A partnership firm can deduct remuneration to its working partners up to Rs 3,00,000 or 90% of book profit on the first Rs 6,00,000 of book profit, plus 60% of book profit above that, under Section 40(b).
Interest on partner capital is deductible up to 12% simple interest. Both payments must be authorised by the partnership deed.
From 1 April 2025, the firm must also deduct 10% TDS on these payments under Section 194T once a partner crosses Rs 20,000 in a year, a rule many older guides still miss.
Important Links
| Resource | Link |
|---|---|
| Income Tax Department (e-filing portal) | incometax.gov.in |
| Income Tax Act text (India Code) | indiacode.nic.in |
| Work out TDS on partner payments | TDS Calculator |
| Compute a partner's own tax on the income received | Income Tax Calculator |
What Is Partner's Remuneration?
Partner's remuneration is the salary, bonus or commission a partnership firm pays to a working partner for managing the business, as permitted by the partnership deed.
A partner can receive three kinds of return from the firm. Remuneration for work, interest on capital invested, and a share of profit.
| Payment | Firm | Partner |
|---|---|---|
| Remuneration (salary, bonus, commission) | Deductible up to the Section 40(b) limit | Taxable as business income, to the extent allowed to the firm |
| Interest on capital | Deductible up to 12% simple interest | Taxable as business income, to the extent allowed to the firm |
| Share of profit | Not deductible (paid out of taxed profit) | Exempt under Section 10(2A) |
Working Partner vs Sleeping Partner: Who Can Be Paid Remuneration?
Only a working partner can receive deductible remuneration, meaning an individual who is actively engaged in conducting the affairs of the firm's business.
What Is the Maximum Remuneration Allowed Under Section 40(b)?
The firm can deduct total remuneration to all working partners of Rs 3,00,000 or 90% of book profit, whichever is higher, on the first Rs 6,00,000 of book profit, and 60% of book profit beyond that.
| Book profit slice | Maximum remuneration |
|---|---|
| First Rs 6,00,000 of book profit, or a book loss | Rs 3,00,000 or 90% of book profit, whichever is higher |
| Balance of book profit above Rs 6,00,000 | 60% of that balance |
The ceiling applies to the combined remuneration of all working partners, not to each partner. A firm with three working partners shares one limit between them in the ratio stated in the deed.
Anything paid above the ceiling is added back to the firm's income. The firm can still pay it to the partner, since the Partnership Act places no cap, but it gets no tax deduction for it.
How to Calculate Book Profit for Section 40(b)
Book profit is the firm's business profit before any partner remuneration is deducted, worked out in four steps from the profit and loss account.
| Step | Item |
|---|---|
| 1 | Net profit as per profit and loss account |
| 2 | Add: remuneration to partners, if debited in the P&L account |
| 3 | Add: interest paid to partners, if debited in the P&L account |
| 4 | Less: interest allowed under Section 40(b) (up to 12% simple interest) |
| = | Book profit |
In plain terms, book profit is the profit under the head Profits and Gains of Business or Profession, before the partners are paid for their work.
Income Tax Calculator
See how the remuneration you receive as a partner is taxed in your own return, under both regimes.
Partner Remuneration Calculation: Worked Examples
The same formula gives very different ceilings at different profit levels, as the table below shows for firms of different sizes.
| Book profit / (loss) | Calculation | Maximum remuneration |
|---|---|---|
| Rs (2,00,000) loss | Higher of Rs 3,00,000 or 90% of nil | Rs 3,00,000 |
| Rs 2,00,000 | Higher of Rs 3,00,000 or Rs 1,80,000 | Rs 3,00,000 |
| Rs 6,00,000 | Higher of Rs 3,00,000 or Rs 5,40,000 | Rs 5,40,000 |
| Rs 7,00,000 | Rs 5,40,000 + 60% of Rs 1,00,000 | Rs 6,00,000 |
| Rs 9,00,000 | Rs 5,40,000 + 60% of Rs 3,00,000 | Rs 7,20,000 |
| Rs 20,00,000 | Rs 5,40,000 + 60% of Rs 14,00,000 | Rs 13,80,000 |
Now a full example with a disallowance. A firm has two working partners and Rs 10,00,000 of total capital. Its deed allows interest on capital, and it pays 18% interest and Rs 12,00,000 of remuneration. After debiting both, the firm shows a profit of Rs 4,00,000.
| Item | Amount |
|---|---|
| Profit per P&L account | Rs 4,00,000 |
| Add: remuneration debited | Rs 12,00,000 |
| Add: interest debited (18% of Rs 10,00,000) | Rs 1,80,000 |
| Less: interest allowed (12% of Rs 10,00,000) | Rs (1,20,000) |
| Book profit | Rs 16,60,000 |
| Maximum remuneration: Rs 5,40,000 + 60% of Rs 10,60,000 | Rs 11,76,000 |
| Remuneration disallowed (Rs 12,00,000 less Rs 11,76,000) | Rs 24,000 |
| Interest disallowed (Rs 1,80,000 less Rs 1,20,000) | Rs 60,000 |
| Firm's taxable income (Rs 4,00,000 + Rs 24,000 + Rs 60,000) | Rs 4,84,000 |
| Tax at 30% plus 4% cess | Rs 1,51,008 |
The disallowed Rs 84,000 stays out of the partners' taxable income. Only the allowed Rs 11,76,000 of remuneration and Rs 1,20,000 of interest is taxed in their hands.
Conditions for Claiming the Remuneration Deduction
A firm can claim the deduction only when all five conditions below are met.
Interest on Partner's Capital: Conditions and the 12% Cap
A firm can deduct simple interest on partner capital up to 12% per annum, provided the partnership deed authorises it.
One exception covers a person who is a partner in a representative capacity, acting for someone else. Interest the firm pays that person in a personal capacity is outside these limits and is allowed in full.
How Remuneration and Profit Share Are Taxed in the Partner's Hands
Remuneration and interest that the firm is allowed to deduct are taxable for the partner as business income, while any amount disallowed to the firm is not taxed again in the partner's hands.
The partner's share of profit is exempt under Section 10(2A) whether the partner is working or sleeping. The partner can still offset expenses against the allowed remuneration, and can use the Income Tax Calculator to see the tax on the business income across both regimes.
TDS on Partner Remuneration: Section 194T
Yes, a partnership firm or LLP must deduct 10% TDS on salary, remuneration, commission, bonus and interest paid or credited to a partner once the total for the financial year exceeds Rs 20,000.
| Point | Rule |
|---|---|
| Effective from | 1 April 2025 |
| Payments covered | Salary, remuneration, commission, bonus and interest to a partner |
| Rate | 10% (20% if the partner has not furnished a PAN, under Section 206AA) |
| Threshold | Total of Rs 20,000 or less in the financial year: no TDS |
| When to deduct | At the earlier of credit to the partner's account, including the capital account, or payment |
| Not covered | Share of profit and capital withdrawals |
A firm that credits Rs 8,00,000 of remuneration and Rs 1,20,000 of capital interest to a partner in the year must deduct Rs 80,000 and Rs 12,000 respectively. The partner then claims the credit from Form 26AS when filing the return.
The rate and threshold are the same under the new Act: Section 194T moves into Section 393 from FY 2026-27, as the TDS rate chart shows alongside every other TDS section. The general rules on deposit and return due dates are in the TDS guide, and the TDS Calculator checks the amount on any payment.
Does Section 40(b) Apply to LLPs and Presumptive Taxation?
Section 40(b) applies to LLPs, because an LLP is taxed as a partnership firm, but it does not give a separate deduction to a firm that pays tax on a presumptive basis.
Tax Planning for a Partnership Firm: Getting the Most from Remuneration
The best tax planning is to pay working partners up to the full Section 40(b) ceiling while keeping interest within 12% simple, since every rupee inside the limit cuts the firm's taxable income at 30%.
The firm itself pays a flat 30% plus cess, with no slab benefit. Partners on lower slabs may choose how much to draw as salary versus how much to leave as profit share, an area where a chartered accountant adds real value.
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Disclaimer: This article explains Section 40(b) and Section 194T of the Income Tax Act for general informational purposes and is not tax advice. Deduction limits depend on your firm's partnership deed and computed book profit; consult a chartered accountant before fixing partner remuneration or filing. The Income Tax Act, 2025 replaces the 1961 Act from 1 April 2026 and renumbers its sections, so confirm the current section reference for your assessment year. Figures reflect the law as of the date above.