Remuneration to partners is the payment made by a Partnership Firm or Limited Liability Partnership (LLP) to its working partners for the services rendered by them in the conduct of the business. It is distinct from the share of profit, which is exempt from tax in the hands of partners.
This article covers the legal framework, tax treatment, deduction limits, TDS obligations, and practical aspects of paying remuneration to partners.
1. Legal Framework
Partnership Firm Under Section 13(a) of the Indian Partnership Act, 1932, a partner is generally not entitled to receive any remuneration for taking part in the business. However, this rule can be overridden by a clear provision in the Partnership Deed.
Limited Liability Partnership (LLP) The LLP Act, 2008 provides greater flexibility. Remuneration can be paid to partners as mutually agreed in the LLP Agreement. There is no default prohibition like in a traditional partnership firm.
In both cases, payment of remuneration must be explicitly authorized by the Partnership Deed or LLP Agreement.
2. Meaning of Remuneration
Remuneration includes salary, bonus, commission, or any other payment made to a partner for services rendered in their capacity as a partner. Only working partners (individuals actively involved in the day-to-day affairs of the business) are eligible for such payment and tax deduction. Remuneration paid to non-working or sleeping partners is not deductible.
3. Tax Deduction under Section 40(b)
The allowability and quantum of deduction for remuneration paid to partners is governed by Section 40(b) of the Income Tax Act. Any excess payment beyond the prescribed limits is disallowed while computing the taxable income of the firm or LLP.
Key Conditions for Deduction:
- Must be paid only to working partners
- Must be authorized by the Partnership Deed or LLP Agreement
- The deed must specify the amount or manner of computation of remuneration
- Deduction is subject to the ceiling limits
Revised Deduction Limits (Effective from FY 2025-26)
The limits for deduction of remuneration were enhanced by the Finance (No. 2) Act, 2024. These new limits apply from Financial Year 2025-26 onwards:
| Book Profit Slab | Maximum Allowable Remuneration (Aggregate) |
|---|---|
| On the first ₹6,00,000 of book profit or in case of loss | ₹3,00,000 or 90% of book profit, whichever is higher |
| On the remaining book profit | 60% of the balance book profit |
Interest on Capital: Allowed up to 12% per annum (simple interest), subject to authorization in the deed.
Note on New Income Tax Act, 2025: The new Income-tax Act, 2025 came into effect from 1st April 2026. The provision dealing with restriction on remuneration and interest to partners (earlier Section 40(b)) now appears under a new section number in the new Act. However, the conditions and deduction limits remain unchanged. Professionals and the tax department continue to commonly refer to it as Section 40(b) for practical purposes.
4. Taxability in Partners’ Hands
- Remuneration received by partners is taxable as Profits and Gains from Business or Profession under Section 28(v).
- It is not treated as salary income.
- Share of profit from the firm/LLP remains fully exempt under Section 10(2A).
5. TDS on Remuneration – Section 194T
From FY 2025-26 onwards, the firm or LLP is required to deduct TDS at 10% under Section 194T on any payment of salary, remuneration, bonus, commission, or interest to partners, if the aggregate amount exceeds ₹20,000 in a financial year.
6. Partnership Firm vs LLP – Key Differences
| Particulars | Partnership Firm | LLP |
|---|---|---|
| Liability | Unlimited | Limited |
| Remuneration Authorization | Partnership Deed | LLP Agreement |
| Flexibility | Moderate | Higher |
| Section 40(b) Applicability | Yes | Yes |
| TDS u/s 194T | Applicable | Applicable |
| Registration | Optional | Mandatory |
7. Best Practices & Drafting Tips
It is highly recommended to include a clear clause in the Partnership Deed or LLP Agreement. A suggested clause is:
“The working partners shall be entitled to remuneration by way of salary, bonus or commission as may be mutually decided by the partners from time to time. Such remuneration shall be payable even in case of loss or inadequacy of profits and shall be subject to the limits prescribed under Section 40(b) of the Income Tax Act or the corresponding provision of the Income-tax Act, 2025, as amended from time to time.”
Firms and LLPs should update their existing deeds through a supplementary deed to incorporate the new higher limits.
Conclusion
Remuneration to working partners is an important tool for both motivation and tax planning in partnership firms and LLPs. With the enhanced deduction limits effective from FY 2025-26 and the introduction of the new Income-tax Act, 2025, businesses must review and update their Partnership Deed or LLP Agreement to ensure full compliance and maximum tax benefit.
Proper documentation, timely TDS deduction, and adherence to Section 40(b) limits are essential to avoid disallowance during tax assessment.
Disclaimer: This article is for educational purposes only. Tax laws are complex and subject to interpretation. Please consult a qualified Tax Profesional for advice specific to your case.
