Working partners in a partnership firm often draw remuneration from firm profits without bothering about how to calculate Partners Remuneration. Whether that payment is tax-deductible for the firm (and taxable in the hands of the partner) depends on two things:
(a) what the partnership deed authorises such remuneration payments and
(b) whether the payment fits within the limits and conditions laid down in the Income-tax Act.
In this blog post, we have tried to explain the legal basis, summarise the very recent changes, and show a practical sample clause you can drop into a partnership deed.
Legal Foundation
Under the Partnership Act, 1932
Under the Indian Partnership Act, 1932, partners are not ordinarily entitled to receive remuneration for taking part in the conduct of the business unless the partnership deed provides for it.
In other words: no remuneration clause = no remuneration (subject to agreed exceptions)
Under the Income Tax Act, 1961 / ITA, 2025
Section 40(b) of the Income-tax Act, 1961 (or Section 35(e) of the Income Tax Act, 2025) governs the manner to calculate partners remuneration including when remuneration and interest paid to partners can be claimed as a deduction by the firm. It specifies
(i) conditions (e.g., partner must be a “working partner”, payment must be authorised by the deed) and
(ii) the ceiling (a formula that depends on “book profit”).
Only on complying with the conditions laid down under the Income Tax Act, the remuneration paid to partners shall be allowed as a expense.
These two legal pillars are the decision-making rules:
Remuneration Clause in the Partnership Deed + Section 40(b).
Need a Professionally Drafted Partnership Deed?
Let our experts prepare a customized deed that fits your business perfectly.
Formula to Calculate Partners Remuneration as per Income Tax Act
Key principle: Once you calculate book profit, the maximum amount of remuneration & interest to partners that the firm can deduct = a slabbed percentage/amount applied to book profit.
A. Rule effective until FY 2024–25 (historical)
- On the first ₹3,00,000 of book profit (or if book profit is negative): maximum deduction = ₹1,50,000 or 90% of book profit (whichever is higher).
- On the balance of book profit (beyond ₹3,00,000): 60% of the balance.
B. Rule effective from FY 2025–26 / AY 2025-26 (important recent change)
- The Finance Act increased the slabs effective 1 April 2025. New rule:
- On the first ₹6,00,000 of book profit (or in case of loss): maximum deduction = ₹3,00,000 or 90% of book profit (whichever is higher).
- On the balance of book profit (beyond ₹6,00,000): 60% of the balance.
These changes were announced in the Budget/Finance Bill and take effect from AY 2025-26.
What is Book Profit?
Book profit (for the purpose of section 40(b) of the 1961 Act or Section 35(e) of the 2025 Act) is typically derived from the firm’s profit before charging interest, depreciation and partners’ remuneration. In practice the computation is:
Book profit = Profit before interest, depreciation & remuneration – Interest allowed on partners’ capital (as per Act) – Depreciation allowable (as per Income-tax Act) + / – Other adjustments (items allowable/disallowable under the Act)
Use the firm’s profit before charging partners’ remuneration as the starting point. Even the recommended illustrative financial statements issued by the Institute of Chartered Accountants of India has brought the Partner’s Remuneration to the face of the statement of Profit & Loss, so that the profit before charging partners’ remuneration can easily be arrived from the statement of P&L itself.
🔗Download the illustrative format by clicking here
Remuneration Calculator
Partner’s Remuneration Calculator
Recent compliance addition — TDS under Section 194T
From 1 April 2025 the income tax act has introduced a new Section 194T (Corresponds to Section 393(3) of the Income Tax Act, 2025)
A firm (or LLP) must deduct TDS at 10% on sums paid/credited to partners as salary, remuneration, commission, bonus or interest, if aggregate payments to a partner in the financial year exceed ₹20,000. The timing of deduction is at payment/credit, whichever is earlier.
So even if the firm can deduct remuneration under 40(b), you must still handle TDS compliance at the firm level.
Related Posts
Why does a Remuneration Clause in the Partnership Deed Matter?
A well-drafted remuneration clause in the partnership deed is crucial because, under the Indian Partnership Act, 1932, partners are not entitled to any salary or commission unless the deed specifically authorises it—making the deed the primary legal authority for such payments. Moreover, under Section 40(b) of the Income-tax Act, 1961, the deduction for partner remuneration is allowed only if it is “in accordance with the partnership deed.” If the deed is vague or merely says remuneration may be “mutually agreed” without specifying amounts or the method of calculation, the Income Tax Department can disallow the deduction, increasing the firm’s taxable income and tax burden.
In fact, the Delhi Tribunal upheld such a disallowance in the case of Quality Traders, Delhi vs. ITO, where the partnership deed failed to specify either the amount or the method of calculating remuneration for working partners. The Assessing Officer disallowed salary to partners on that ground, and both the CIT(Appeals) and Tribunal upheld the order—citing CBDT Circular No. 739 (1996), which mandates the deed must specify remuneration details clear enough for compliance with Section 40(b)
Sample Remuneration Clause
The following may be used as a sample for the purpose of being included in the Deed of Partnership
The partners hereby agree that only the working partners of the firm, namely [Insert Names], shall be entitled to receive remuneration for their services in conducting the business of the firm. The remuneration payable shall be as under:
- Each working partner shall be paid a fixed monthly salary of ₹[amount], subject to revision by mutual consent of all partners, provided that such revision shall always remain within the limits prescribed under Section 40(b) of the Income-tax Act, 1961/ (Section 35(e) of the Income-tax Act, 2025), as amended from time to time.
- In addition to fixed salary, the working partners shall collectively be entitled to remuneration by way of commission, computed at [x%] of the Book Profit of the firm (as defined under the Income-tax Act for Section 40(b) purposes), subject to the maximum ceilings laid down therein. The commission shall be apportioned among the working partners in their profit-sharing ratio, unless otherwise agreed in writing.
- The aggregate remuneration (fixed salary plus commission) payable to all working partners shall in no case exceed the maximum amount deductible under Section 40(b) of the Income-tax Act, 1961/ (Section 35(e) of the Income-tax Act, 2025), including any statutory amendments or notifications in force.
- The remuneration shall be due and payable irrespective of whether the firm makes profits or incurs a loss, but subject to the Income-tax Act’s deductibility limits.
- The firm shall deduct income tax at source (including under Section 194T of the 1961 Act or Section 393(3) of the 2025 Act, where applicable) before making payment of remuneration to the partners.
If a compact version of the clause is preferred in place of the above, the following clause may be used
The working partners of the firm, shall be entitled to remuneration for their services, computed at ₹[fixed amount] per month each and/or [x%] of the Book Profit of the firm, subject to the maximum ceiling prescribed under Section 40(b) of the Income-tax Act, 1961/ (Section 35(e) of the Income Tax Act, 2025), as amended from time to time.
Conclusion
In short, partner’s remuneration is not just about paying yourselves fairly. It’s about keeping the Partnership Act, the Income-tax Act, and even the TDS provisions in perfect sync. A carefully worded clause in your partnership deed can save you from painful disallowances and awkward tax notices. After all, you don’t want the Assessing Officer to be the “silent partner” who takes the biggest share!
Draft smart, comply better, and let the real partnership debates stay focused on business, not on book profits.
📢 Now Offering Professional Tax Services!
We’re excited to share the offer of our new Tax Services section! Whether it’s income tax filing, GST return support, or other compliance solutions, we’re here to help individuals, businesses, and NRIs navigate Indian tax systems with ease.
👉 Explore Our Tax Services
