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Remuneration and Interest to Partners – Sec 40(b)

U.C Date : 25 Feb 2016

Remuneration to Partners

Remuneration includes salary, bonus, commission. Remuneration in partnership firm is allowed as a deduction if following conditions are satisfied

  1. Remuneration is allowed only to working partners.
  2. Remuneration must be authorised by partnership deed and according to the terms of partnership deed. Also the quantum of deduction or manner of its computation is to be mentioned in the deed. If there is not any such provision in deed then no deduction is allowed.
  3. It should be related to the period of the partnership deed. If there is another partnership deed for another period then such deed’s provisions will be considered for that period.
  4. Remuneration should be within the permissible limits as mentioned below
Book Profit Amount deductible as remuneration under section 40(b)
If book profit is negative Rs. 1,50,000
If book profit is positive-

On first Rs. 3 lakh of book profit

On the balance of book profit

 

Rs. 1,50,000 or 90% of book profit whichever is more

60% of book profit

Calculation of book profit :-

Profit as per Profit & Loss a/c –                                                                                      xxx
Add- Remuneration to partners if debited to Profit and loss a/c
Add- Brought forward business loss, deduction u/s 80C
to 80U if debited to profit and loss a/c
Less – Income under house property, capital gain, other
sources if credited to profit and loss a/c
Book Profits                                                                                                                    xxx

Remuneration which is allowed as expenses in the hands of partnership firm will be taxable in the hands of receiving partner as “Income from Business or Profession”.
If such remuneration is not allowed as expense in hands of partnership firm then it will not be taxable in the hands of partners.

Interest on Capital

For deduction of interest following conditions must be satisfied –

  • Payment of Interest can be made to working or non working partner.
  • Payment of Interest must be authorized by the partnership deed and It should be related to the period of the partnership deed. If there is another partnership deed for another period then such deed’s provisions will be considered for that period.
  • Rate of interest should not exceed 12%. If the amount of interest exceeds 12% of the capital then such excess amount is disallowed.
  • If a person is a partner in a firm on behalf or for the benefit of any other person then any interest paid to such person otherwise as a representative capacity shall not be taken into account for the purpose of this section. Interest paid to such person as a representative capacity and to person so represented is taken into account.
  • If interest is paid to a partner on behalf or for the benefit of any other person then such interest is not disallowed under this section.
  • If the firm receives interest on drawings from partner then it is taxable in the hands of firm.

The amounts which are deductible as remuneration or interest in the hands of firm under section 40(b) are taxable in the hands of partner which are receiving such amounts under the head Profit from business/profession. However if the amount is disallowed in hands of firm, then such amounts are exempt in the hands of partner.

No TDS is to be deducted by partnership firm on salary or interest paid or credited to partner. This also applies where such salary or remuneration is taxable in the hands of partner.  For more information you can read –  TDS on Salary to Partners

A partnership firm is assessed as a firm for income tax purpose when some conditions are fulfilled – Section 184

15 comments

  1. Sir Please clarify my 2 doubts

    1) Book Profit for calculating partners remuneration i.e. interest on capital should be deducted to arrive at BP Example profit before interest is 2 lakhs interest on capital is 1.3 lakh what will be the BP for calculating remuneration is 2 lakh or 70000.

    2) in partnership deed remuneration to partners has been mentioned as per applicable under the IT act is it correct or the amount to be mentioned.

    • Prateek Agarwal

      1) Rs. 70,000 lakhs will be considered as book profits.
      2) In partnership deed any one of a) fixed remuneration 2) manner of computation may be mentioned to satisfy the condition. So remuneration is allowed if it is mentioned in partnership deed that remuneration will be calculated as per maximum allowed under IT ACt.

  2. Firm’s book profit is 113000 and remuneration to partners is 240000.So for computing partner’s remuneration I take maximum of 150000 or 113000*90%=101700 i.e,150000.Now my book profit itself is only 113000 so what will be the allowable remuneartion?Is it 150000 or limited to 113000?Can the difference between 150000&113000 be claimed as loss?

  3. Is remuneration & partners capital interest secured in partnership firm u/s 44b for asst yr 2017_18

    • Prateek Agarwal

      I think there is typo error in your question. It is u/s 40b.
      Yes, remuneration and interest is also allowed for A.y 2017-18. The only change made by finance act 2016 is that persons filing tax under presumptive basis under section 44AD are now not allowed to take deduction under section 40b.

  4. Kalpesh Lakhani

    Hello Sir,
    There is a Partnership Firm Called “A” doing construction business and following Project Completeion Method for recognisation of Revenue.Generally Project is Complete with in 2-3 yrs periods, So Can Firm give the remuneration to their partners during This Periods of WIP??? is it allowed and As per Sec 40(b)???

    • Rohit Pithisaria

      If all the other conditions are met, then the firm can give remuneration to their partners. Revenue recognisation method have no effect on Sec 40(b).

  5. SIR, i have a doubt if FIRM earns only RS.50000 profit of first year then how it is possible to apply the provisions of remuneration(i.e 1,50000 or 90% of profit) or otherwise we can share the entire profit to partners according to their profit sharing ratio if it is done there is any violation by doing like that

    • Prateek Agarwal

      When profits are less than rs. 1,50,000 then you can give the whole amount as salary to partners. While giving remuneration it is not necessary that it is in profit sharing ratio.

    • THANKU SIR

  6. Jignesh motani

    In partner ship shop before 2016 salary and capital interest are deduct from profit then after tax count and now a new taxation 2016 it not deduct from profit direct tax pay on without deduct salary and interest . so give guideline about that news.

    • Prateek Agarwal

      There is no such change in budget 2016 and not any notification. Please share with us any link you found.

  7. CA KALI KANT JHA

    Before 1996 firm had not liable for Income Tax and profit was taxable in the hands of partners. When Dr. Manmohan Singh was finance minister, he brought the firm under taxability. At that time Basic Exemption for Individual was Rs. 24,000 and remuneration to partners were 90% of Ist Rs. 1,00,000 and thereafter 60% or 40% etc and in case of loss Rs. 50,000 was allowable as remuneration. The Basic Exemption of Income for Individual was positively co-related with remuneration payable/paid to partners of the firm. At present Basic Exemption of Income for Individual is Rs. 2,50,000 and remuneration to partners were 90% of Ist Rs. 3,00,000 . And Basic Exemption for Individual has gone up more that 10 times but the remuneration payable/paid to partners of the firm has gone up 3 times only. THIS IS BECAUSE OF LAC OF KNOWLEDGE OF FINANCE MINISTRY AND AT PRESENT THEY ARE DOING CUT AND PASTE AT ONE PLACE AND ITS CONSEQUENTIAL EFFECT AT OTHER PLACE IGNORED.

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