Partnership Deed Changes for Remuneration
This query is : Resolved
Quick Summary
27 November 2025
a)Subsequent to Changes in the limit in the Section 40(b) via Finance Act'2024 is it mandatory to amend the Partnership Deed and insert the new clause with revised limits.?
b) Is it mandatory to quantify the remunaration payable to partners as per the deed or clause mentioning that remuneration shall be paid as per the provisions laid down under section 40(b) of the Income Tax Act'1961 will suffice.?
b) Is it mandatory to quantify the remunaration payable to partners as per the deed or clause mentioning that remuneration shall be paid as per the provisions laid down under section 40(b) of the Income Tax Act'1961 will suffice.?
27 November 2025
- Yes, it is advisable (though not strictly mandatory) to amend the partnership deed to reflect the revised limits under Section 40(b) after Finance Act 2024, to ensure audit defensibility and compliance.
- Merely stating that remuneration will be paid “as per Section 40(b)” is not sufficient—the deed must either quantify the remuneration or clearly specify the manner of its computation (e.g., percentage of book profits), otherwise deduction may be disallowed.
- Merely stating that remuneration will be paid “as per Section 40(b)” is not sufficient—the deed must either quantify the remuneration or clearly specify the manner of its computation (e.g., percentage of book profits), otherwise deduction may be disallowed.
27 November 2025
- Requirement under law: Section 40(b) requires that remuneration must be authorized by the partnership deed and paid in accordance with the deed.
- Implication: If the deed already specifies remuneration “as per limits under Section 40(b), as amended from time to time,” then amendment may not be strictly necessary.
- Best practice: To avoid disputes during assessment or audit, firms usually insert a revised clause or update the deed to explicitly align with the new limits. This ensures clarity and prevents disallowance on technical grounds.
- Implication: If the deed already specifies remuneration “as per limits under Section 40(b), as amended from time to time,” then amendment may not be strictly necessary.
- Best practice: To avoid disputes during assessment or audit, firms usually insert a revised clause or update the deed to explicitly align with the new limits. This ensures clarity and prevents disallowance on technical grounds.
27 November 2025
Quantification of Remuneration in the Deed
- Condition for deduction: Remuneration is deductible only if:
- Paid to a working partner
- Authorized by the deed
- Amount or manner of computation is specified in the deed
- Insufficient clause: A generic statement like “remuneration shall be paid as per Section 40(b)” does not meet the requirement. Courts and CBDT have clarified that the deed must either:
- State the exact amount, OR
- Provide a clear formula/method of computation (e.g., “90% of first ₹6,00,000 of book profits and 60% thereafter”).
- Risk: If the deed lacks quantification or computation method, the remuneration may be disallowed as deduction, even if paid within statutory limits.
So, insert a clause that either quantifies the remuneration or specifies the computation method linked to book profits.
- Condition for deduction: Remuneration is deductible only if:
- Paid to a working partner
- Authorized by the deed
- Amount or manner of computation is specified in the deed
- Insufficient clause: A generic statement like “remuneration shall be paid as per Section 40(b)” does not meet the requirement. Courts and CBDT have clarified that the deed must either:
- State the exact amount, OR
- Provide a clear formula/method of computation (e.g., “90% of first ₹6,00,000 of book profits and 60% thereafter”).
- Risk: If the deed lacks quantification or computation method, the remuneration may be disallowed as deduction, even if paid within statutory limits.
So, insert a clause that either quantifies the remuneration or specifies the computation method linked to book profits.
27 November 2025
That the Party of the First Part hereto shall be the working Partner of the Firm and shall be entitled to remuneration on the aggregate of the following
i) On 1st 6,00,000/- Rs. 3 Lacs or 90% of the book profit whichever is higher but in no case it will be more than the amount of Book Profit Itself
ii) On the Balance Profit 60%
For the purpose of the aforesaid term Book Profit shall mean the Book Profit as defined in Section 40(b) of the Income Tax Act'1961
Is this ok?
i) On 1st 6,00,000/- Rs. 3 Lacs or 90% of the book profit whichever is higher but in no case it will be more than the amount of Book Profit Itself
ii) On the Balance Profit 60%
For the purpose of the aforesaid term Book Profit shall mean the Book Profit as defined in Section 40(b) of the Income Tax Act'1961
Is this ok?
27 November 2025
A typo error:::
- Wording Clarity:
- The phrase “On 1st 6,00,000/- Rs. 3 Lacs or 90% of the book profit whichever is higher” is confusing.
- Section 40(b) allows 90% of book profit up to ₹3,00,000 (not ₹6,00,000).
- Your draft mentions ₹6,00,000 but compares with ₹3,00,000 — this mismatch could be challenged.
- Wording Clarity:
- The phrase “On 1st 6,00,000/- Rs. 3 Lacs or 90% of the book profit whichever is higher” is confusing.
- Section 40(b) allows 90% of book profit up to ₹3,00,000 (not ₹6,00,000).
- Your draft mentions ₹6,00,000 but compares with ₹3,00,000 — this mismatch could be challenged.
27 November 2025
- As per Section 40(b)(v), allowable remuneration is:
- On the first ₹3,00,000 of book profit: ₹1,50,000 or 90% of book profit, whichever is higher
- On the balance book profit: 60% of book profit
- Your draft uses ₹6,00,000 as the threshold, which does not match the Act.
- On the first ₹3,00,000 of book profit: ₹1,50,000 or 90% of book profit, whichever is higher
- On the balance book profit: 60% of book profit
- Your draft uses ₹6,00,000 as the threshold, which does not match the Act.
27 November 2025
Here’s a cleaner version you can use:
The Party of the First Part shall be the Working Partner of the Firm
and shall be entitled to remuneration computed as under:
i) On the first Rs. 3,00,000 of book profit or in case of loss:
Rs. 1,50,000 or 90% of the book profit, whichever is higher;
ii) On the balance of the book profit: 60% of such book profit.
For this purpose, 'book profit' shall have the meaning assigned
under Section 40(b) of the Income-tax Act, 1961.
The Party of the First Part shall be the Working Partner of the Firm
and shall be entitled to remuneration computed as under:
i) On the first Rs. 3,00,000 of book profit or in case of loss:
Rs. 1,50,000 or 90% of the book profit, whichever is higher;
ii) On the balance of the book profit: 60% of such book profit.
For this purpose, 'book profit' shall have the meaning assigned
under Section 40(b) of the Income-tax Act, 1961.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Supply through E-commerce Operators
- Relief u/s Section 89
- Rent lease agreement
- Merchant Export Accounting
- Is E Way Bill Valid If Transport ID Not Mentioned in PART A But Vehicle details mentioned in PART B
- STCG on ETF gold & silver
- If there is Long term capital gain exists how much total income to be considered
- GST ON DAMAGED GOODS
- REGARDING SECTION 44AE
- Taxation on LTCG for property sold after 24JUL2024
- Sales return eway bill
- Sales amount in Gstr1
- CG after sale of flat
- E Commerce GSTR1 & 3B how to file
- GST Cancellation without jurisdiction
- Legal Opinion on Registrar's Refusal to Investigate a Society for Non-Renewal and Non-Compliance
- GST Refund_RFD-01
- Form10BD was uploaded successfully without any Error but after 24 hours, Form10BE are not available
- Annexure B utility for GST Refund
- Tax amount diff in Gstr1 and 3B in tax compare reports
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
CAclubindia
