Moment guide · FY 2026-27

I am drawing remuneration and interest from my partnership firm

How is partner remuneration taxed and when does TDS apply?

Partner remuneration is deductible to the firm only within section 40(b) limits — 90% of book profit up to ₹3 lakh and 60% above — and interest on capital only up to 12%. From AY 2026-27, the firm deducts 10% TDS under section 194T on remuneration, interest or commission paid to a partner above ₹20,000 a year, and cash payments above ₹20,000 are disallowed under section 40A(3).

The #1 trap

Paying partner interest above 12% or remuneration above the 40(b) formula and assuming the firm still deducts it — the excess is disallowed to the firm, even though it is taxable to the partner. From AY 2026-27, 194T requires 10% TDS on partner payments above ₹20,000 a year, and cash payments above ₹20,000 are disallowed entirely under section 40A(3).

Harish and Meera, partners in a consulting firm

Harish and Meera's firm has a book profit of ₹10,00,000 for FY 2025-26. Under section 40(b), the maximum deductible partner remuneration is 90% of the first ₹3,00,000, which is ₹2,70,000, plus 60% of the remaining ₹7,00,000, which is ₹4,20,000, giving a ceiling of ₹6,90,000. The firm pays Harish ₹4,00,000 and Meera ₹3,50,000, totalling ₹7,50,000, which is ₹60,000 above the 40(b) ceiling, so that excess is disallowed to the firm and added back in its return, even though both partners pay tax on their full remuneration. The firm also pays interest of 15% on capital of ₹5,00,000, which is ₹75,000 a year, but only 12% is deductible, which is ₹60,000, so the ₹15,000 excess is disallowed. From AY 2026-27, the firm must deduct 10% TDS under section 194T on partner remuneration, interest and commission payments above ₹20,000 a year in aggregate, so on the ₹7,50,000 of remuneration the firm deducts ₹75,000 of TDS and credits it to the partners' Form 26AS. If the firm had paid Meera's share in cash above ₹20,000, the entire cash payment would be disallowed under section 40A(3). Each partner reports their remuneration and interest as business income at their own slab rate, and the firm files its return with the 40(b) computation attached. A quick call with us dials in the final figure. Harish and Meera also verify that the 40(b) ceiling is computed on the book profit after charging the partner interest but before charging the partner remuneration, because the order of computation changes the ceiling itself. If the firm is a professional firm, the same 90%/60% formula applies; the limits are not income-dependent. The interest on capital is deductible only if the partnership deed authorises it and the rate is within 12%, so a deed silent on interest disallows the entire payment. From AY 2026-27, the firm deducts 10% TDS under section 194T when the aggregate of remuneration, interest and commission to a partner exceeds ₹20,000 a year, and the TDS is deposited by the 7th of the following month. The partners also remember that interest paid to a partner is treated as business income in their hands, not interest income, and the remuneration is business income too. Cash payments above ₹20,000 to a partner are disallowed under section 40A(3), so every payment is routed by bank transfer. A quick call with us dials in the final figure.