Partner’s Remuneration Under Section 40(b): How to Calculate It + Section 194T TDS Updates (2025)

The Finance Act 2024 doubled the first-slab threshold for partner remuneration under Section 40(b) from Rs. 3 lakh to Rs. 6 lakh, and simultaneously introduced Section 194T, a brand-new TDS obligation on firms effective April 1, 2025.
If your firm pays working partners any salary, bonus, or commission, you need to recalculate your allowable deductions and set up TDS deduction right away.
This step-by-step guide walks through every rule, every slab, and a complete worked example.

Step 1: What Is Book Profit Under Section 40(b)?

Book profit is the foundation of the entire calculation. Under Explanation 3 to Section 40(b), book profit equals the net profit shown in the profit and loss account for the year, after adding back all remuneration paid or payable to working partners.
In plain terms: you start with the P&L profit, then add back whatever the firm already deducted as partner remuneration. (ClearTax, 2024)

The formula is straightforward: Book Profit = Net Profit per P&L + Total Partner Remuneration Charged to P&L.

There is, however, a genuine judicial controversy about what counts as “profit” here. The Calcutta High Court has held that non-business income credited to the P&L, such as dividends and capital gains, forms part of book profit for computing the Section 40(b) limit. The Rajasthan High Court disagrees, ruling that only business income qualifies. Until the Supreme Court settles this, firms with significant non-business income should seek specific advice on which position to take.

One more rule applies: interest on partner capital is capped at 12% per annum (simple interest). Any interest paid above 12% is disallowed entirely before you even start computing the remuneration limit.

Step 2: Do Your Partners Qualify as Working Partners?

Only remuneration paid to working partners is eligible for deduction under Section 40(b). Under Explanation 4 to Section 40(b), a working partner is one who is actively engaged in conducting the affairs of the firm’s business or profession. Being a passive investor does not qualify. (TaxGuru, 2024)

Two important exclusions apply here. First, a company cannot be a working partner, regardless of how active its role may be. Second, Section 40(b) applies only to traditional partnership firms governed by the Indian Partnership Act, 1932. Limited Liability Partnerships (LLPs) are governed by the LLP Act, 2008, and their remuneration deductions are determined purely by the LLP agreement, not by Section 40(b). If you’re comparing the two structures, see our detailed post on the difference between LLP and partnership firm in India.

The Section 40(b) limit applies to the combined total of all working partners’ remuneration. It’s not a per-person cap. If a firm has three working partners, the aggregate of all three payments is what must stay within the limit.

Step 3: Is Your Partnership Deed in Order?

Before any remuneration qualifies for deduction, the firm’s partnership deed must explicitly authorize the payment. This is a non-negotiable statutory requirement under Section 40(b). Remuneration cannot relate to a period before the deed authorizes it, and it cannot exceed the amount or formula specified in the deed.
(ABCaus.in, 2024)

If you recently amended your deed to revise remuneration, the new limits apply only from the date of the amended deed, not retrospectively. This is a common audit trigger. Make sure your deed specifies either a fixed amount or a formula tied to book profit.

For a full walkthrough of what a deed should contain, see our guide on partnership deed registration in India (2025).

Step 4: What Are the Section 40(b) Remuneration Slabs After Finance Act 2024?

The Finance Act 2024 revised the Section 40(b) remuneration limits significantly, effective from AY 2025-26 (FY 2025-26). The first slab threshold was doubled from Rs. 3,00,000 to Rs. 6,00,000 of book profit, and the minimum floor was raised from Rs. 1,50,000 to Rs. 3,00,000. (TaxGuru, 2024)

The loss scenario deserves special attention. If the firm has a negative book profit (i.e., a net loss), the minimum allowable remuneration is Rs. 3,00,000 (the fixed floor). This floor does not depend on any percentage of book profit, because there is no positive book profit to compute a percentage on. Partners can still be paid, and the firm can still claim the deduction, up to Rs. 3 lakh in a loss year.

Step 5: How Do You Calculate Partner Remuneration and Any Disallowance?

Applying the slabs involves four sub-steps: compute book profit, apply the first slab, apply the balance slab, and compare the total limit against the actual payment. Any excess is disallowed and added back to the firm’s taxable income. Here is a complete worked example for FY 2025-26.

Worked Example: FY 2025-26

Partnership firm with 2 working partners. Firm pays each partner Rs. 4,50,000 (total Rs. 9,00,000).

In this example the firm’s total payment of Rs. 9 lakh sits exactly at the allowable limit. The firm deducts the full Rs. 9 lakh as a business expense and pays tax at the flat rate of 30% on its remaining taxable income. Each partner receives Rs. 4,50,000 as taxable income under the head “Profits and Gains from Business or Profession” (PGBP) and must report it in their individual ITR-3. The firm’s profit share distributed to partners is separately exempt under Section 10(2A) and does not get reported as remuneration income.

Also note: firms assessed under presumptive taxation (Section 44AD for business or Section 44ADA for professionals) cannot claim partner remuneration deductions at all. Presumptive income is computed at a fixed percentage of turnover, and no further deductions are allowed on top of it.

For an overview of audit requirements that apply alongside these computations, see our post on partnership firm audit limits.

Step 6: How Does Section 194T TDS Work on Partner Payments (New from April 2025)?

Section 194T, introduced by the Finance Act 2024 and effective from April 1, 2025, creates a mandatory TDS obligation on firms for payments made to partners. The rate is 10%, and the threshold is Rs. 20,000 per partner per financial year. If the aggregate payments to a partner during the year do not exceed Rs. 20,000, no TDS applies.

What Payments Does Section 194T Cover?

Section 194T applies to both traditional partnership firms and LLPs. This is a key difference from Section 40(b), which covers only traditional firms. So even if your LLP pays partners interest on capital, TDS under 194T must be deducted.

Continuing the Worked Example: TDS Calculation

TDS Compliance Details

How Should Partners Report This Income in Their ITR?

Remuneration received by a working partner from their firm is taxable under the head “Profits and Gains from Business or Profession” (PGBP). Partners must file ITR-3 to report this income. The TDS deducted by the firm will appear in the partner’s Form 26AS and Annual Information Statement (AIS), and can be claimed as a credit against the partner’s final tax liability.
See our detailed post on the ITR-5 form for the firm-side filing, which covers how the firm reports partner remuneration and TDS in its own return.

Interest on capital received from a partnership firm is also treated as PGBP income in the partner’s hands, not as “income from other sources,” even though it is technically interest. This treatment flows from Section 28(v) of the Income Tax Act.

The firm’s profit share distributed to the partner is entirely exempt in the partner’s hands under Section 10(2A). Partners sometimes incorrectly include this in their PGBP income. Only remuneration, bonus, commission, and interest on capital are taxable.

Is Section 40(b) Different for LLPs vs. Partnership Firms?

Yes, and this distinction matters for every business owner choosing between the two structures. Section 40(b), with its statutory remuneration slabs and book profit formulas, applies exclusively to traditional partnership firms. LLPs have no equivalent statutory cap under this section. Remuneration to LLP partners is governed by whatever the LLP agreement specifies, and the deductibility is tested under general principles rather than the Section 40(b) slabs. (ABCaus.in, 2024)

Section 194T, by contrast, applies to both structures equally. An LLP paying a partner Rs. 25,000 in interest on capital must deduct 10% TDS under Section 194T, even though Section 40(b) does not govern the LLP’s deduction limit.

For a complete comparison of the two structures including tax treatment, compliance costs, and conversion options, read our post on the difference between LLP and partnership firm. And if you’re setting up a new firm, our partnership firm registration guide covers the full process.

FAQ: Partner Remuneration Under Section 40(b) and Section 194T