- VIKAS ABAHNG
- | Income Tax - Articles
- 16 Dec 2020
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- 4 comments
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
- It must be authorized by Partnership Deed.
- It should be paid to only Working Partners.
- It should not exceed Maximum permissible limit (Refer Next Point)
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:
- It should be authorized by Partnership Deed.
- It should not exceed 12% p.a. simple Interest
Lets take an simple Example
| Income from PGBP | 8,00,000 |
| Remuneration to Partners | 4,00,000 |
| Interest Paid@ 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:
- Interest- 3,50,000-2,80,000= 70,000
- Remuneration- Nil
As the Remuneration paid Rs.4,00,000 is well within the limit as specifies under 40(b) i.e 6,72,000.
Tags: income tax act 1961, Partnership
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Name: VIKAS ABAHNG
Qualification: Student - CA/CS/CMA
Company: N/A
Location: Maharashtra, IN
Member Since: 13 Dec 2020 | Total Posts: 7
I am CA final Student, currently doing my Articleship from Mid sized firm. My CA final Attempt is due in May 2021. I am Open to learning new things every time. I always relate theoretical knowledge with Practical life and it helps me alot in my CA Final Studies as well. View Full Profile
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Your book profit should have been 12,70,000. Therefore, allowable remunertion will be rs.8,52,000.
Recheck your book profit calculation. it must be Rs.1270000.
Calculations are wrong in this write up, please check and correct