Introduction

In a partnership firm, partners may receive various types of compensation, including a share of profits, interest on capital, and salary or remuneration for actively participating in business operations. While the firm’s profits are taxed at the entity level, the salary paid to a partner is treated differently under Indian tax laws. The tax liability on a partner’s salary is governed by the Income Tax Act, 1961, particularly under Section 28(v). Understanding how such salary is taxed helps ensure proper compliance, avoids double taxation, and enables accurate financial planning for both the firm and the individual partner.

Nature of Salary to Partners

Salary paid to a partner is considered as remuneration for services rendered in the conduct of the firm’s business. It may include monthly salary, bonus, commission, or any other payment agreed upon in the partnership deed. It is distinct from a share in profit, which is exempt in the hands of the partner, and it must be authorized in the deed to be allowed as a deductible expense to the firm under Section 40(b) of the Income Tax Act.

Taxability in the Hands of the Partner

Under Section 28(v), any salary, bonus, commission, or remuneration received by a partner from the firm is taxable as “Profits and Gains of Business or Profession” and not as “Income from Salary.” Therefore, the partner is treated as a self-employed individual, and the amount received is taxed under business income, allowing them to claim relevant business-related expenses such as interest on loans or expenses incurred in earning that income.

Taxation in the Hands of the Firm

From the firm’s perspective, salary to a partner is allowed as a deductible business expense under Section 40(b), subject to certain limits:

• On the first ₹3,00,000 of book profit or in case of loss: Maximum of ₹1,50,000 or 90% of book profit, whichever is higher
  
• On the balance book profit: 60% of the remaining book profit
  

Only remuneration that complies with these limits and is expressly mentioned in the partnership deed is deductible. Excess or undocumented payments are disallowed and taxed in the hands of the firm.

Tax Deduction at Source (TDS) Applicability

Since partner’s salary is not taxed under “Income from Salary,” the firm is not required to deduct TDS on the amount paid. However, the partner is responsible for paying advance tax on the income received, in accordance with the advance tax schedule, if their total tax liability exceeds ₹10,000 in a financial year.

GST and Other Indirect Tax Considerations

Remuneration paid to partners for services to the firm is not subject to GST, as it is considered part of the firm’s internal arrangement and not a supply of service under GST law. However, if a partner provides services to the firm in an independent capacity (unrelated to the partnership role), such income may attract GST based on threshold limits and nature of service.

Conclusion

The salary or remuneration received by a partner from a partnership firm is treated as business income and taxed under the head “Profits and Gains of Business or Profession.” It is not subject to TDS but is liable for advance tax. While the firm can claim the payment as a deductible expense within prescribed limits, the partner must report it as taxable income and may claim deductions for related expenses. Accurate recording in the partnership deed, adherence to tax rules, and proper accounting are essential to ensure smooth and compliant taxation for both the firm and the partner.

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