Enhanced Limits for Partners’ Remuneration — Section 40(b) & Section 194T

This briefing explains the enhanced limits for partners' remuneration allowable as deduction under Section 40(b) of the Income-tax Act and the interplay with TDS obligations (notably Section 194T as applicable). It focuses on practical computation, record requirements, sample illustrations and compliance actions firms and partners must take to remain audit-proof.

It assumes basic familiarity with partnership taxation, the partnership deed, and tax audit requirements under the Act.

Statutory framework

Section 40(b) restricts the deduction for partners' remuneration and interest paid by a firm in computing business income. Deduction is allowable only if:

• The remuneration is authorised by the partnership deed;
• It is paid (or is deemed to be paid) to partners who are residents; and
• The amount does not exceed the limits prescribed under the section — which have now been enhanced by the recent amendment/notification.

Enhanced limits — what changed

The recent change raises the ceilings used to compute allowable remuneration. Practically, this increases the maximum deductible sum firms can claim without attracting adjustment under 40(b). The precise formula remains percentage-based on firm profit with prescribed slabs (for example — hypothetical illustrative slabs shown below); always check the amending notification for exact percentages and thresholds.

Computation (illustrative)

The computation follows an ordered test:

1. Compute net profit of the firm as per profit & loss before charging partner remuneration and interest.
2. Apply the prescribed percentage slab to determine maximum allowable remuneration.
3. Deduct actual paid remuneration up to the allowable limit; excess is disallowed under Section 40(b).

Example (illustrative)

Assumptions: Firm profit before partner remuneration = ₹10,00,000. New allowable percentage (example) = 60% (check statute). Maximum allowable remuneration = ₹6,00,000. If partners were actually paid ₹5,50,000 — full amount is deductible. If paid ₹6,50,000 — ₹50,000 would be disallowed under Section 40(b).

Note: This example is illustrative. Use the exact percentages and ceilings from the notified amendment for computation.

Practical considerations

• Ensure partnership deed expressly authorises the remuneration formula and the ceiling. • Maintain board/partners resolution records approving remuneration. • Document computation workings and allocation among partners (time-based, agreed ratio, or fixed split). • If remuneration is linked to services (working partners), preserve timesheets, attendance, or service logs to support the claim.

Scope & trigger

Section 194T (as introduced/amended) addresses tax deduction at source on certain payments made to specified persons including partners. The clause typically requires a payer to deduct TDS when making specified payments (fees, commissions, remuneration) above a prescribed threshold to a resident payee.

Thresholds & rates

The amendment introduces a threshold amount — payments below which no TDS is required — and specifies the applicable TDS rate for payments above the threshold. The notification that enhanced Section 40(b) limits will also clarify whether partner remuneration attracts TDS under Section 194T and at what rate. Confirm the current TDS rate and threshold from the amending notification or CBDT circular.

Practical compliance steps

• Identify the payer: typically the firm/TPS making the payment to partner.
• Determine the nature of payment: remuneration for services vs profit share (profit share may be exempt from TDS depending on provision language).
• Apply thresholds and rates: deduct TDS at the prescribed rate if payment exceeds threshold.
• Deposit TDS and file returns: comply with TDS deposit timelines and return filing requirements (Form 26QB / Form 24Q / Form 27Q as applicable or designated return under notification).

Illustration

If a firm pays ₹6,50,000 to partners where the TDS threshold is ₹2,50,000 and the rate is 2% (hypothetical), the firm must deduct TDS of 2% on the taxable component (e.g., remuneration portion) and deposit it within prescribed timelines. Profit shares (if genuinely profit distribution) may be out of scope — careful classification is essential.

Classification risk — remuneration vs profit share

The distinction between "remuneration" and "share of profit" is central. Share of profit paid to partners is generally not taxable in the hands of the firm nor subject to TDS, but remuneration paid for services is treated as business expense and may attract TDS. Ensure firm documentation (partnership deed, payment vouchers, minutes) clearly separates profit distribution from service remuneration.

Key interactions

• Deductibility under Section 40(b) does not automatically resolve TDS obligations. A payment allowed under 40(b) can still attract TDS if 194T conditions are met. • Disallowance under 40(b) (excess remuneration) may create timing mismatches between tax provision and TDS filings — reconcile both at year-end. • Non-deduction of TDS or incorrect classification increases interest/penalty exposure for the firm.

Audit & documentation focus

Tax authorities will examine: partnership deed terms, board/partners resolutions, remuneration computation worksheets, TDS certificates, and partition between profit share and remuneration. Maintain contemporaneous records to meet scrutiny.

Cashflow & partner impact

TDS reduces net cash paid to partners; partners should reconcile credits against Form 26AS and claim the TDS credit. Firms should communicate net pay effects clearly and provide timely TDS certificates (Form 16A or specified document).

Example A — Within enhanced limit

Firm profit before remuneration: ₹12,00,000. Enhanced allowable % (illustrative): 60% → max remuneration ₹7,20,000. Partners paid remuneration ₹6,80,000. Deduction under Section 40(b): ₹6,80,000 (allowed). If TDS threshold is ₹5,00,000 and rate 1% (illustrative) — firm must deduct 1% on ₹6,80,000 (i.e., ₹6,800) and deposit to government; partners receive ₹6,73,200 net.

Example B — Excess payment

Same profit; partners paid ₹8,00,000. Allowable = ₹7,20,000 → ₹80,000 disallowed under Section 40(b). TDS should be applied on the paid amount if threshold crossed — firm should still deduct TDS on ₹8,00,000 (or on remunerative component as per rules). The disallowed ₹80,000 will be added back in computing taxable income of firm, increasing tax liability.

Reminder: These are illustrative computations. Use exact notified percentages, thresholds and rates when doing real filings.

1. Review partnership deed: ensure clear authorisation for remuneration formula and any uplift to limits.
2. Compute firm profit before remuneration on a monthly/quarterly basis to track potential 40(b) ceiling exposure.
3. Classify payments clearly in ledgers as 'remuneration for services' or 'share of profit'.
4. Apply TDS rules: check thresholds and rates under Section 194T; deduct and deposit TDS timely if applicable.
5. Maintain approvals: partners' resolution/meeting minutes authorising remuneration annually or as per deed.
6. Prepare computation worksheets and allocation schedules (time-sheet or service split for working partners).
7. Issue TDS certificates to partners and update tax credits (Form 26AS reconciliation).
8. At year-end, reconcile remuneration paid, 40(b) allowable amount, TDS deposited, and tax audit schedules; make adjustments if necessary.
9. Retain supporting documents for at least the statutory period (typically 6–8 years depending on disputes).

Risks

Non-compliance risks include disallowance under 40(b), interest/penalty for failure to deduct/ deposit TDS, notices during assessment, and potential interest for delayed reconciliation. Misclassification of profit share as remuneration can trigger disputes.

Mitigations

• Update partnership deed and obtain partner approval. • Keep contemporaneous evidence of services rendered by working partners. • Adopt monthly/quarterly monitoring of remuneration versus allowable ceiling. • Set up automated TDS deduction in payroll/partner disbursal systems. • Seek advance rulings or professional opinion in complex cases.

This briefing is prepared from the uploaded source document and the notifying circulars/amendments. Primary reference (uploaded):

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Always verify percentages, thresholds and effective dates from the official Gazette notification and CBDT circulars before filing.

The enhanced Section 40(b) limits provide firms with greater headroom to remunerate working partners, but they bring heightened compliance obligations — notably careful classification and TDS compliance under Section 194T where applicable. Proactive documentation, deed alignment and automated TDS processes will reduce audit risk and streamline partner payouts.

Prepared as a Zerolev briefing from uploaded source: :contentReference[oaicite:3]{index=3}