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Income Tax · BusinessPartner remuneration and interest: tax treatment for partnership firms
A partnership firm pays tax at 30%, but salary and interest to working partners reduce its taxable profit – within limits. Since April 2025, TDS also applies on these payments. Here is how Section 40(b) limits and Section 194T work, with a worked example.
A partnership firm (including an LLP) is taxed at a flat 30% plus surcharge and cess. Payments to partners as salary (remuneration) and interest on capital are deductible for the firm – but only within the limits of Section 40(b) of the Income-tax Act, 1961 (carried into the 2025 Act). The partner pays tax on these amounts as business income.
Conditions for deduction
- Remuneration only to working partners (individuals actively engaged in the business).
- Remuneration and interest must be authorised by the partnership deed, and the amount or method must be specified.
- Payments must relate to the period after the deed.
- Interest must not exceed 12% simple per annum.
- Remuneration must be within the book profit limits.
Limits on remuneration (from FY 2024-25)
| Book profit | Maximum remuneration |
|---|---|
| On the first ₹6,00,000 or in case of loss | ₹3,00,000 or 90% of book profit, whichever is higher |
| On the balance | 60% of book profit |
Book profit = net profit as per P&L, computed under the Act's business provisions, plus remuneration to partners debited.
Worked example
Example: M/s Sharma & Sons, a firm in Pitampura with two working partners, has net profit of ₹18,00,000 after debiting interest to partners of ₹2,40,000 (12% on capital of ₹20,00,000), but before remuneration.
| Step | Amount |
|---|---|
| Book profit | ₹18,00,000 |
| Limit on first ₹6,00,000 (higher of ₹3,00,000 or 90%) | ₹5,40,000 |
| Limit on balance ₹12,00,000 × 60% | ₹7,20,000 |
| Maximum remuneration | ₹12,60,000 |
If the deed provides ₹6,30,000 to each partner (₹12,60,000 total), the firm's taxable income = ₹18,00,000 – ₹12,60,000 = ₹5,40,000. Tax at 30% + 4% cess = ₹1,68,480.
If the deed allowed ₹15 lakh, only ₹12.6 lakh would be deductible; ₹2.4 lakh would be disallowed, though fully taxable in partners' hands.
TDS on partners (from 1 April 2025)
| Point | Rule |
|---|---|
| Section | 194T (1961 Act); Section 393(3) (2025 Act) |
| Payments | Salary, remuneration, commission, bonus, interest to partners |
| Threshold | Aggregate > ₹20,000 in the year |
| Rate | 10% |
| Timing | At credit or payment, whichever is earlier (year-end credits included) |
In the example, each partner's ₹6,30,000 remuneration plus ₹1,20,000 interest = ₹7,50,000 → TDS ₹75,000 each, deposited by the 7th of the following month (30 April for March credits).
Partner's taxation
| Receipt | Tax in partner's hands |
|---|---|
| Remuneration and interest (within limits allowed to firm) | Business income; file ITR-3 |
| Share of profit | Exempt (Section 10(2A)) |
| Excess remuneration disallowed in firm | Not taxable in partner's hands to the extent disallowed |
Partners can claim expenses incurred for earning remuneration (e.g. interest on money borrowed to invest as capital) against this income.
Presumptive firms
- Under Section 44AD: no deduction for partners' remuneration or interest – presumptive income is final.
- Under Section 44AE: remuneration and interest are allowed within 40(b).
LLPs
The same rules apply to LLPs, which are taxed as firms. TDS under 194T applies to partners of LLPs as well.
Drafting the deed
- Specify remuneration as an amount or formula (e.g. "as per Section 40(b) limits, shared equally").
- Specify interest rate (up to 12%).
- Update the deed when partners change or terms change.
Common mistakes
- Paying remuneration to sleeping partners.
- No clause in the deed – entire remuneration disallowed.
- Interest above 12%.
- Not deducting TDS under 194T from April 2025.
- Using old limits (₹1.5 lakh / 90%) for FY 2024-25 onwards.
Key takeaway
Plan partner remuneration around book profit: up to ₹3 lakh or 90% on the first ₹6 lakh and 60% on the rest, with interest up to 12%, all authorised by the deed – and deduct 10% TDS above ₹20,000. Our accounting and tax team prepares remuneration workings and reviews partnership deeds.
Official references
Provisions discussed (summaries in our Law Library):
- Income-tax Act, 2025 – Section 393(3) (corresponds to 194T): TDS – payments to partners
- Income-tax Act, 1961 – Section 194T (corresponds to 393(3)): TDS – payments to partners
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
What is the maximum partner remuneration allowed to a firm?
On the first ₹6 lakh of book profit (or loss): ₹3 lakh or 90% of book profit, whichever is higher. On the balance: 60% of book profit. These limits apply from FY 2024-25.
What is the maximum interest allowed to partners?
12% per annum simple interest on capital, if authorised by the partnership deed.
Is TDS deducted on partner's salary?
Yes. From 1 April 2025, a firm must deduct 10% TDS on salary, remuneration, commission, bonus or interest to a partner where the aggregate exceeds ₹20,000 in the year (old Section 194T; Section 393(3) of the 2025 Act).
Is a partner's share of profit taxable?
No. A partner's share of profit from the firm is exempt in the partner's hands under Section 10(2A), as the firm has already paid tax on it.
Can a firm pay remuneration when it has a loss?
Yes. In case of loss, remuneration up to ₹3 lakh (or 90% of book profit, whichever is higher – which is ₹3 lakh in a loss) is allowed.
Is interest to a non-working partner allowed?
Yes, interest up to 12% is allowed to any partner if authorised by the deed. Remuneration is allowed only to working partners.
Can partners take drawings instead of salary?
Drawings are withdrawals of capital or profit, not remuneration, and are not deductible for the firm.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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