Partner Remuneration Under Sec 40(b): The Slab Test, Plus the Two Companions Every Firm Audit Checks
Section 40(b) of the Income-tax Act caps how much of a partnership firm's payment to working partners is tax-deductible. The Finance Act 2024 revised the slabs, effective AY 2025-26 onward — and the remuneration limit is only the headline; a firm audit needs two companion checks alongside it to be complete.
The Two-Slab Remuneration Test
The deductible ceiling on working-partner remuneration is computed on book profit, in two slabs:
- First ₹6,00,000 of book profit (or, on a loss, the same first slab) — the higher of ₹3,00,000 or 90% of that slab
- Balance above ₹6,00,000 — 60%
Book profit here is the Section 40(b) Explanation 3 figure — computed before deducting remuneration to partners, but after partner interest has already been allowed. A firm with a genuine book loss still gets the ₹3,00,000 floor on the first slab; the 90%/₹3,00,000 "higher of" test doesn't collapse to zero just because book profit is negative.
Payment must also be authorised by the partnership deed — remuneration paid without deed authorisation for that specific amount or computation method isn't just capped, it's disallowed in full regardless of the slab test.
Companion Check 1: The 12% Interest Cap
Interest paid or credited to partners on their capital is deductible only up to 12% simple per annum. Anything charged above 12% in the firm's books is disallowed for the excess — the firm can pay a partner 15% under the partnership deed, but only the interest computed at 12% is an allowable deduction; the remaining 3 percentage points' worth is added back.
Companion Check 2: Section 194T TDS
Since 1 April 2025, Section 194T requires the firm to deduct TDS at 10% on payments to partners — remuneration, interest, bonus, commission — once the aggregate of such payments to a partner in the financial year crosses ₹20,000. This is a genuinely new obligation layered on top of the remuneration and interest computations, and it's easy to miss because it's a TDS check on the firm as deductor, not a deductibility test on the payment itself — a firm can get the Section 40(b) remuneration limit and the 12% interest cap exactly right and still be in default on 194T if the aggregate payment crossed ₹20,000 without TDS being deducted.
Why All Three Need Checking Together
None of these three checks substitutes for the others. A firm can pay remuneration exactly within the Section 40(b) slab limits, cap partner interest at 12%, and still have a live 194T exposure if TDS wasn't deducted on the aggregate payment. Conversely, correct TDS deduction under 194T says nothing about whether the underlying remuneration or interest figures themselves are within their respective deductibility limits.
Frequently Asked Questions
Is the ₹3,00,000 minimum available even if the firm has a book loss?
Yes. On the first ₹6,00,000 slab, the ceiling is the higher of ₹3,00,000 or 90% of that slab — including where book profit for that slab is a loss, the ₹3,00,000 floor still applies rather than collapsing to zero or a negative figure.
What happens if partner interest is charged at 15% but the deed only permits 12%?
Only interest up to 12% simple per annum is deductible regardless of what rate is actually charged or what the deed permits — anything charged above 12% is disallowed for the excess, even if the deed authorises the higher rate.
When does Section 194T TDS apply?
Once the aggregate of remuneration, interest, bonus, and commission paid or credited to a partner in the financial year crosses ₹20,000, the firm must deduct TDS at 10% on that aggregate — this has applied since 1 April 2025.
Can a firm deduct remuneration paid to a partner without deed authorisation?
No. Remuneration must be authorised by the partnership deed for that specific amount or computation method — payment without proper deed authorisation is disallowed in full, independent of whether it would otherwise fall within the Section 40(b) slab limits.
CORAA's Partner Remuneration Calculator runs all three checks together — the two-slab Section 40(b) remuneration limit, the 12% partner-interest cap, and the Section 194T ₹20,000 aggregate TDS trigger — off the same book-profit and payment inputs, so a firm audit doesn't clear the headline remuneration check while missing the two companions.