Section 40(b)(iv)

Section 40(b)(iv) — the law in short

What the courts have decided on section 40(b)(iv), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Munjal Sales Corporation v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  My firm pays interest on partners' capital. Is the s.40(b)(iv) ceiling the only test the AO can apply?
  No — both tests apply, in that order. A firm must first bring the interest within s.36(1)(iii) and then keep within the ceiling in s.40(b)(iv), because ss.30 to 38 grant the deduction while s.40 operates as a limitation on them. Whether the partners' capital was in the nature of a loan makes no difference to that analysis.
• Statutory position — section 40(b)(v): the working-partner remuneration ceiling, raised from AY 2025-26 CBDT Circulars & InstructionsCuts both ways
  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.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.