ITR-5 AY 2026-27: Partner Remuneration & Interest

For a partnership firm filing ITR-5 for AY 2026-27, partner remuneration and interest must satisfy Section 40(b) of the Income-tax Act, 1961. The firm can claim remuneration paid to working partners only within the prescribed book profit limit. Interest paid to partners is deductible only up to 12% simple interest per annum, provided the partnership deed authorises the payment.

The Finance Act, 2024 increased the remuneration ceiling applicable from FY 2024-25 onwards, making the correct calculation especially important for AY 2026-27, relating to FY 2025-26. Any excess amount must be added back as disallowable remuneration and interest of the partnership in ITR-5.

Section 40(b) limits for partner remuneration and interest in AY 2026-27

Section 40(b) restricts the deduction available to a partnership firm for certain payments made to its partners. The main restrictions are:

• Remuneration must be paid only to working partners.
• The partnership deed must authorise the remuneration.
• The remuneration must remain within the prescribed limit based on book profit.
• Interest to partners must be authorised by the partnership deed.
• Interest is deductible only up to 12% simple interest per annum.
• Any excess amount is disallowed while computing the firm’s taxable income.

The statutory provisions for these restrictions are contained in Section 40 of the Income-tax Act.

Section 40(b) remuneration limit for partners AY 2026-27

For FY 2025-26, the deductible remuneration limit is calculated as follows:

Book profit or loss	Maximum deductible remuneration
On the first ₹6,00,000 of book profit, or in case of loss	₹3,00,000 or 90% of book profit, whichever is higher
On the balance book profit	60% of the balance

The increased first slab of ₹6,00,000 applies for AY 2026-27. Earlier, the first slab was ₹3,00,000.

Example of the remuneration limit

Assume that the firm’s book profit is ₹10,00,000.

• 90% of the first ₹6,00,000 = ₹5,40,000
• Balance book profit = ₹4,00,000
• 60% of ₹4,00,000 = ₹2,40,000
• Maximum deductible remuneration = ₹7,80,000

If the firm pays ₹9,00,000 as remuneration, the excess amount is:

₹9,00,000 minus ₹7,80,000 = ₹1,20,000

The firm must add back ₹1,20,000 as disallowable partner remuneration in ITR-5.

What is book profit for partner remuneration calculation?

For Section 40(b), book profit generally means the net profit calculated under the business or profession provisions before allowing partner remuneration, subject to the statutory adjustments.

In practical terms, begin with the profit or loss shown in the firm’s profit and loss account and make the required tax adjustments. If partner remuneration has already been debited to the profit and loss account, add it back while determining book profit.

A simplified formula is:

Book profit = Net profit as per profit and loss account + partner remuneration debited to the profit and loss account, after other required tax adjustments

Interest paid to partners is not automatically added back merely for calculating book profit. However, any interest that is not allowable under Section 40(b) must be added back separately while computing taxable business income.

Book profit calculation example

Consider the following figures for FY 2025-26:

• Net profit after charging partner interest and remuneration: ₹8,00,000
• Remuneration debited to profit and loss account: ₹5,00,000
• Tax depreciation adjustment increasing profit: ₹1,00,000
• Interest paid to partners: ₹1,20,000

The simplified book profit calculation is:

• Net profit as per accounts: ₹8,00,000
• Add: Partner remuneration: ₹5,00,000
• Add: Other tax adjustment: ₹1,00,000
• Book profit: ₹14,00,000

The remuneration limit would be:

• 90% of first ₹6,00,000 = ₹5,40,000
• Balance book profit = ₹8,00,000
• 60% of ₹8,00,000 = ₹4,80,000
• Maximum remuneration deduction = ₹10,20,000

Since the actual remuneration is ₹5,00,000, it falls within the Section 40(b) limit.

The exact book profit calculation may require adjustments for depreciation, inadmissible expenses, exempt income and other items under the Income-tax Act. The firm should use the tax-adjusted profit rather than relying only on the accounting profit.

Partner interest disallowance under Section 40(b) AY 2026-27

A partnership firm may claim interest paid or payable to partners only up to 12% simple interest per annum. The partnership deed should clearly specify:

• The partner entitled to interest
• The applicable rate of interest
• The basis of calculation, such as capital account or loan account
• The date from which interest applies
• Whether the rate can change in future years

Interest calculation example

Suppose a firm pays interest on a partner’s capital as follows:

• Capital balance: ₹10,00,000
• Actual interest rate: 15%
• Interest paid: ₹1,50,000
• Maximum allowable interest at 12%: ₹1,20,000

The disallowance is:

₹1,50,000 minus ₹1,20,000 = ₹30,000

The firm can claim ₹1,20,000 as deduction and must add back ₹30,000 in the business income computation.

When can the entire partner interest be disallowed?

The entire interest payment may become disallowable where:

• The partnership deed does not authorise interest.
• The deed authorises interest but does not specify a valid rate or method.
• Interest is paid at more than 12% and the excess is not separately disallowed.
• The payment relates to a period before the deed authorised it.
• The payment is made to a person who is not a partner during the relevant period.
• The firm claims interest that was not actually debited or payable in accordance with its books and deed.

The 12% ceiling applies to interest paid to partners. It does not mean that every interest payment is automatically deductible. The deed and the accounting records must support the claim.

Working partner remuneration deduction limit AY 2026-27

Remuneration is deductible only when paid to a working partner. A working partner is an individual who actively participates in conducting the affairs of the business or profession of the firm.

Remuneration paid to a sleeping or non-working partner is not deductible under Section 40(b), even if the partnership deed contains a payment clause.

The deed should also identify the method of determining remuneration. It can specify:

• A fixed amount
• A percentage of book profit
• A formula based on the Section 40(b) limit
• A variable amount determined by the partners under an authorised clause

A vague clause such as “partners may be paid remuneration as mutually decided” can create a compliance risk. The authorisation should be sufficiently clear and applicable for the relevant financial year.

How to report disallowable partner remuneration in ITR-5

The firm should not reduce its taxable income by the entire amount debited to the profit and loss account if part of the remuneration or interest is disallowed.

Use the following process for disallowable remuneration and interest of partnership firm in ITR-5 AY 2026-27:

1. Record the total partner remuneration and interest in the books.
2. Calculate the firm’s book profit under Section 40(b).
3. Calculate the maximum allowable remuneration.
4. Compare actual remuneration with the allowable limit.
5. Compare actual partner interest with the 12% ceiling and the partnership deed.
6. Identify the disallowable amount.
7. Report the disallowance in Schedule BP, Computation of income from business or profession.
8. Ensure that the final taxable profit includes the required add-back.

ITR-5 reporting illustration

Assume the firm has reported the following in its accounts:

• Partner remuneration: ₹12,00,000
• Partner interest: ₹2,00,000
• Allowable remuneration under Section 40(b): ₹9,00,000
• Allowable interest under Section 40(b): ₹1,50,000

The disallowable amounts are:

• Remuneration disallowance: ₹3,00,000
• Interest disallowance: ₹50,000
• Total Section 40(b) disallowance: ₹3,50,000

The firm should add ₹3,50,000 to the profit while completing Schedule BP. It should not claim the disallowed amount as a business deduction.

The exact field names and sequence may vary between the notified ITR-5 form and the electronic filing utility. The firm should select the Schedule BP row relating to expenditure disallowable under Section 40(b) and retain a working paper supporting the calculation. The Income Tax Department’s ITR filing resources provide the applicable forms and filing guidance.

ITR-5 Schedule BP partner remuneration and interest disallowance

Schedule BP generally reconciles the profit or loss reported in the profit and loss account with the income taxable under the head “Profits and gains of business or profession”.

The reporting flow is:

Particular	Treatment in Schedule BP
Net profit as per profit and loss account	Start with the accounting result
Remuneration debited to profit and loss account	Add back for book profit calculation and allow only within Section 40(b) limit
Excess remuneration	Add back as disallowable expenditure
Partner interest within 12% and deed terms	Claim as allowable business expenditure
Excess or unauthorised partner interest	Add back as disallowable expenditure
Final taxable business profit	Report after all tax adjustments

The firm should avoid adding back the entire remuneration and interest if a portion is allowable. The correct approach is to add back the amount debited in the accounts and then claim the eligible amount through the tax computation, or use the specific adjustment fields available in the utility.

The treatment should remain consistent with the profit and loss account, books of account and partner ledger accounts.

New TDS requirement for partner payments from FY 2025-26

Section 194T introduces tax deduction at source on certain payments made by a firm to its partners. It applies to payments such as:

• Salary
• Remuneration
• Commission
• Bonus
• Interest

The provision applies from 1 April 2025, making it relevant for payments during FY 2025-26 and AY 2026-27. TDS is generally required at 10% when the aggregate payments or credit exceed ₹20,000 in the financial year, subject to the conditions of the section.

The firm should also review:

• Whether the partner has provided a valid PAN
• Whether the amount was credited to the partner’s account, including a capital or current account
• Whether TDS was deducted at the earlier of credit or payment, as applicable
• Whether the TDS statement and certificates were filed correctly

Section 194T is separate from the Section 40(b) deduction limit. Deducting TDS does not make excessive remuneration or interest deductible. The firm must comply with both provisions independently. The statutory text and related provisions can be checked on the Income Tax Department tax law portal.

Common questions about Section 40(b) disallowance in ITR-5

Can remuneration be paid to all partners?

No. Deductible remuneration under Section 40(b) is available only for working partners. Remuneration paid to a non-working partner is disallowable.

Is interest at exactly 12% fully deductible?

It can be deductible if the partnership deed authorises the payment and other conditions are satisfied. The interest must be calculated as simple interest and should not exceed 12% per annum.

What happens if the firm has a loss?

Where the firm has a loss, the maximum deductible remuneration is ₹3,00,000 or the amount of loss, whichever is higher, subject to the statutory wording and computation of book profit. A tax professional should verify the calculation where book profit is negative or becomes negative after adjustments.

Can the firm claim remuneration if the deed is amended later?

A later amendment generally cannot retrospectively authorise remuneration for a period when no valid authorisation existed. The deed should authorise the payment for the relevant period.

Is partner remuneration taxable for the partner?

Remuneration, interest, bonus and commission received by a partner from the firm are generally taxable in the partner’s hands as business or professional income under Section 28(v), subject to the applicable provisions. The firm’s disallowance does not automatically make the payment tax-free for the partner.

Does a firm need to report disallowance if it did not debit the amount in its books?

If the firm did not debit or claim the payment as an expense, there may be no accounting deduction to add back. However, the firm cannot claim a separate deduction merely because the payment was made. The books, partner accounts and tax return should present the same facts consistently.

Practical checklist before filing ITR-5 for AY 2026-27

Before submitting the return, verify the following:

• The partnership deed is available and effective for FY 2025-26.
• The deed authorises partner remuneration.
• Only working partners receive deductible remuneration.
• The deed authorises partner interest.
• Interest does not exceed 12% simple interest.
• Book profit has been calculated after making tax adjustments.
• The revised ₹6,00,000 first slab has been used.
• Excess remuneration has been added back.
• Excess or unauthorised interest has been added back.
• Schedule BP agrees with the profit and loss account.
• Partner accounts reconcile with the books.
• Section 194T TDS compliance has been reviewed.
• The partner’s share of profit is not separately claimed as a business expense by the firm.

Summary

For AY 2026-27, a partnership firm must calculate partner remuneration using the revised Section 40(b) limit: ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, whichever is higher, and 60% of the remaining book profit. Interest paid to partners is generally restricted to 12% simple interest and must be authorised by the partnership deed.

The firm should calculate the partnership firm book profit, identify the allowable amount, and report the balance as Section 40(b) disallowance in the partnership firm income tax return. Correctly reporting disallowable remuneration and interest of a partnership in ITR-5 in AY 26-27 will help align the firm’s books, Schedule BP, partner accounts and TDS records.