It gets called "partner salary" almost everywhere, but the Income Tax Act doesn't treat it as salary at all — it's business income, reported differently, taxed differently, and it needs to match what the firm has claimed under Section 40(b). LegalDev files ITR-3 for partners with that reconciliation done properly, not assumed.
Calling it a salary makes people expect Form 16, TDS deducted at source, and the standard deduction that regular employees get. None of that applies here. Remuneration paid to a working partner is legally an appropriation of the firm's profit, taxed in the partner's hands as income from business or profession under Section 28(v) — and the firm does not deduct any TDS on it.
This has two practical consequences most partners miss. First, the partner is responsible for paying advance tax on this income directly, since there's no TDS cushion to fall back on. Second, the amount reported as remuneration income needs to match — rupee for rupee — what the firm has actually claimed as a deduction under the Section 40(b) cap, because a mismatch here is one of the more common triggers for a scrutiny notice on both the firm and the partner.
Remuneration (salary, commission, bonus) — Taxed as business income under Section 28(v) in the partner's hands, matched to what the firm deducted within its Section 40(b) limit. Reported in ITR-3, not as salary.
Interest on capital — Interest paid on a partner's capital contribution is taxable in the partner's hands, but only to the extent the firm is allowed to deduct it — capped at 12% per annum under Section 40(b), even if the deed specifies a higher rate.
Share of profit — Fully exempt in the partner's hands under Section 10(2A), since the firm has already paid 30% flat tax on its total income before profits are distributed. This exemption avoids the same income being taxed twice.
Partner remuneration is the salary, commission or bonus a working partner receives from the partnership firm for actively contributing to its business, as authorised by the partnership deed. It is separate from a partner's share of profit and from any interest received on capital contributed to the firm.
No. Even though it is commonly called "partner salary", remuneration received by a partner is taxed as business income under Section 28(v) of the Income Tax Act, not as salary income under Section 17. This distinction matters because salary-specific deductions and the standard deduction do not apply to it.
A partner reporting remuneration, interest on capital, or a share of profit from a partnership firm files ITR-3, which is meant for individuals and HUFs with income from business or profession, including income received as a partner.
No. Payments made by a firm to its partners as remuneration or interest on capital are not subject to TDS under the Income Tax Act, since these are treated as an appropriation of the firm's profit rather than a payment to a third party. The partner instead reports and pays tax on this income directly through their own return, including any applicable advance tax.
No. A partner's share of the firm's profit is exempt in the partner's hands under Section 10(2A), because the firm has already paid tax on that profit at the flat rate applicable to firms. Only remuneration and interest received by the partner are taxable in the partner's individual return.
They should not. The remuneration a partner reports as income should match what the firm has actually deducted within the Section 40(b) limit. Any remuneration paid beyond that cap is disallowed as a deduction for the firm but may still be taxable in the partner's hands if actually received, so the two computations need to be reconciled together.
Share your partnership deed and remuneration details — we'll classify the income correctly, reconcile it against the firm's claim, and file ITR-3 on time.