Partner Remuneration and Conversion to Company

Deduction limits and TDS rules are periodically revised. This article is for general information and does not constitute tax advice.

Partner Remuneration: Section 40(b) Limits

Following the Finance Act 2024 revision (FY 2025-26 onward): on the first ₹6,00,000 of book profit, the higher of ₹3,00,000 or 90% of that book profit; beyond that, 60%. Where the firm has a loss, the maximum deductible remains a flat ₹3,00,000. Remuneration must be authorised by the partnership deed and can only go to working partners; interest, capped at 12% per annum, can go to any partner. Firms under the presumptive scheme (44AD/44ADA) can’t claim any remuneration deduction on top of that figure.

The Genuinely New Development: Section 194T

From 1 April 2025, Section 194T — the first TDS provision to operate inside a partnership firm or LLP — requires 10% TDS on salary, remuneration, bonus, commission, and interest paid or credited to a partner once the aggregate for that partner crosses ₹20,000 a year. TDS is deducted at whichever comes earlier, crediting or paying, creating genuine timing pressure. Unlike most TDS provisions, there’s no Section 197 lower/nil-deduction certificate route; a partner below the taxable threshold still faces the full 10% and claims it back as a refund. Non-compliance carries three consequences: interest under 201(1A), 30% disallowance under 40(a)(ia), and a penalty equal to the TDS amount under 271C.

Conversion to Company

A firm or LLP converting into a company can do so tax-neutrally under Section 47 if all assets/liabilities transfer, every partner becomes a shareholder proportionately, partners receive nothing beyond shares, and the original partners’ combined shareholding stays at 50% or more of voting power for 5 years. Breaching any condition later withdraws the exemption retrospectively, taxable in the year of breach. The company can generally carry forward the firm’s losses and unabsorbed depreciation, subject to its own conditions.