The Finance Bill 2024 proposes a significant amendment to Section 40 of the Income Tax Act, which governs the deduction limits for remuneration paid to working partners in a partnership firm. Currently, the maximum deductible amount is restricted based on book-profit thresholds. The Bill aims to increase this limit starting April 1, 2025. Under the new provisions, the deductible remuneration for the first Rs. 6,00,000 of book-profit will be raised to Rs. 3,00,000 or 90% of the book-profit, whichever is higher, compared to the previous limit of Rs. 1,50,000. For any book-profit exceeding this amount, the deduction remains at 60%. This amendment will apply from the assessment year 2025-2026 and beyond, allowing firms to claim higher deductions for remuneration paid to their working partners, thereby potentially reducing their taxable income.
Budget 2024: Increase in limit of remuneration to working partners of a firm allowed as deduction
Section 40 of the Act provides for amounts that shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (v) of clause (b) of the said section provides for disallowance of any payment of remuneration to any partner who is working partner which is authorized by and is in accordance with the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all partners during the previous year exceeds the aggregate amount computed as hereunder:
| (a) | on the first Rs. 3,00,000 of the book- profit or in case of a loss | Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more; |
| (b) | on the balance of the book-profit | at the rate of 60 per cent : |
2. This limit was put in place on the statute w.e.f AY 2010-11. It is now proposed to amend the limit of remuneration to working partners in a partnership firm, which is allowed as deduction. It is proposed that on the first Rs 6,00,000 of the book-profit or in case of a loss, the limit of remuneration is increased to Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more as follows:
| (c) | on the first Rs. 6,00,000 of the book- profit or in case of a loss | Rs. 3,00,000 or at the rate of 90 per cent of the book- profit, whichever is more; |
| (d) | on the balance of the book-profit | at the rate of 60 per cent : |
3. The amendments to sub-clause (v) of clause (b) of section 40 of the Act will take effect from the 1st day of April, 2025 and will, accordingly, apply in relation to assessment year 2025-2026 and subsequent years.
[Clause 14]
Extract of Clause 14 of Finance Bill 2024
Clause 14 of the Bill seeks to amend section 40 of the Income-tax Act relating to amounts not deductible.
Sub-clause (v) of clause (b) of the said section provides for disallowance of remuneration paid to any working partner above certain threshold limits.
It is proposed to amend item (a) of sub-clause (v) of clause (b) of the said section 40 so as to increase the limit of remuneration to working partners, which is allowable as deduction such that on the first Rs 6,00,000 of the book-profit or in case of a loss, the limit of remuneration is increased to Rs 3,00,000 or at the rate of 90 per cent. of the book-profit, whichever is more.
This amendment will take effect from 1st April, 2025 and will, accordingly, apply in relation to the assessment year 2025-2026 and subsequent years.
