Learn The New Partner Remuneration Deduction Limits Under Section 40(B) And TDS Rules Under Section 194T For FY 2025-26. Updated Guide With Examples, Tables & Compliance Tips.
Are you running a partnership firm in India and wondering how much you can actually pay your working partners while still getting a full tax deduction? Or maybe you’ve heard about the new TDS rules that kicked in from April 2025 and you’re not sure if your firm is compliant?
You’re not alone. Every year, thousands of partnership firms face tax disallowances simply because they didn’t understand the fine print around partner remuneration. The good news? The Finance Act 2024 has actually doubled your deduction room starting FY 2025-26. The not-so-good news? A brand-new TDS obligation under Section 194T now applies to every firm paying partners.
In this guide, I’ll walk you through everything you need to know — in plain English — so you can optimize your firm’s tax position without landing in hot water with the Income Tax Department.
What Is Partner Remuneration and Why Does It Matter?
Partner remuneration is the salary, bonus, or commission your firm pays to partners who actively work in the business. It’s different from a profit share, which is what partners get simply for owning a piece of the firm.
Here’s the key difference:
| Aspect | Remuneration | Profit Share |
| What it pays for | Active work in the firm | Ownership stake |
| Deductible for the firm? | Yes (within limits) | No |
| Taxable for the partner? | Yes — as business income | No — fully exempt under Section 10(2A) |
| Needs partnership deed clause? | Yes, mandatory | Yes |
Why this matters: When your firm deducts partner remuneration as a business expense, it lowers the firm’s taxable income. At a 30% tax rate, every rupee of legitimate deduction saves your firm 30 paise in tax. But if you get it wrong, the tax department disallows the deduction entirely — and you end up paying tax on money you already paid out.
The Big Change: What Finance Act 2024 Did to Section 40(b)
The Finance Act 2024 made two major changes to partner remuneration rules, effective from Assessment Year 2025-26 (Financial Year 2025-26):
- Doubled the first-slab threshold from ₹3 lakh to ₹6 lakh of book profit
- Raised the minimum floor from ₹1.5 lakh to ₹3 lakh (even in loss years)
Plus, it introduced Section 194T — a new TDS rule that requires firms to deduct 10% tax on partner payments exceeding ₹20,000 per year.
Let’s break each of these down.
Section 40(b) Remuneration Limits for FY 2025-26
How the New Limits Work
The maximum remuneration your firm can deduct depends entirely on your book profit. Here’s the exact formula:
| Book Profit Slab | Maximum Deductible Remuneration |
| First ₹6,00,000 (or in case of loss) | ₹3,00,000 or 90% of book profit, whichever is HIGHER |
| Balance above ₹6,00,000 | 60% of the remaining book profit |
Important: This limit applies to the combined total of all working partners — not per partner.
Before vs. After: The Comparison
| Aspect | Pre-2025 (FY 2024-25) | Post-2025 (FY 2025-26) |
| First slab threshold | First ₹3,00,000 of book profit | First ₹6,00,000 of book profit |
| First slab deduction | ₹1,50,000 or 90%, whichever is higher | ₹3,00,000 or 90%, whichever is higher |
| Balance deduction | 60% of remaining book profit | 60% of remaining book profit |
| Loss year maximum | ₹1,50,000 | ₹3,00,000 |
| TDS on partner payments | Not applicable | 10% if annual payments > ₹20,000 per partner |
| Compliance level | Moderate | Strict (TDS + deed updates required) |
How to Calculate Book Profit for Partner Remuneration
“Book profit” sounds complicated, but it’s actually straightforward. Here’s the step-by-step method:
- Start with the net profit shown in your firm’s Profit & Loss account
- Add back any remuneration already paid to partners (if already deducted in P&L)
- Add back any interest on capital paid beyond 12% per annum
- Make any other adjustments required under the Income Tax Act
- The result is your book profit
Formula:
Book Profit = Net P&L Profit + Total Partner Remuneration Charged to P&L
For Example:
If your P&L shows a net profit of ₹3,00,000 after deducting ₹9,00,000 in partner remuneration, your book profit is:
₹3,00,000 + ₹9,00,000 = ₹12,00,000
Worked Example: Partner Remuneration Calculation for FY 2025-26
Scenario: Your partnership firm has 2 working partners. You paid each partner ₹4,50,000 as remuneration (total ₹9,00,000). Your P&L net profit after this deduction is ₹3,00,000.
Step 1: Compute Book Profit
- Net profit per P&L (after remuneration) = ₹3,00,000
- Add back: Total partner remuneration = ₹9,00,000
- Book Profit = ₹12,00,000
Step 2: Apply Section 40(b) Slabs
| Calculation | Amount |
| On first ₹6,00,000 of book profit — 90% | ₹5,40,000 |
| (₹5,40,000 > ₹3,00,000 minimum floor, so ₹5,40,000 applies) | |
| On balance ₹6,00,000 (₹12,00,000 − ₹6,00,000) — 60% | ₹3,60,000 |
| Total Maximum Allowable Remuneration | ₹9,00,000 |
Step 3: Compare with Actual Payment
- Actual remuneration paid = ₹9,00,000
- Maximum allowable = ₹9,00,000
- Disallowance = NIL (fully within limits!)
Tax Impact: Your firm deducts the full ₹9,00,000 as a business expense and pays 30% tax only on the remaining ₹3,00,000. Each partner reports ₹4,50,000 as “Profits and Gains of Business or Profession” (PGBP) income in their ITR-3.
What Happens in a Loss Year?
If your firm reports a book loss, the maximum deductible remuneration is ₹3,00,000 (for all working partners combined). This is the new minimum floor introduced by the Finance Act 2024.
For Example:
If three working partners each receive ₹1,00,000 in a loss year, the total is ₹3,00,000 — exactly at the limit. But if they receive ₹1,20,000 each (total ₹3,60,000), the excess ₹60,000 is fully disallowed.
Who Qualifies as a Working Partner?
Only working partners can receive tax-deductible remuneration. A working partner is someone who is actively engaged in conducting the firm’s business — not just a sleeping investor.
Key rules:
- The partnership deed must explicitly name each working partner eligible for remuneration
- A company cannot be a working partner
- Remuneration paid to non-working (sleeping) partners is fully disallowed
- Vague language like “remuneration as decided by partners” usually gets rejected by tax officers
The New TDS Rule: Section 194T (Effective April 1, 2025)
Starting April 1, 2025, every firm and LLP must deduct 10% TDS on payments to partners if the total annual payments to a single partner exceed ₹20,000.
What Payments Are Covered?
| Covered Under 194T (TDS Applies) | NOT Covered (No TDS) |
| Salary / remuneration | Profit share (exempt under Section 10(2A)) |
| Bonus | Capital withdrawal |
| Commission | Expense reimbursements |
| Interest on capital |
Section 194T Compliance at a Glance
| Compliance Item | Rule |
| Who deducts TDS | The firm / LLP |
| TDS Rate (with PAN/Aadhaar) | 10% |
| TDS Rate (without PAN/Aadhaar) | 20% (under Section 206AA) |
| Threshold Limit | ₹20,000 per partner per financial year |
| When to deduct | At the time of payment or credit to partner’s account, whichever is earlier |
| TDS Deposit Deadline | 7th of the following month (April 30 for March payments) |
| TDS Return Form | Form 26Q (filed quarterly) |
⚠ Critical Rule Many Firms Miss
You must deduct TDS on the FULL amount paid — even if part of it is later disallowed under Section 40(b).
For Example:
Your firm pays a partner ₹5,00,000, but only ₹3,50,000 is allowable under Section 40(b). The excess ₹1,50,000 is disallowed and added back to your firm’s income. Despite this disallowance, you must still deduct 10% TDS on the entire ₹5,00,000 when you credit the partner’s account.
Forgetting this can trigger:
- 1% monthly interest under Section 201
- 30% disallowance of the expense under Section 40(a)(ia)
- Potential penalties
Impact on Tax Planning: What Firms & Partners Must Do Now
For Partnership Firms
- Update your partnership deed to reflect the revised Section 40(b) limits
- Set up TDS compliance for Section 194T immediately
- Calculate book profit carefully before finalizing partner payments
- File Form 26Q quarterly for all partner TDS deductions
- Maintain documentation — deed clauses, board resolutions, bank transfers, TDS proof
For Working Partners
- Report remuneration as PGBP income in ITR-3 (not as salary)
- Claim TDS credit from Form 26AS / AIS when filing your return
- Pay advance tax on expected remuneration to avoid interest under Sections 234B and 234C
- Remember: Your profit share is fully exempt — don’t accidentally include it as taxable income
Key Exclusions You Must Know
| Structure / Situation | Section 40(b) Applicability | Section 194T TDS Applicability |
| Traditional Partnership Firms | ✅ Yes | ✅ Yes |
| LLPs (Limited Liability Partnerships) | ❌ No (governed by LLP Agreement) | ✅ Yes |
| Firms under Section 44AD (Presumptive Taxation) | ❌ No deduction allowed | ✅ Yes |
| Firms under Section 44ADA (Professionals) | ❌ No deduction allowed | ✅ Yes |
Frequently Asked Questions (FAQ)
Q1. What is the maximum partner remuneration allowed under Section 40(b) for FY 2025-26?
For FY 2025-26, the limit is: ₹3,00,000 or 90% of the first ₹6,00,000 of book profit (whichever is higher), plus 60% of book profit beyond ₹6,00,000. In a loss year, the maximum is ₹3,00,000 for all working partners combined. These revised limits were introduced by the Finance Act 2024 and apply from AY 2025-26 onwards.
Q2. When does Section 194T TDS apply, and what is the rate?
Section 194T applies when a firm or LLP pays salary, remuneration, commission, bonus, or interest on capital to a partner, and the aggregate payments exceed ₹20,000 in a financial year. The TDS rate is 10% with a valid PAN/Aadhaar. Without PAN/Aadhaar, the rate jumps to 20% under Section 206AA. This provision has been effective since April 1, 2025.
Q3. Must TDS be deducted under Section 194T even if remuneration is disallowed under Section 40(b)?
Yes. TDS under Section 194T is triggered at the time of payment or credit to the partner’s account — regardless of whether the remuneration is ultimately deductible under Section 40(b). The firm must deduct TDS on the full amount paid. The Section 40(b) disallowance affects the firm’s income computation but does not relieve the TDS obligation.
Q4. Does Section 40(b) apply to LLPs?
No. Section 40(b) and its statutory remuneration slabs apply only to traditional partnership firms registered under the Indian Partnership Act, 1932. LLPs are governed by the LLP Act, 2008, and their partner remuneration deductibility is determined by the LLP agreement itself. However, Section 194T TDS rules apply to both traditional firms and LLPs equally.
Q5. Can a firm under Section 44AD or 44ADA deduct partner remuneration?
No. Firms opting for presumptive taxation under Section 44AD (business) or Section 44ADA (profession) cannot claim deductions for partner remuneration under Section 40(b). Presumptive income is computed at a fixed percentage of turnover, and the Act does not permit any further deductions — including partner remuneration, depreciation, or interest beyond that presumptive amount.
Final Thoughts: Don’t Let Compliance Catch You Off Guard
The Finance Act 2024 has given partnership firms a genuine tax-saving opportunity by doubling the Section 40(b) deduction limits. A firm with ₹12,00,000 in book profit can now deduct up to ₹9,00,000 in partner remuneration — that’s ₹90,000 more than before.
But with greater flexibility comes greater responsibility. The new Section 194T TDS rule means every firm must now track partner payments, deduct TDS where applicable, file quarterly returns, and maintain bulletproof documentation.
My advice? Review your partnership deed today. Update it to reflect the new limits. Set up your TDS compliance process before your next partner payment. And if you’re unsure about book profit calculations or deed wording, consult a tax professional — the cost of getting it right is far less than the cost of a tax disallowance.
