Partnership firm shares its profits among partners based on the terms agreed in the partnership deed. Depending on their role, partners may be working partners, who invest and actively manage the business, or silent partners, who only contribute capital. The remuneration paid, whether as salary, bonus, commission, or interest, is determined by the remuneration clause in the deed and is subject to specific tax rules under Section 40(b) of the Income Tax Act.
the limit for a partner’s remuneration under Indian tax laws, specifically related to the Book Profit of a partnership firm. This is often used for calculating a partner’s salary or bonus that’s deductible as an expense for the firm.
Here’s a breakdown of the rules shown in the image:
Before 1st April 2025
The calculation is based on the firm’s Book Profit or Loss:
- First ₹3,00,000 of Book Profit or Loss: The limit is the higher of either ₹1,50,000 or 90% of the Book Profit.
- Remaining Balance of Book Profit: The limit is 60% of this remaining amount.
After 1st April 2025
The limits are revised, and the base for the first slab of profit is increased:
- First ₹6,00,000 of Book Profit or Loss: The limit is the higher of either ₹3,00,000 or 90% of the Book Profit.
- Remaining Balance of Book Profit: The limit remains at 60% of this remaining amount.
significant increase in the initial profit slab and the corresponding fixed limit, which would allow for a higher deductible remuneration for partners in firms with smaller profits.
What is Partner’s Remuneration?
A partner’s remuneration is the salary, bonus, or commission paid to a partner by a partnership firm. Similar to regular employees, partners receive monthly payments for their contribution to the firm. Partners receive the following compensation for their work:
- Remuneration
- Interest on Capital Invested
- Share of Profit
What is TDS on Partner’s Remuneration?
As per section 194T, TDS will be required to be deducted for any salary, remuneration, bonus, or commission payments made to a partner by a firm at the rate of 10% if payment in a financial year exceeds Rs. 20,000.
Is Deduction of Partner’s Remuneration Allowed?
Partnership Firms are allowed to deduct the Interest and Remuneration paid to Partners as expenses when arriving at their ‘Profits and Gains from Business and Profession’ (PGBP). However, Section 40(b) has specified a maximum limit up to which the deduction can be claimed on interest and remuneration amounts.
However, this is not allowed if partnership firms choose to pay tax on a presumptive basis under section 44AD or section 44ADA.
Section 40(b) of the Income Tax Act: Remuneration and Interest to Partner
Section 40(b) of the Income Tax Act specifies the ceiling limit for the compensation and capital interest that can be paid to a partner. Any amount exceeding this limit is ineligible for deduction.
What are the Conditions for Claiming Deduction for Partner’s Remuneration?
To qualify for deduction of Partners Remuneration, the following conditions must be satisfied:
| Condition | Description |
|---|---|
| Paid to Working Partners | Remuneration is only Paid to Working Partners. |
| Authorized by the Partnership Deed | Remuneration should be Authorized by the Partnership Deed; the deed should mention the calculation method. |
| Relevant Timeframe | The remuneration should be for a period starting from the date of the partnership deed. |
| Within Permissible Limits | Remuneration should be within the permissible limits. |
| Maximum Rate of Interest | Interest on partner’s capital is allowed at a maximum rate of 12% p.a. |
| Applicable Partnership Period | The remuneration should relate to the partnership deed period. |
What is the Maximum Deduction for Partner’s Remuneration?
Maximum permissible limits under Section 40(b) for FY 2024-2025:
| Book Profit | Limit |
|---|---|
| On the first Rs.3,00,000 of book profit or loss | Rs.1,50,000 or 90% of the book profit, whichever is higher |
| On the remaining balance of book profit | 60% of the book profit |
For FY 2025-26, the limits will be as follows:
| Book Profit | Limit |
|---|---|
| On the first Rs.6,00,000 of book profit or loss | Rs.3,00,000 or 90% of the book profit, whichever is higher |
| On the remaining balance of book profit | 60% of the book profit |
Calculation of Book Profits
| Calculation | Amount |
|---|---|
| (i) Profit as per Profit & Loss Account (P&L) | xxxx |
| (ii) Add: Remuneration to partners, if debited in the P&L above | xxxx |
| (iii) Add: Interest paid to partners, if debited in the P&L above | xxxx |
| (iv) Less: Interest as allowed under Section 40(b) | xxxx |
| Book Profits | xxxx |
In simple words, Book Profit means PGBP before Remuneration.
Example on Partners Remuneration Calculation
For FY 2024-25, the Partners Remuneration will be computed as follows:
| Situation | Book Profit/ (Loss) | Calculation | Max Remuneration Allowed |
|---|---|---|---|
| 1 | Rs. 9,00,000 | (Higher of Rs.1,50,000 or Rs. 3,00,000 * 90%) + Rs. 6,00,000 * 60% | Rs 6,30,000 |
| 2 | Rs. 7,00,000 | (Higher of Rs.1,50,000 or Rs. 3,00,000 * 90%) + Rs. 4,00,000 * 60% | Rs 5,10,000 |
| 3 | Rs. 2,00,000 | Higher of Rs.1,50,000 or Rs. 2,00,000 * 90% | Rs 1,80,000 |
| 4 | (Rs. 2,00,000) | Higher of Rs.1,50,000 or Rs. 0 * 90% | Rs 1,50,000 |
For FY 2025-26 onwards, Partners Remuneration will be computed as follows:
| Situation | Book Profit/ (Loss) | Calculation | Max Remuneration Allowed |
|---|---|---|---|
| 1 | Rs. 900,000 | (Higher of Rs.3,00,000 or Rs. 6,00,000 * 90%) + Rs. 3,00,000 * 60% | Rs 7,20,000 |
Remuneration that is deductible as expenses for the partnership firm will be considered taxable income for the receiving partner as “Income from Business or Profession”. If the remuneration is not allowed as an expense for the partnership firm, it will not be taxable for the partners.
Conditions for Claiming Deduction of Interest Paid to Partner
Interest on Partner’s Capital:
In order for interest to be eligible for deduction, the following conditions must be met:
| Condition | Description |
|---|---|
| Authorized in the Partnership Deed | Interest payment must be authorized/approved in the partnership deed. |
| Maximum Rate | The rate of interest paid should not exceed 12%. If it exceeds, the excess amount is disallowed. |
| Applicable Partnership Type | It is not allowed if the partnership firm chooses to pay tax on a presumptive basis under section 44AD or section 44ADA. |
| Relevant Timeframe | The remuneration should be for a period starting from the date of the partnership deed. |
Partner in Representative Capacity
If a person is a partner in a representative capacity (i.e., acting on behalf of another person rather than in their personal capacity), then any interest paid by the firm directly to that individual in their personal capacity will be exempt from the conditions and maximum limit set for disallowance. Therefore, the entire interest amount will be allowed as a deduction.
Partner Remuneration & Interest: Important Points to Note
- When it is stated that remuneration or interest is not allowed, it means that it is not allowed as a deduction for calculating the net taxable profit. The firm can still pay it to the partner in cash, as there are no restrictions under the Partnership Act.
- The amounts that are deductible as remuneration or interest in the hands of the firm under Section 40(b) are taxable for the partner receiving those amounts under the head “Profit from Business/Profession.” However, if the amount is disallowed in the hands of the firm, it is exempt in the hands of the partner.
- The partnership firm does not need to deduct TDS (Tax Deducted at Source) on salary or interest paid or credited to a partner. TDS is not required even if such salary or remuneration is taxable in the hands of the partner.
Share of Profit
Share of Profit is the percentage of profit distributed among partners, regardless of whether they are working or sleeping partners. The partners mutually decide on the ratio in which they will share profits. If the Partnership Deed does not specify the ratio, the profits can be distributed equally among them.
This ratio applies not only to profit sharing but also when partners need to divide losses. The entire profit need not be distributed among partners. A part of the profit can be kept separate for reserve and surplus.
Irrespective of whether you are a working or sleeping partner, the share of profit received is exempt from tax under Section 10(2A) of the Income Tax Act.
Frequently Asked Questions
| Question | Answer |
|---|---|
| Is interest on a partner’s capital taxable? | According to Section 28, the business partner will be subject to taxation on the interest earned on capital. This means the income generated from interest will be taxable under profits and gains from business and profession. |
| Can sleeping partners get a salary? | Sleeping partners do not receive a salary; instead, they receive a share of profits derived from the business. The distribution of such profits is based on each partner’s respective share in the business. |
| Is it mandatory to pay remuneration to the partner? | Remuneration is applicable only to working partners who actively manage the affairs of the firm. Non-individual partners, such as companies, are not considered working partners and thus are not eligible for remuneration. |
| Is it mandatory for a partnership firm to pay interest on a partner’s capital? | No, it is not mandatory for a partnership firm to pay interest on a partner’s capital. However, if interest is paid, it is treated as a deductible expense for the firm. |
| Is Section 40B applicable to LLPs (Limited Liability Partnerships)? | Yes, Section 40B is applicable to LLPs (Limited Liability Partnerships). |
| Can a partner claim deduction on interest paid by the firm on partner’s capital in his/her individual tax return? | No, a partner cannot claim deduction on interest paid by the firm on partner’s capital in his/her individual tax return. The deduction is available only to the partnership firm. |
| What is the difference between salary and remuneration? | Remuneration is specifically reserved for working partners in a firm, while salary is a form of remuneration often associated with traditional employment. Non-individual partners like companies do not qualify for remuneration. |