Section 40b: Interest & Salary paid to Partners by Partnership Firm
As per Section 40(b) of the Income Tax Act 1961, Interest & Salary paid to the Partners by the Partnership Firm are allowed to be deducted as an expense only in case all the specified conditions are being adhered to.
“working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.
How much remuneration or interest can be paid to a partner?
a) Interest payable to partners:
- It shall be in accordance with the terms of the partnership deed, however, it shall not exceed 12% per annum.
b) Remuneration payable to partners:
- Remuneration shall be in accordance with the terms of the partnership deed, however, it shall not exceed the following limit:
| S. No. | Particulars | Salary Allowed |
|---|---|---|
| (a) | On first Rs. 3 Lakhs of book profit or in case of loss | Rs. 1,50,000 or 90% of book profit, whichever is more |
| (b) | On the balance of the book profit | 60% of book profit |
Deductibility of salary or interest paid to partner?
Following sum paid by a partnership firm to its partners shall not be allowed as deduction to such firm:
1) Salary, bonus, commission or remuneration paid to non-working partners.
2) Remuneration or interest paid to the partners which are not in accordance with the terms of the partnership deed.
3) If remuneration or interest paid to the partners are in accordance with the terms of the partnership deed but they relate to any period prior to the date of the partnership deed.
4) Interest paid to partners is in accordance with the terms of the partnership deed but it exceeds 12% per annum;
5) Remuneration paid to partners is in accordance with the terms of the partnership deed but it exceeds the following permissible limit:
a) On first Rs. 3 Lakhs of book profit or in case of loss – Rs. 1,50,000 or 90% of book profit, whichever is more;
b) On the balance of the book profit – 60% of book profit
Point to be Noted:
(1) ‘Book profit’ means the net profit computed under the head ‘Business or Profession’ as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
So we can say Book profit is calculated in the following ways:
- Net profit as per profit and loss account
- Add remuneration if already debited
- Deduct interest if it is not deducted
- Make adjustments for expenses as per section 28 to 44D
(2) “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.
(3)Partner in a Representative Capacity:
Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as “partner in a representative capacity” and “person so represented”, respectively),—
(i) interest paid by the firm to such individual in his personal capacity, will not be subject to the conditions and ceiling as prescribed for disallowance;
(ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause.