IMPORTANT NOTE REGARDING REMUNERATION CLAUSE IN PARTNERSHIP DEEDS:
Many partnership firms are in the process of revising remuneration clauses in their deeds due to increased in remuneration threshold u/s 40(b) w.e.f. 01st April 2025.
As per Section 40(b), the allowable amount of deduction for remuneration paid to the working partners is based on the firm’s Book Profit for the year.
To maximize the deduction, most partnership deeds contain a clause that states that the remuneration payable to the working partners for the FY shall be based on the firm’s Book Profit for the concerned FY.
For example, it is common to find the following or similar clause in a partnership deed, which determines the remuneration of the working partners:
“That each partner shall be entitled to a monthly remuneration of Rs……… subject to the limits prescribed under section 40(b)(v) of the Income Tax Act, 1961. In the event of the surplus of income of the firm falling below such salary, the same shall be reduced proportionately, to ensure that no disallowance is made by the tax authorities.”
As can be noted in the above example, each working partner is stipulated to receive a
monthly amount of remuneration. However, such remuneration may be reduced after the
firm’s income for the year is computed. This gives the flexibility to ensure that the remuneration to the partners does not get disallowed in the hands of the firm for exceeding the limit (based on Book Profit) as stipulated in section 40(b)(v) of the Act.
However, in order to ensure that the partnership deeds contain the exact quantum of remuneration to the working partners and it is not left to be determined at the end of the FY, the CBDT has issued a Circular No. 739 dated 25th March 1996 which provides the following conditions:
✅ In cases where neither the amount has been quantified nor even the limit of total
remuneration has been specified but the same has been left to be determined by the
partners at the end of the accounting period, in such cases payment of remuneration to
partners cannot be allowed as deduction in the computation of the firm’s income.
✅ It is clarified that for the assessment years subsequent to the assessment year 1996-97,
no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.
Please keep in mind the Circular and quote exact amount of remuneration in your partnership deeds.
