partner remuneration under the Indian Income Tax Act for Assessment Year (AY) 2026-27, i.e., the financial year 2025-26:

partner remuneration under the Indian Income Tax Act for Assessment Year (AY) 2026-27, i.e., the financial year 2025-26:

1. Remuneration Limits Under Section 40(b) – New Higher Ceiling

Effective April 1, 2025 (FY 2025-26; applicable for AY 2026-27):

  • The allowable deduction for remuneration paid to working partners has doubled.

  • Revised limits under Section 40(b):

    • On the first ₹6,00,000 of book profit (or in case of loss): higher of ₹3,00,000 or 90% of book profit.

    • On the rest of the book profit: 60% of book profit.

Previously, this limit was:

  • On the first ₹3,00,000: ₹1,50,000 or 90% of book profit (whichever higher)

  • On the balance: 60% of book profit.

2. Introduction of Section 194T – Mandatory TDS on Partner Payments

Also effective April 1, 2025:

  • A new section, Section 194T, mandates 10% TDS on payments to partners when total annual payments exceed ₹20,000.

  • Applies to payments like salary/remuneration, commission, bonus, interest.

  • Drawings and capital repayment are excluded.

Key points:

  • TDS must be deducted at the time of credit to the partner’s account or payment, whichever is earlier.

  • Once the ₹20,000 threshold is crossed in a financial year, TDS applies to the entire payment—not just the excess.

⏳ 3. Compliance & Penalties for Non-Compliance

Consequences of not deducting or depositing TDS:

  • Disallowance: 30% of the expense (related to salary, commission, interest, etc.) will be disallowed.

  • Interest Penalty:

    • 1% per month (or part thereof) for non-deduction of TDS.

    • 1.5% per month for non-deposit of deducted TDS.

  • Late Filing Penalty: ₹200 per day, up to the TDS amount, for non-filing of TDS returns.

Additionally:

  • No exemption via Form 15G/H.

  • No lower TDS under Section 197.

  • Partners must claim TDS credit when filing their ITR. Excess TDS can be refunded or adjusted.

Summary Table

Aspect Before (AY 2025-26) From AY 2026-27 (FY 2025-26)
Remuneration limit First ₹3L: ₹1.5L or 90% book profit; balance 60% First ₹6L: ₹3L or 90% book profit; balance 60%
TDS applicability Not applicable Section 194T: 10% TDS if payments exceed ₹20,000/yr
TDS withheld on — Salary, commission, bonus, interest — not drawings or capital repayment
Penalties for non-TDS — Disallowance, interest, and ₹200/day late return penalty

What Firms Should Do

  • Update partnership deeds to reflect increased remuneration limits.

  • Obtain TAN, if not already done, before April 1, 2025.

  • Implement TDS systems to timely deduct and deposit TDS under Section 194T.

  • Communicate changes to partners to prepare them for TDS implications and ITR adjustments.

  • Consult a tax advisor to ensure smooth compliance and avoid penalties.


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