Maximum Limit of Interest and Remuneration to Partners under Section 40(b)
Introduction
Firms can claim deduction of Interest & Remuneration paid to Partners while computation of Profits & Gains from Business & Profession. However, there is ceiling limit on maximum amount of Interest & Remuneration paid under Section 40(b).
Remuneration:
Conditions for claiming deduction of Remuneration paid to Partners
Maximum Permissible Limit:
Book Profit | Limit |
On the first Rs. 300000 of Book Profit or in case of Loss | Rs. 1,50,000 or 90% of Book Profits whichever is higher |
On the Balance Book Profit | 60% of Book Profits |
Calculation of Book Profits:
A) Income from PGBP as calculated | XXXX |
B) Add: Interest/Remuneration Paid/Payable (If considered in Point A) | (XXXX) |
C) Less: Interest under Section 40(b) | (XXXX) |
Book Profits | XXXX |
Interest:
Conditions for claiming deduction of Interest paid to Partners:
Lets take an simple Example
Income from PGBP | 8,00,000 |
Remuneration to Partners | 4,00,000 |
Interest [email protected] 15% | 3,50,000 |
Calculation of Book Profit.
PGBP Income | 8,00,000 |
Add: Remuneration
Add: Interest Paid @15% |
4,00,000
3,50,000 |
Less: Interest @12% (Allowable) | 2,80,000 |
Book Profit | 9,70,000 |
Allowable Remuneration
On First 3,00,000 | 1,50,000 or 90% of 3,00,000 i.e 2,70,000 whichever is higher
So 2,70,000 |
On Balance 5,28,000 (9,70,000-3,00,000) @60% | 4,02,000 |
Allowable Remuneration | 6,72,000 |
Disallowance under Section 40(b) in our Example is as follows:
As the Remuneration paid Rs.4,00,000 is well within the limit as specifies under 40(b) i.e 6,72,000.
Calculations are wrong in this write up, please check and correct