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September 24, 2026
Remuneration to Partners in a Partnership Firm Under ITA 2025
Introduction
A partnership firm may compensate partners who actively participate in its business or profession through salary, bonus, commission or other remuneration. For income-tax purposes, such payments are not automatically deductible merely because they are recorded in the books. Remuneration to partners is governed by specific conditions under the Income-tax Act, 2025.
The Income-tax Act, 2025 came into force on 1 April 2026. The key rules cover the status of the partner, authorization in the partnership deed, the maximum deduction linked to book profit, assessment of the firm, tax treatment in the partner’s hands and TDS.
Summary
- Remuneration to partners is deductible only when paid to eligible working partners.
- The partnership deed must authorize the remuneration and specify the payment terms.
- Section 35(e) limits deductible remuneration based on the firm’s book profit.
- Partner remuneration is taxed under business income, not under the salary head.
- TDS at 10% applies when covered partner payments exceed the prescribed ₹20,000 threshold.
What is Remuneration to Partners?
Remuneration to partners refers to salary, bonus, commission or remuneration, by whatever name called, paid by a firm to a partner. It is different from a partner’s share in the firm’s total income.
Section 15(4) of the Income-tax Act, 2025 provides that salary, bonus, commission or remuneration due to or received by a partner from the firm is not regarded as salary for the purposes of that section. Therefore, the payment is not treated as normal employee salary merely because the partnership deed calls it “salary”.
Businesses setting up a firm can also refer to our Partnership Firm Registration service for assistance with registration and partnership documentation.
Income-tax Act, 2025 Provisions for Remuneration to Partners
The principal provision governing deduction of Remuneration to partners is Section 35(e). It restricts remuneration paid to a partner who is not a working partner. It also covers remuneration to a working partner where the payment is not authorized by the applicable partnership deed, does not follow the deed, relates to an earlier period that was not properly authorized, or exceeds the statutory ceiling.
Section 26(2)(g) deals with the corresponding treatment in the partner’s hands. It includes interest, salary, bonus, commission or remuneration due to or received by a partner from the firm to the extent allowed to the firm as a deduction under Section 35(e).
Who is a Working Partner?
The working partner condition is central to the deduction of Remuneration to partners.
Section 35(e) defines a working partner as an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which the individual is a partner.
Being named as a partner or being entitled to a share of profit is not enough for this deduction. The individual must actively participate in conducting the firm’s affairs. Remuneration paid to a partner who does not satisfy this definition is not deductible under Section 35(e).
Conditions for Claiming Remuneration to Partners as a Deduction
A partnership firm must satisfy the following conditions before claiming Remuneration to partners as a deduction:
- The payment must be made to a working partner.
- The partnership deed applicable to the relevant period must authorize the remuneration.
- The payment must be in accordance with the terms of the partnership deed.
- Remuneration relating to a period before the authorizing deed is restricted where the earlier applicable deed did not authorize it.
- The aggregate remuneration of all working partners must stay within the ceiling under Section 35(e).
These requirements are contained in Section 35(e), which specifically restricts remuneration that does not meet the working partner, partnership deed or monetary limit requirements.
The partnership deed is therefore important for tax purposes. The clause for Remuneration to partners should clearly support the amount the firm intends to claim.
Assessment as a Firm Under Sections 325 and 326
Sections 325 and 326 also affect Remuneration to partners.
Under Section 325, a firm is assessed as a firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in it. A certified copy of the instrument must accompany the return for the tax year in which assessment as a firm is first sought. If there is a change in the constitution of the firm or the partners’ shares, a certified copy of the revised instrument must be furnished with the return for that tax year.
Section 326 provides that if a firm does not comply with Section 325 for a tax year, no deduction is allowed for interest, salary, bonus, commission or remuneration paid by the firm to any partner. The corresponding amount is also not chargeable under Section 26(2)(g) in the hands of the partners for that tax year.
This makes proper partnership documentation and compliance with the assessment requirements important when claiming partner remuneration.
Maximum Limit of Remuneration to Partners
Section 35(e)(iii) prescribes the maximum aggregate Remuneration to partners that can be allowed for all working partners together.
|
Book Profit |
Maximum Deductible Remuneration |
|
First ₹6,00,000 of book profit, or in case of loss |
₹3,00,000 or 90% of book profit, whichever is higher |
| Balance of book profit |
60% of book profit |
This is an aggregate ceiling, not a separate limit for each working partner. Section 35(e)(iii) expressly refers to the aggregate remuneration to all working partners.
The statutory ceiling also does not override the partnership deed. If the deed authorizes a lower amount, the firm cannot claim more merely because Section 35(e) permits a higher maximum. Similarly, Remuneration to partners exceeding the prescribed ceiling is not deductible to the extent of the excess.
What is Book Profit for Partner Remuneration?
The maximum Remuneration to partners is calculated with reference to “book profit”.
Under Section 35(e), book profit means the net profit shown in the profit and loss account for the relevant tax year, computed as per Chapter IV-D, increased by the aggregate remuneration to all partners if that amount has already been deducted while computing net profit.
If Remuneration to partners has already been debited to the profit and loss account, it is therefore added back while determining book profit for this calculation.
Firms should not simply apply the prescribed percentages to an unadjusted accounting profit figure. The book profit must first be determined according to the statutory definition.
Example of Calculating Remuneration to Partners
Assume the book profit of a partnership firm is ₹10,00,000.
On the first ₹6,00,000, 90% is:
₹6,00,000 × 90% = ₹5,40,000
Since ₹5,40,000 is higher than ₹3,00,000, the amount for the first slab is ₹5,40,000.
The balance book profit is ₹4,00,000.
₹4,00,000 × 60% = ₹2,40,000
Therefore:
Maximum remuneration = ₹5,40,000 + ₹2,40,000 = ₹7,80,000
The ₹7,80,000 is only the statutory ceiling. The actual deduction of Remuneration to partners must still be supported by the partnership deed and satisfy the applicable provisions of Sections 35(e), 325 and 326.
Firms managing their tax reporting can also review our Business Income Tax Return Filing service for professional filing assistance.
Tax Treatment in the Hands of Partners
The tax treatment of Remuneration to partners is governed primarily by Section 26(2)(g).
Section 26(2)(g) includes interest, salary, bonus, commission or remuneration due to or received by a partner from the firm under the head “Profits and gains of business or profession“, to the extent the amount is allowed as a deduction to the firm under Section 35(e).
Section 15(4) complements this rule by confirming that such remuneration is not regarded as salary for the purposes of that section.
Thus, merely calling a payment “salary” in the partnership deed does not make it salary income for this purpose.
TDS on Remuneration to Partners
TDS is another important requirement for Remuneration to partners.
Under Section 393(3), Table Serial No. 7, TDS applies to any sum in the nature of salary, remuneration, commission, bonus or interest paid to a partner of the firm or credited to the partner’s account, including the capital account.
The provision specifies:
|
Particular |
Requirement |
|
Payer |
Firm |
| Covered payment |
Salary, remuneration, commission, bonus or interest |
|
TDS rate |
10% |
| Threshold |
₹20,000 |
Section 393(3) states that where the amount or aggregate of covered amounts exceeds the threshold, tax is deducted on the entire amount at the rate specified in the table.
This TDS rule is separate from the deduction ceiling under Section 35(e). Therefore, satisfying the conditions for deducting Remuneration to partners does not remove the firm’s responsibility to check its TDS obligations.
For assistance with reporting deducted tax, businesses can refer to our TDS Return Filing service.
Official Notification and Legal Reference
The deduction limits for Remuneration to partners come directly from Section 35(e) of the Income-tax Act, 2025. They should not be attributed to a separate CBDT notification.
The official consolidated legislation published by the Income Tax Department is the Income-tax Act, 2025, as amended by the Finance Act, 2026. The Act provides that, save as otherwise provided, it came into force on 1 April 2026. For reference, the official Act can be accessed through the Income Tax Department’s Income-tax Act, 2025 page.
Separately, the Central Board of Direct Taxes issued Notification No. 22/2026, F. No. 370142/41/2025-TPL, G.S.R. 198(E) dated 20 March 2026. The notification was issued under Section 533 of the Income-tax Act, 2025 and notified the Income-tax Rules, 2026.
This notification is an official legal reference for the Income-tax Rules, 2026. However, it is not the source of the maximum partner remuneration limit. The ₹6,00,000 slab, ₹3,00,000 amount, 90% rate and 60% balance rate are expressly contained in Section 35(e)(iii) of the Act itself.
Mistakes While Claiming Remuneration to Partners
Common errors in Remuneration to partners include paying remuneration to a non-working partner, failing to authorize the payment properly in the partnership deed, claiming an amount inconsistent with the deed, calculating book profit incorrectly or exceeding the statutory ceiling.
Another mistake is treating the Section 35(e) ceiling as an individual limit for each partner when it applies to the aggregate remuneration of all working partners. Firms may also overlook Sections 325 and 326 or fail to examine the TDS requirement under Section 393.
Careful review of the partnership deed, working partner status, book profit, assessment conditions and TDS requirements can help firms apply the provisions correctly.
Need Help with Partnership Tax Compliance?
Managing Remuneration to partners, TDS, income tax filing and partnership compliance requires accurate calculations and proper documentation. Ebizfiling helps partnership firms with tax return filing, TDS compliance, partnership registration and other business compliance services.
With professional support from Ebizfiling, you can manage your tax and compliance requirements more efficiently and reduce the risk of filing errors.
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Conclusion
Remuneration to partners is governed by connected provisions of the Income-tax Act, 2025. Section 35(e) determines the deduction conditions and maximum ceiling, while Sections 325 and 326 make proper assessment as a firm and partnership documentation relevant to the deduction.
Section 26(2)(g) governs the linked treatment in the partner’s hands, Section 15(4) confirms that the payment is not treated as salary for that provision, and Section 393 contains the applicable TDS rule.
A partnership firm should therefore review its deed, working partner status, book profit calculation, assessment requirements and TDS obligations together before claiming Remuneration to partners. Ebizfiling can assist businesses with partnership registration, income tax filing and related tax compliance requirements.
Frequently Asked Questions
1. Do the partner remuneration provisions also apply to LLPs?
Yes. Under Section 2(45) of the Income-tax Act, 2025, the definition of a “firm” includes a Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008. Therefore, the relevant tax provisions governing partner remuneration can also apply to LLPs, subject to the applicable conditions.
2. Can partner remuneration be disallowed even if it is within the Section 35(e) limit?
Potentially, yes. Section 36(2) allows the Assessing Officer to disallow expenditure paid to a specified person if it is considered excessive or unreasonable having regard to fair market value, legitimate business needs or the benefit derived. A partner of a firm is specifically included as a “specified person.”
3. What happens if the firm fails to deduct TDS on partner remuneration?
Where tax was required to be deducted on a sum payable to a resident but was not deducted, or was deducted but not deposited within the prescribed time, 30% of the relevant amount may be disallowed while computing business income under Section 35(b). This consequence can apply independently of the remuneration ceiling under Section 35(e).
4. Can the TDS-related disallowance be claimed in a later tax year?
Yes. Where an amount was disallowed because the required TDS was not deducted or deposited on time, Section 35(b) allows the relevant deduction in a subsequent tax year when the applicable tax is deducted and paid in accordance with the provision.
5. What if the firm did not deduct TDS but the partner already paid tax on the income?
The firm may avoid being treated as an assessee in default if the partner has filed the return of income, included the relevant amount while computing income and paid the tax due, subject to furnishing the prescribed accountant’s certificate. However, interest liability for delayed deduction may still arise. The prescribed certificate is furnished through Form No. 149 under the Income-tax Rules, 2026.
6. What happens if a partner does not provide PAN to the firm?
Section 397(2) provides for TDS at a higher rate when the recipient fails to furnish PAN to the deductor. For payments where the special 5% exceptions do not apply, the prescribed higher-rate mechanism can result in deduction at 20% where that is higher than the rate otherwise applicable. Partner remuneration is therefore exposed to higher TDS if PAN requirements are not complied with.
7. Which TDS certificate should a partner receive for tax deducted on remuneration?
TDS on partner remuneration is not salary TDS because partner remuneration is not treated as salary under Section 15(4). For TDS on income other than employee salary, Form No. 131, prescribed under Section 395(4)(a) read with Rule 215, serves as the TDS certificate issued by the deductor to the deductee.
8. Can a partner claim the standard deduction against remuneration received from the firm?
No standard deduction under the salary provisions is available merely because partner remuneration is described as “salary.” Section 19 provides the standard deduction while computing income chargeable under the head “Salaries”, whereas Section 15(4) specifically excludes salary, bonus, commission or remuneration received by a partner from the firm from salary treatment for this purpose.
9. Can Ebizfiling assist when a partnership deed needs changes relating to partner remuneration?
Yes. Ebizfiling provides partnership compliance support that includes guidance for partnership deed amendments, partner changes and related regulatory requirements. If the remuneration arrangement changes, professional assistance can help ensure that the updated documentation reflects the revised terms appropriately.
10. Can Ebizfiling help report partner remuneration while filing the firm's income tax return?
Yes. Ebizfiling’s partnership firm annual filing service covers income-tax return filing and reporting of financial details such as income, expenses and partner remuneration. This can help firms maintain consistency between their books, partner-related entries and income-tax reporting.
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