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

1. Maithili_n says:

Your book profit should have been 12,70,000. Therefore, allowable remunertion will be rs.8,52,000.

2. CA Ankit Singhal says:

Recheck your book profit calculation. it must be Rs.1270000.

3. SREEDHARAN SAMPATH says:

Calculations are wrong in this write up, please check and correct

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