Remuneration Clause explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A remuneration clause must either specify the amount payable to each individual working partner or lay down the manner of quantifying it. Where neither the amount nor the limit is stated and it is left to be decided later, the remuneration is not deductible.
Circular 739 and why the remuneration clause exists
The handbook opens its drafting annexure with the point that decides whether a firm's largest deduction survives assessment. Under CBDT Circular No. 739 dated 25 March 1996, for assessment years subsequent to 1996-97, no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.
Accordingly, a remuneration clause to working partners needs to be incorporated and should be made subject to the provisions of section 40(b)(v) — and the handbook adds the observation that carries the warning: "it has been seen that in the absence of this clause the remuneration payable to the working partners have not been allowed as deduction."
The circular offers an either / or. The deed may:
(a) specify the amount payable to each individual working partner — a fixed figure, which then has to be revisited every time it becomes inadequate; or
(b) lay down the manner of quantifying the remuneration — a formula, which self-adjusts with book profit.
The handbook's specimen uses route (b), and it is the one to prefer: a fixed-amount remuneration clause becomes stale the year the firm grows, and amending a deed to raise it mid-year raises the very "period pre-dating the deed" objection that section 40(b) also carries.
What defeats both routes is the third possibility the handbook spells out: "In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of the firm's income." A clause saying remuneration will be "as mutually decided from time to time" is exactly that case.
The specimen remuneration clause
The handbook gives two versions. The first is the loose one — the partners "shall be entitled to any remuneration … which may be decided mutually by the partners from time to time and that the maximum remuneration payable shall be paid in accordance with Section 40(b)". The second, which it offers as the alternative drafting, is the formula:
"That all partners shall be working partners and will be entitled for remuneration as hereunder:
In case of Loss: Rs 1,50,000
In case of Book Profit:
On book profit up to Rs 3,00,000 — Rs 1,50,000 or 90% of such book profit, whichever is more
On balance book profit exceeding Rs 3,00,000 — 60% of book profit exceeding Rs 3,00,000
The gross allowable remuneration as calculated above shall be apportioned to the parties in the following ratio …"
The figures in that specimen remuneration clause are the statutory limits as they stood before the amendment made by the Finance (No. 2) Act, 2024. The handbook's edition is September 2024, with a February 2025 foreword, and it prints the older slabs.
Read the current section 40(b)(v) before adopting the clause. No revised figures are stated here, because the handbook does not carry them and they should be taken from the section itself.
Two points of drafting technique in the specimen survive the change and are worth keeping regardless. First, it declares that all partners shall be working partners — which is the section 40(b) condition. Second, it provides an amount "in case of loss", which matters because the statutory formula has a separate limb for a loss year. Third, it apportions the gross allowable remuneration between the partners in a stated ratio, which is what "the amount payable to each individual working partner" in Circular 739 requires.
The most robust drafting is to express the clause by reference — the maximum permissible under section 40(b)(v) as in force for the relevant previous year, apportioned in a stated ratio — so that the deed does not go stale with the section.
The interest clause, drafted the way the remuneration clause should be
The handbook's interest clause uses exactly that by-reference technique, and it appears in five of its specimens in identical terms:
"That interest at the rate of 12% per annum or as may be prescribed under section 40(b)(iv) of the Income-tax Act, 1961 or any other applicable provisions as may be in force in the income-tax assessment of the partnership firm for the relevant accounting period, or at a lower rate as may be agreed … shall be paid to the partners or credited to the partners on the amount standing to the credit of the account of the partners."
Three things make it good drafting: it names a rate, it ties that rate to the statutory ceiling as in force for the relevant period, and it permits a lower rate by agreement. A clause drafted this way does not need amending when the section changes.
Stamp duty, and who can be a partner
On execution the handbook is brief but specific: "The Agreement has to be executed and the necessary Stamp Duty has to paid in accordance with the Capital contribution by the partners in accordance with prevailing Stamp Duty as per the State Stamp Duty Act." Stamp duty on a partnership deed is therefore capital-linked and State-specific — its specimens are headed "To be executed on Rs ……… Non Judicial Stamp Paper" with the amount left blank for that reason.
On capacity, it records that the Karta can become a partner on behalf of an HUF, and that a private limited company and a limited liability partnership firm can also become partners in a partnership firm by appointing their representatives.
The other clauses that sit alongside the remuneration clause
The handbook's principal specimen runs 24 clauses. Alongside the remuneration clause and the interest clause, the ones worth lifting are:
| Clause | What it provides |
|---|---|
| Name / business / place | Each with "or such other … as may be mutually agreed in future with the consent of the partners", so a change does not need a new deed |
| Duration | At will — which also determines whether a partner can dissolve by notice |
| Withdrawal of profits | A monthly cap per partner, adjustable against the partner's account at annual accounting |
| Employment of staff | No apprentice, clerk or servant employed or dismissed without the consent of all partners |
| Borrowing | Written consent of all partners for credit facilities from any financial institution |
| Accounts | Accounting year from 1 April; balance sheet audited as required by law and signed by all partners |
| Retirement | One calendar month's notice; remaining partners pay the purchase money of his share |
| Continuation after death | The firm shall not be dissolved; deemed a change in constitution and not succession |
| Ownership of premises | Where a partner's own leased premises are used, he retains sole ownership and control on dissolution or reconstitution |
| Individual capacity | Each partner enters in individual capacity — relevant where an HUF or company is involved |
The Med-Arb clause
The handbook's dispute clause is its most modern feature, and it appears in three specimens. It provides for mediation first, with a named mediator, in accordance with the Mediation Act, 2023; and if the dispute is not resolved within a stated number of days or months, referral to arbitration under the Arbitration and Conciliation Act, 1996. The mediator may, with the written consent of all parties, also act as the arbitrator; the award is final and binding; both proceedings are confidential; and costs are borne equally unless otherwise agreed or awarded.
Its separate mediation-only clause notes that the specific location for mediation — city and/or country — is typically specified in the clause, which is a detail easily left blank.
Practical checklist for the remuneration clause
- Draft the remuneration clause by manner of quantification, not a fixed sum.
- Express it by reference to section 40(b)(v) as in force for the relevant year.
- Declare which partners are working partners.
- Provide expressly for a loss year.
- Apportion the gross allowable remuneration between the partners in a stated ratio.
- Never write "as mutually decided from time to time" and stop there.
- Use the same by-reference technique for interest under section 40(b)(iv).
- Compute stamp duty on capital contribution under the State's Act.
Common mistakes in a remuneration clause
- Leaving remuneration to be fixed at the year end.
- Copying the printed slabs without checking the current section.
- Omitting the loss-year limb from the formula.
- Failing to apportion between individual working partners.
- Amending the deed mid-year to raise a fixed amount.
- Leaving the stamp paper value unmatched to capital contribution.