What is Section 40(b) partner remuneration limit?
Reviewed by CA Apurav GargLast reviewed
In short
The ceiling on salary, bonus and commission a firm or LLP can deduct for its working partners, worked out on the firm's book profit; anything paid above it is not allowed as an expense of the firm.
Want help applying this to your own accounts?
We handle bookkeeping, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.
What the rule does
Section 40(b) of the Income-tax Act, 1961, now section 35(e) of the Income-tax Act, 2025, limits what a partnership firm can deduct for payments to its own partners. For income tax, "firm" includes an LLP.
Remuneration to partners, by whatever name (salary, bonus, commission), and interest on their capital are allowed only if all of these hold:
- Remuneration goes to a working partner: an individual actively engaged in running the business. Remuneration to a partner who is not working is not allowed at all.
- The payment is authorised by the partnership deed, which should state the amount or how it is worked out, for the period it covers. A deed cannot authorise payments for a period before it was signed.
- The total remuneration to all working partners is within the limit worked out on book profit: a higher allowance on the first slab of book profit, a lower share of the rest, and a minimum amount where there is a loss.
- Interest to partners is within the simple interest rate the law sets as the ceiling.
Book profit
Book profit is the firm's net profit as shown in its profit and loss account, computed the way business income is computed for tax, plus the remuneration to partners if it has already been deducted. In practice it is the profit after partners' interest and before their remuneration.
How partners are taxed
What the firm is allowed to deduct is taxed in the partner's hands as business income; any excess that the firm could not deduct is taxed in the firm and is not taxed again in the partner's hands. The firm deducts TDS on remuneration, interest and similar payments to partners, under section 393(3) of the 2025 Act (earlier section 194T, from 1 April 2025).
Why it matters when choosing an entity
For a profitable D2C or marketplace business run by its owners, the limit decides how much profit can come out as tax-deductible remuneration. The Proprietorship vs LLP vs Private Limited Tax Calculator compares a proprietorship, an LLP and a private limited company on the same profit.
What goes wrong
- A deed that just says "as mutually agreed". The amount or method must be in the deed.
- Paying a sleeping partner remuneration.
- Revising the deed after the year-end and applying it to the past year.
Example in rupees
An LLP selling on marketplaces has two working partners. Its deed authorises remuneration of ₹15,00,000 each. For tax year 2026-27:
| Figure | Amount |
|---|---|
| Net profit after partners' interest, before their remuneration (book profit) | ₹40,00,000 |
| Remuneration paid under the deed: 2 × ₹15,00,000 | ₹30,00,000 |
| Limit on that book profit under the law in force for 2026-27 | ₹25,80,000 |
| Not allowed in the LLP's hands | ₹4,20,000 |
The LLP adds ₹4,20,000 back to its income and pays tax on it. The partners are taxed on the ₹25,80,000 the LLP was allowed, not on the full ₹30,00,000. Had the deed not authorised any remuneration, none of it would be allowed. Work out the limit for your own figures with the Proprietorship vs LLP vs Private Limited Tax Calculator, which uses the limits in force. The figures are illustrative.
Legal reference: Income-tax Act, 2025: section 35(e) and section 393(3), from tax year 2026-27; Income-tax Act, 1961: sections 40(b), 28(v) and 194T, up to 31 March 2026
Related terms
Work it out for your business
Want help applying this to your own accounts?
We handle bookkeeping, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.
General information only, not professional advice. Rules and rates change — check the official source before you act.