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

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 [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:

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

Kindly Refer to Privacy Policy & Complete Terms of Use and Disclaimer.

Author Bio

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