SECTION 40(B) REMUNERATION TO PARTNERS

SECTION 40(B) REMUNERATION TO PARTNERS

Section 40(B) of Income Tax Act provides the maximum permissible amount payable to a partner in a partnership firm. The returns of a partner can be in the form of

  • Interest on Capital: Interest payable to partners shall be in accordance with the terms of the partnership deed, however, it shall not exceed 12% per annum.
  • Share of Profit
  • Remuneration: Remuneration payable to partners shall be in accordance with the terms of the partnership deed

ESTIMATION OF INCOME OF PARTNER IN A FIRM

The partner’s share in the total income of firm is exempt in the hands of the partner and hence would not be included in his total income. And due to this exemption, he cannot set-off his share of profits a firm’s losses.

INTEREST PAYABLE TO PARTNERS

There are few conditions which shall be fulfilled in order to be eligible for interest payable under section 40(B):

  • The interest payable by a firm to its partners should be authorized by and in accordance with the partnership deed.
  • The interest payable by a firm to its partners should not be for a period falling prior to the date of such partnership deed authorizing the payment of such interest.
  • Interest payable to partners has a maximum cap of 12% per annum. Firm cannot pay any more than the prescribed limit.

Note: Interest here means simple interest and not compounding interest.

CONDITIONS FOR DEDUCTION UNDER REMUNERATION:

Remuneration to partners includes salary, bonus, commission, etc. Following conditions need to be satisfied for claiming the deduction:

  • Remuneration shall be allowed only to working partners. Working Partner is a partner who actively engages in conducting the business affairs of the firm.
  • Remuneration must be authorized by partnership deed and according to the terms of partnership deed.  Clear directions must be specified in the partnership deed.
  • Remuneration paid to the working partners will be allowed as deduction but it should belong to the period as specified in the partnership deed. It should be related to the period of the partnership deed.
  • It is not allowed if tax is paid on presumptive basis under section 44AD or section 44ADA.
  • Remuneration payable shall be within the maximum permissible limits (as mentioned below). This limit is for total salary to all partners and not for any single partner.

CALCULATION OF BOOK PROFIT FOR PARTNER’S REMUNERATION U/S 40(B)

Book profit means the net profit as shown in the profit and loss account which is computed according to the manner laid down in the chapter IV-D. Book profit is calculated after some adjustments which are mentioned below:

  • Net profit as per profit and loss account
  • Add remuneration/salary/bonus/commission if already debited
  • Add Brought forward business loss, deduction under section 80C to 80U if debited to profit and loss a/c
  • Deduct interest if it is not deducted
  • Make adjustments for expenses as per section 28 to 44D.

AMOUNT OF DEDUCTION:

BOOK PROFIT (Rs.)MAXIMUM DEDUCTIBLE AMOUNT (Rs.)
Loss1,50,000
Profit upto Rs.3,00,00090% of book Profit or Rs.1,50,000; whichever is more
More than Rs.3,00,00060% of the Book profit

TAXABILITY IN THE HANDS OF PARTNERS:

Remuneration is taxable in hands of partners as Business Income. Note that remuneration to partners is distant from the share of profits payable to partner since share of profits is exempt,  but remuneration is taxable in the income of partners.

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