Partner’s Remuneration Under Section 40(b): Complete Taxation Guide

In the realm of Indian partnership firms, partners often contribute more than just capital—they bring in expertise, management skills, and strategic direction. To compensate for these contributions, firms provide partners’ remuneration, encompassing salaries, bonuses, commissions, and other forms of payment. Grasping the nuances of its calculation and taxation is pivotal for both partners and firms to ensure adherence to tax laws and optimise financial planning. This provision also presents a valuable opportunity for partnership firms to strategically manage and optimize their tax liabilities.

Defining Partner’s Remuneration

Partner’s remuneration refers to the compensation awarded to partners for their active participation in the firm’s operations. This includes:

• Salaries: Fixed periodic payments for services rendered.
• Bonuses: Performance-based incentives.
• Commissions: Payments tied to specific business achievements.
• Other Allowances: Additional benefits as agreed upon.

It’s essential to differentiate this from the partner’s share of profit, which is exempt from tax under Section 10(2A) of the Income Tax Act, 1961.

Taxation Aspects of Partners’ Remuneration

For the Partnership Firm

• Deductibility: Remuneration paid to working partners is deductible from the firm’s taxable income, provided it complies with the conditions laid out in Section 40(b) of the Income Tax Act.
• Limits: The deduction is permissible only if the remuneration is authorized by the partnership deed and falls within the prescribed limits.

For the Partner

• Taxable Income: Remuneration is taxable under the head “Profits and Gains of Business or Profession.”
• Filing Requirement: Partners must report this income in their personal tax returns and may need to maintain books of accounts if income exceeds specified thresholds.

Permissible Limits Under Section 40(b)

The Income Tax Act stipulates specific limits on the amount of remuneration that can be deducted by the firm, Applicable for Filing ITR for FY 2025-26:

• On the first ₹6,00,000 of book profit or in case of a loss: Maximum deduction is ₹3,00,000 or 90% of book profit, whichever is higher.
• On the balance of book profit: 60% of the amount.

These limits are applicable only if the remuneration is paid to working partners and is authorised by the partnership deed.

Example of Computation Of Remuneration as per 40(b):

Case 1: When Book Profit is more than ₹6,00,000

Case 2: When Book Profit is less than ₹6,00,000

Recent Changes in 40(b), Applicable for FY 2024-25:

Till April 2025 the amount of remuneration that can be deducted by the partnership firm as per 40(b) was:

• On the first ₹3,00,000 of book profit or in case of a loss: Maximum deduction is ₹1,50,000 or 90% of book profit, whichever is higher.
• On the balance of book profit: 50% of the amount.

Conditions for Deductibility

For the remuneration to be deductible:

1. Authorization: It must be authorized by the partnership deed.
2. Working Partner: Payment should be made to a working partner actively engaged in the business.
3. Quantification: The amount or method of computation should be specified in the deed.
4. Compliance: The payment should comply with the limits prescribed under the Income Tax Act.

Introduction of Section 194T: TDS on Partner’s Remuneration

Effective from April 1, 2025, Section 194T mandates:

• Applicability: Partnership firms and LLPs must deduct TDS at 10% on payments such as salary, remuneration, interest, bonus, or commission made to their partners if the total payments exceed ₹20,000 in a financial year.
• Timing: TDS must be deducted at the time of credit to the partner’s account or at the time of payment, whichever is earlier.
• Exemptions: Repayment of capital account balances and reimbursements for business expenses are exempt from TDS under Section 194T.

Impact on Partner’s Tax Liability

• Taxable Income: The remuneration received is added to the partner’s taxable income.
• Advance Tax: Partners may be liable to pay advance tax on this income.
• Deductions: Partners can claim deductions for expenses incurred in earning this income, subject to conditions.

Compliance Requirements

• Partnership Deed: Must clearly specify the terms of remuneration.
• Documentation: Maintain proper records of payments and TDS deductions.
• Filing: Ensure timely filing of TDS returns and issuance of TDS certificates to partners.

FAQs

Q1: Is partner’s remuneration taxable in the hands of the partner?
Yes, it is taxable under the head “Profits and Gains of Business or Profession.”

Q2: Can a firm claim deduction for remuneration paid to non-working partners?
No, deduction is allowed only for remuneration paid to working partners.

Q3: What happens if the partnership deed does not specify remuneration?
In such cases, the firm cannot claim deduction for remuneration paid to partners.

Q4: Is TDS applicable on partner’s remuneration?
Yes, as per Section 194T, TDS at 10% is applicable if the payment exceeds ₹20,000 in a financial year.

Q5: Can partners claim deductions for expenses against remuneration income?
Yes, partners can claim deductions for expenses incurred wholly and exclusively for earning the remuneration income.

Conclusion

Understanding the intricacies of partner’s remuneration is crucial for both partners and partnership firms. Proper structuring and compliance not only ensure tax efficiency but also prevent potential legal issues. It’s advisable to consult with a tax professional to navigate the complexities and stay updated with the latest regulations.