What is the maximum remuneration my firm can deduct for its working partners for the year I am filing now, and does the old professional / non-professional split still exist?
For assessment year 2025-26 onwards the ceiling is Rs 3,00,000 or 90 per cent of the book profit, whichever is more, on the first Rs 6,00,000 of book profit or in case of a loss, and 60 per cent of the balance of the book profit. Those figures were substituted by the Finance (No. 2) Act 2024 (Act No. 15 of 2024) with effect from 1 April 2025. For assessment years 2010-11 to 2024-25 the same two-band table applied but with Rs 1,50,000 and Rs 3,00,000 in place of Rs 3,00,000 and Rs 6,00,000. The separate table for professional firms disappeared from AY 2010-11 and there is now one table for all firms.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2025-04-01, reported as Items (1) and (2) of section 40(b)(v) substituted, and the monetary figures raised, by the Finance (No. 2) Act 2024, Act No. 15 of 2024, with effect from 1 April 2025, that is from assessment year 2025-26. It bears on section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(iv), section 40(b)(v), section 28(v), section 184, section 185, section 194T of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and TDS Defaults matters.
Two things decide these disallowances and neither is the arithmetic. The first is the deed: sub-clause (ii) disallows any remuneration or interest that is not authorised by, or is not in accordance with, the terms of the partnership deed, and sub-clause (iii) disallows it for any period falling before the date of the deed that authorises it, subject to the carve-out for an earlier deed. A deed that leaves the figure to be settled by the partners at the year end will not carry the claim. The second is that the payee must be a working partner within Explanation 4 — an individual actively engaged in conducting the affairs of the business or profession — so a corporate partner, or an individual who merely holds capital, is caught by sub-clause (i) whatever the deed says. Alongside these, sub-clause (iv) caps interest to any partner at twelve per cent simple interest per annum. Book profit for the ceiling is defined by Explanation 3: net profit as shown in the profit and loss account computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that has been deducted in arriving at the net profit. Since 1 April 2025 there is a second consequence of getting the payment right: section 194T requires the firm to deduct tax at ten per cent on salary, remuneration, commission, bonus or interest paid or credited to a partner.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 40(b) lists, for a firm assessable as such, the payments to partners that are not deducted in computing income under the head 'Profits and gains of business or profession'. Sub-clause (i) disallows remuneration to a partner who is not a working partner. Sub-clause (ii) disallows remuneration to a working partner, or interest to any partner, which is not authorised by, or is not in accordance with, the terms of the partnership deed. Sub-clause (iii) disallows remuneration or interest that is authorised by and in accordance with the deed but relates to a period falling prior to the date of that deed, subject to the carve-out where an earlier deed authorised it. Sub-clause (iv) disallows interest to a partner in so far as it exceeds twelve per cent simple interest per annum. Sub-clause (v) disallows remuneration to a working partner in so far as the aggregate paid to all the partners during the previous year exceeds the statutory ceiling.
For assessment year 2025-26 onwards the aggregate ceiling in sub-clause (v) is: on the first Rs 6,00,000 of the book-profit or in case of a loss, Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more; and on the balance of the book-profit, at the rate of 60 per cent. The earlier figures, applicable from assessment year 2010-11 to assessment year 2024-25, were Rs 1,50,000 or 90 per cent of the book-profit, whichever is more, on the first Rs 3,00,000 of the book-profit or in case of a loss, and 60 per cent on the balance. Before assessment year 2010-11 there were two tables, one for firms carrying on a profession referred to in section 44AA or notified for the purposes of that section and one for any other firm, with three bands each at 90, 60 and 40 per cent; that distinction no longer exists. Explanation 3 defines book-profit as the net profit shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that amount has been deducted in computing the net profit. Explanation 4 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 he is a partner.
Clause (b) is a set of cumulative gates, and a payment must pass every one of them before the ceiling in sub-clause (v) even becomes relevant. The status gate is sub-clause (i) and Explanation 4 — only a working partner. The authorisation gate is sub-clause (ii) — the deed must authorise the payment and the payment must accord with it. The timing gate is sub-clause (iii) — the deed must precede the period. Only then does sub-clause (v) cap the aggregate, and the cap is measured against book-profit as defined in Explanation 3, which is deliberately grossed up by the remuneration already debited so that the ceiling is not computed on a figure the remuneration has itself depressed. Interest is treated separately and capped at twelve per cent by sub-clause (iv).
For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner
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Handle my notice → Ask a CA on WhatsAppFor assessment year 2025-26 onwards the ceiling is Rs 3,00,000 or 90 per cent of the book profit, whichever is more, on the first Rs 6,00,000 of book profit or in case of a loss, and 60 per cent of the balance of the book profit. Those figures were substituted by the Finance (No. 2) Act 2024 (Act No. 15 of 2024) with effect from 1 April 2025. For assessment years 2010-11 to 2024-25 the same two-band table applied but with Rs 1,50,000 and Rs 3,00,000 in place of Rs 3,00,000 and Rs 6,00,000. The separate table for professional firms disappeared from AY 2010-11 and there is now one table for all firms. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(iv), section 40(b)(v), section 28(v), section 184, section 185, section 194T of the Income Tax Act 1961. It is reported as Items (1) and (2) of section 40(b)(v) substituted, and the monetary figures raised, by the Finance (No. 2) Act 2024, Act No. 15 of 2024, with effect from 1 April 2025, that is from assessment year 2025-26. Two things decide these disallowances and neither is the arithmetic. The first is the deed: sub-clause (ii) disallows any remuneration or interest that is not authorised by, or is not in accordance with, the terms of the partnership deed, and sub-clause (iii) disallows it for any period falling before the date of the deed that authorises it, subject to the carve-out for an earlier deed. A deed that leaves the figure to be settled by the partners at the year end will not carry the claim. The second is that the payee must be a working partner within Explanation 4 — an individual actively engaged in conducting the affairs of the business or profession — so a corporate partner, or an individual who merely holds capital, is caught by sub-clause (i) whatever the deed says. Alongside these, sub-clause (iv) caps interest to any partner at twelve per cent simple interest per annum. Book profit for the ceiling is defined by Explanation 3: net profit as shown in the profit and loss account computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that has been deducted in arriving at the net profit. Since 1 April 2025 there is a second consequence of getting the payment right: section 194T requires the firm to deduct tax at ten per cent on salary, remuneration, commission, bonus or interest paid or credited to a partner. If it applies to you, the first step is this: Fix the assessment year before you fix the ceiling: Rs 6,00,000 / Rs 3,00,000 / 90 per cent / 60 per cent applies from AY 2025-26; Rs 3,00,000 / Rs 1,50,000 / 90 per cent / 60 per cent applies for AY 2010-11 to AY 2024-25.
Section 40(b) lists, for a firm assessable as such, the payments to partners that are not deducted in computing income under the head 'Profits and gains of business or profession'. Sub-clause (i) disallows remuneration to a partner who is not a working partner. Sub-clause (ii) disallows remuneration to a working partner, or interest to any partner, which is not authorised by, or is not in accordance with, the terms of the partnership deed. Sub-clause (iii) disallows remuneration or interest that is authorised by and in accordance with the deed but relates to a period falling prior to the date of that deed, subject to the carve-out where an earlier deed authorised it. Sub-clause (iv) disallows interest to a partner in so far as it exceeds twelve per cent simple interest per annum. Sub-clause (v) disallows remuneration to a working partner in so far as the aggregate paid to all the partners during the previous year exceeds the statutory ceiling. The matter was decided on 2025-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. For assessment year 2025-26 onwards the aggregate ceiling in sub-clause (v) is: on the first Rs 6,00,000 of the book-profit or in case of a loss, Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more; and on the balance of the book-profit, at the rate of 60 per cent. The earlier figures, applicable from assessment year 2010-11 to assessment year 2024-25, were Rs 1,50,000 or 90 per cent of the book-profit, whichever is more, on the first Rs 3,00,000 of the book-profit or in case of a loss, and 60 per cent on the balance. Before assessment year 2010-11 there were two tables, one for firms carrying on a profession referred to in section 44AA or notified for the purposes of that section and one for any other firm, with three bands each at 90, 60 and 40 per cent; that distinction no longer exists. Explanation 3 defines book-profit as the net profit shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that amount has been deducted in computing the net profit. Explanation 4 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 he is a partner.
Clause (b) is a set of cumulative gates, and a payment must pass every one of them before the ceiling in sub-clause (v) even becomes relevant. The status gate is sub-clause (i) and Explanation 4 — only a working partner. The authorisation gate is sub-clause (ii) — the deed must authorise the payment and the payment must accord with it. The timing gate is sub-clause (iii) — the deed must precede the period. Only then does sub-clause (v) cap the aggregate, and the cap is measured against book-profit as defined in Explanation 3, which is deliberately grossed up by the remuneration already debited so that the ceiling is not computed on a figure the remuneration has itself depressed. Interest is treated separately and capped at twelve per cent by sub-clause (iv). In the words reproduced by the source cited on this page: "For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner"
It was decided by the CBDT Circulars & Instructions on 2025-04-01 and is reported as Items (1) and (2) of section 40(b)(v) substituted, and the monetary figures raised, by the Finance (No. 2) Act 2024, Act No. 15 of 2024, with effect from 1 April 2025, that is from assessment year 2025-26. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(iv), section 40(b)(v), section 28(v), section 184, section 185, section 194T, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. For assessment year 2025-26 onwards the aggregate ceiling in sub-clause (v) is: on the first Rs 6,00,000 of the book-profit or in case of a loss, Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more; and on the balance of the book-profit, at the rate of 60 per cent. The earlier figures, applicable from assessment year 2010-11 to assessment year 2024-25, were Rs 1,50,000 or 90 per cent of the book-profit, whichever is more, on the first Rs 3,00,000 of the book-profit or in case of a loss, and 60 per cent on the balance. Before assessment year 2010-11 there were two tables, one for firms carrying on a profession referred to in section 44AA or notified for the purposes of that section and one for any other firm, with three bands each at 90, 60 and 40 per cent; that distinction no longer exists. Explanation 3 defines book-profit as the net profit shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that amount has been deducted in computing the net profit. Explanation 4 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 he is a partner. It arises in Deductions & Disallowances, Assessment & Scrutiny and TDS Defaults matters, on section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(iv), section 40(b)(v), section 28(v), section 184, section 185, section 194T of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Read the deed clause before arguing the quantum — check that it authorises remuneration, that it either quantifies it or lays down the manner of quantifying it, and that it is dated on or before the start of the period for which the remuneration is claimed. Compute book profit under Explanation 3 by adding back the partners' remuneration already debited, and do the two-band computation on that figure, not on the net profit as shown. Confirm that every partner drawing remuneration answers Explanation 4 — actively engaged in conducting the affairs of the business or profession — and record how; sub-clause (i) allows nothing at all to a non-working partner. Check partner interest separately against the twelve per cent simple interest ceiling in sub-clause (iv), and remember Explanations 1 and 2 on interest paid to a partner in a representative capacity. For payments on or after 1 April 2025, deduct tax under section 194T on the remuneration and interest, and check that the section 40(b) computation and the TDS return agree.
Still good law. Read this pass from the Department's Year 2025 page for section 40, which is the most recent version published on that site. The footnotes on that page attribute the raised figures to Act No. 15 of 2024 w.e.f. 1-4-2025. The pre-2025 figures were confirmed against the Department's Year 2010 and Year 2011 pages, and the pre-2010 professional / non-professional tables against the Year 2000 to Year 2009 pages. Whether any change has been made after the Year 2025 version was published has not been checked, and the corresponding provision of the Income-tax Act, 2025 was not examined. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Statutory entry, not a decision. 'tier' is set to 'cbdt' because the library's fixed tier vocabulary has no value for a statutory entry; the source is the Income-tax Department's own section pages. 'decided_on' is the date the raised limits take effect, 1 April 2025, not a date of decision. The figures given here are from the Department's Year 2025 page for section 40, at /w/section-40-64, whose footnotes record 'Sub. for "Rs. 3,00,000" by Act No. 15 of 2024, w.e.f. 1-4-2025' (footnote 18) and 'Sub. for "Rs. 1,50,000" by Act No. 15 of 2024, w.e.f. 1-4-2025' (footnote 19). The Department's undated page at /w/section-40 is a Year 2009 archive and must not be used for a current year: it prints the AY 2010-11 to AY 2024-25 figures — Rs 3,00,000 / Rs 1,50,000 / 90 per cent / 60 per cent — as its operative text, with the pre-2010 professional / non-professional two-table version below that as history. /w/section-40-1 is Year 2000 and /w/section-40-3 is Year 2010. The two-band figures for the earlier period were confirmed from the Department's Year 2010 and Year 2011 pages. Explanation 3, Explanation 4 and the twelve per cent ceiling in sub-clause (iv) were read verbatim off the Year 2025 page. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
For assessment year 2025-26 onwards the aggregate ceiling in sub-clause (v) is: on the first Rs 6,00,000 of the book-profit or in case of a loss, Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more; and on the balance of the book-profit, at the rate of 60 per cent. The earlier figures, applicable from assessment year 2010-11 to assessment year 2024-25, were Rs 1,50,000 or 90 per cent of the book-profit, whichever is more, on the first Rs 3,00,000 of the book-profit or in case of a loss, and 60 per cent on the balance. Before assessment year 2010-11 there were two tables, one for firms carrying on a profession referred to in section 44AA or notified for the purposes of that section and one for any other firm, with three bands each at 90, 60 and 40 per cent; that distinction no longer exists. Explanation 3 defines book-profit as the net profit shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that amount has been deducted in computing the net profit. Explanation 4 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 he is a partner.
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My firm pays interest on partners' capital. Is the s.40(b)(iv) ceiling the only test the AO can apply?
My deed gives a formula for partner remuneration, not a figure. Will the deduction be disallowed?
The officer says my partner is a sleeping partner because she is not in the office every day. Can he disallow her remuneration?
A Board circular supports my reading of the section. Can I hold the Tribunal or the High Court to it, and can a circular settle what a provision means?