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.
Author Bio
is it mandatory to deduct interest at 12 percent while reverse calculation , for instance if I have paid only 8% interest to partners than which amount should be taken for the calculation , 12% amount or the original interest amount that has been paid to partners
because if we less 12% amount than my book profit is arriving very low
Sir,
If we have transferred partners salary to their bank account….So do we required to show this salary in partner’s capital account as well as liability ?
in the allowable remuneration ” On Balance 5,28,000 (9,70,000-3,00,000) @60% ” how 5,28,000 arrived ?
i’m confused
DEAR SIR
PLEASE EXPLAIN BOOK PROFIT =970000 ?
WHEN I HAVE CALCULATE INCOME TAX WEBSITE THAN SHOW BOOK PROFIT =1270000
Helpful in learning widely regarding financial liabilities and statutory obligations of a LLP.But Structure of the Board of Directors is not clear.And Whether salary/wages to Manager/Supervisor/Worker/Technician are allowable or not is not clearly stated.
I have car expenses which are of personal in nature which are hit to p and L now I am disallowing them, then should I increase my profit which will ultimately increase remuneration?
CAN A PARTNER GET REMMUNERATION EVEN IS THEIR IS A LOSS
Yes, since it says on 1st ₹300,000 of Book Profits or in case there’s loss, ₹150,000 or 90% of Book Profits, whichever is HIGHER. So Higher in case of loss would be ₹1,50,000/-
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