators and tax authorities treat as disguised remuneration.

Ignoring Income Tax compliance: Even when Companies Act compliance is in order, failure to deduct TDS on salary or professional fee payments creates separate income tax violations and penalties.

Not reviewing remuneration against Section 12A conditions: Section 8 companies with Section 12A registration must ensure that remuneration to directors is consistent with the conditions of that registration — a compliance failure under one regime can trigger adverse consequences under the other.

Frequently Asked Questions

Conclusion

The question of whether a Section 8 company can pay salaries to its directors does not have a binary answer — but it does have a clear legal framework that, once understood, is navigable.

Directors cannot be paid for being directors — the governance role is voluntary and unpaid. But directors who also serve as full-time executives, or who provide genuine professional services to the company, can receive reasonable remuneration for those services — subject to prior approval from the Central Government and compliance with all applicable income tax and company law requirements.

The framework exists for a sound reason: Section 8 companies are formed to serve their charitable objects, and the regulatory oversight of director remuneration is designed to prevent the non-profit structure from being used to extract private benefit under the cover of charitable purpose. Organisations that operate within this framework — with proper documentation, appropriate approvals, and reasonable remuneration — have nothing to fear from regulatory scrutiny.

The organisations that face consequences are those that pay remuneration informally, without approvals, without documentation, or at levels that cannot be justified by the services rendered and the financial position of the company.

Get the approvals. Document the roles. Pay what is reasonable. And build the organisation on a foundation that can withstand scrutiny.

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Anjali Pandey

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