pri Partner’s Remuneration & Interest under Income Tax Act, 1961 Partner’s Remuneration & Interest under Income Tax Act, 1961

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

  1. It must be authorized by Partnership Deed.
  2. It should be paid to only Working Partners.
  3. 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:

  1. It should be authorized by Partnership Deed.
  2. 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:

  1. Interest- 3,50,000-2,80,000= 70,000
  2. 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.

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