When a partnership firm pays remuneration, salary, bonus, or commission to its working partners, it is natural to wonder whether Tax Deducted at Source (TDS) applies. This is a common query among small businesses, consultants, and tax practitioners.
In this blog, we break down the tax treatment of partners’ remuneration under the Income Tax Act, explain whether TDS is applicable, how such payments are taxed in the hands of the partner, and key points firms should note for compliance.
Introduction
In a partnership firm, partners contribute capital, time, and effort to manage the business. To compensate them for their active role, the firm often pays remuneration or salary, which is agreed upon in the partnership deed. However, confusion arises here: Does this payment attract TDS, like salaries paid to employees?
Understanding this is crucial because getting it wrong could lead to unnecessary compliance efforts or errors in tax filings. In this blog, we will describe the rules around TDS on partners’ remuneration, what the Income Tax Act says, and how both the firm and the partner should handle this for tax purposes.
What is Partner’s Remuneration?
Partner’s remuneration refers to any compensation paid by a partnership firm to its working partners for managing the business. It can be called a Salary, a bonus, a Commission, a Monthly allowance, or any other similar payment.
The term used does not matter; what is important is that the payment is made to working partners and is covered by the partnership deed. This remuneration is over and above the partner’s share of profits from the firm.
Such remuneration is generally allowed as a deduction to the firm while computing its taxable profits, provided it meets the conditions laid down in Section 40(b) of the Income Tax Act.
Does TDS Apply to Partner’s Remuneration?
The clear answer is NO. Partnership firms are not required to deduct TDS on remuneration paid to their partners. Here is why –
1. Partners are not employees
Section 192 of the Income Tax Act deals with TDS on salary payments made by an employer to an employee. In a partnership, partners are the owners of the firm, not employees. Since no employer-employee relationship exists between the firm and its partners, Section 192 does not apply.
2. It is treated as business income, not salary
The Income Tax Act (Section 28(v)) states that any salary, bonus, commission, or remuneration received by a partner from the firm is taxable as business income in the partner’s hands, not as salary. Since it is not treated as salary, no TDS is applicable under the salary provisions.
3. No TDS under professional or contractual services
The firm is not hiring its partner to provide services as an outsider. Therefore, TDS provisions under Section 194J (professional fees) or Section 194C (contract work) do not apply either.
4. CBDT Clarifications & Case Laws
Courts and tax circulars have confirmed that no TDS is to be deducted on a partner’s remuneration, interest, or commission because these payments arise out of the partnership relationship, not an independent contract.
Tax Treatment in the Hands of Partners
The remuneration or salary received by a partner from the firm is taxable in the partner’s return under the head “Profits and Gains from Business or Profession” (PGBP).
Key points –
- The partner can claim business-related expenses against this income (e.g., office rent, staff salary if incurred personally).
- Since it is taxed as business income, the partner cannot claim salary-specific exemptions such as standard deduction, HRA, or leave travel allowance.
- The partner is responsible for paying advance tax on this income if applicable.
Conditions Under Section 40(b) for Deduction
While no TDS is needed, the firm must ensure the following to claim the remuneration as a deduction –
- The remuneration must be approved by the partnership deed.
- The deed should specify either the exact amount or the method of computation.
- The remuneration should be paid only to working partners (those actively involved in the business).
- The payment must not exceed the limits under Section 40(b) –
| Book Profit Range | Maximum Allowable Remuneration |
| On the first Rs 3,00,000 of book profit | Rs 1,50,000 or 90% of book profit, whichever is higher |
| On balance, book profit | 60% of the balance book profit |
If the firm pays beyond these limits, the excess portion will be disallowed as a deduction and will increase the firm’s taxable income.
Common Mistakes to Avoid
- Treating partners as employees for TDS purposes – There is no employer-employee relationship between a firm and its partners.
- Failing to document remuneration in the partnership deed – If the deed does not authorize remuneration, it won’t be allowed as a deduction.
- Paying remuneration to non-working partners – Only working partners are eligible for tax-deductible remuneration.
- Assuming TDS is needed because the payment is called “salary” – The name of the payment does not determine TDS applicability.
Conclusion
The partnership structure is unique; partners are both owners and contributors to the business. While they may receive remuneration for their work, no TDS is required on these payments, since they are taxed as business income and not salary.
The key for firms is to ensure that remuneration is properly authorized, within legal limits, and documented in the partnership deed. For partners, it is essential to report income correctly and manage advance tax payments as needed.
By understanding these rules, firms and partners can stay compliant, avoid unnecessary errors, and handle their tax filings confidently.
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References
The Income-Tax Act, 1961 (Act No. 43 of 1961)
