Under the Income Tax Act, Salary, Bonus, Interest, or Remuneration paid to a working partner is an allowable expense, which is subject to certain limits. If it is paid to a non-working partner, the same shall be disallowed. Under this post, we will discuss the provision contained under Section 40b For Remuneration to Partners.
Section 40b of the Income tax Act
Interest on the capital of working partner and Remuneration in the form of salary, bonus, or commission paid to the partners is allowed as a deduction to a partnership firm under section 40b of the Income Tax Act, 1961.
However, there are certain limits up to which such deduction is available to allow as allowable expenditure under the Act. Amount paid above the limit is not allowed as a deduction to the partnership firm. Here we are going to discuss the limit of remuneration paid to partners as per section 40b.
Remuneration to partners as per section 40b
The Remunerations paid to partners include salary, bonus, and commission. There are some important points which needs to be considered while applying provisions of this section, the same is given as under-
| Such remuneration should be paid only to the working partners. |
| It should be authorized by the partnership deed. |
| It should not pertain to a period prior to the Partnership Deed. |
| It should not exceed the permissible limit as given above. |
| A 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. |
The maximum limit of remuneration for allowable deduction is given as under-
| Book Profit | The maximum amount of deduction allowable as payment of remuneration to partners |
|---|---|
| On first Rs. 3 Lakh of book profits, or In case of loss | Rs. 1,50,000 or 90% of book profit, whichever is more |
| On the balance of book profit | 60% of the book profit |
Also read- Last Date of Income-tax Return and Tax Audit
For calculation purposes, it can be understood with an example-
Example-
👉 Book Profit of a partnership firm is Rs. 9 Lakh
👉 Maximum remuneration allowable as per section 40b of the Income Tax Act = 3 Lakh * 90% + 6 Lakh * 60% = 6.3 Lakh
Note- Remuneration which is allowed as expenses in the hands of partnership firm will be taxable in the hands of receiving partner as “Income from business and profession” and if such remuneration is not allowed as expenses in the hands of partnership firm then it will not be taxable in the hands of partners.
Calculation of book profit according to section 40b of the Income Tax Act
For payment of remuneration to partners, it is required to calculate book profit, and the same is given here-
| Particulars | Amount |
|---|---|
| Profit as per profit & loss a/c | *** |
| Add- Remuneration paid to partners (if debited to P & L A/c) | *** |
| Add- Brought forward business loss, deduction u/s 80C to 80U, only if debited to profit & loss a/c | *** |
| Less- Income under the head House Property, Capital Gain, Other Sources (if credited to profit and loss a/c) | *** |
| Book Profit for the purpose of section 40b of Income Tax Act | *** |
Must Read- Complete Section 40b of the Income Tax Act, 1961
TDS on remuneration to partners as per section 40b of the income tax act
No TDS is to be deducted by the partnership firm on remuneration paid or credited to partners. TDS is not required to be deducted even when such salary or remuneration is taxable in the hands of the partner. The reason for this is here-
Salary of remuneration paid to the partners is not taxable in the hands of partners as salary but it is considered as income from the business. As there is no employer-employee relationship exists between partner and partnership firm hence TDS is not required to be deducted by the partnership firm, and
as per explanation 2 of section 15, “Any salary, bonus, commission or remuneration, by whatever name called due to, or received by, a partner of a firm from the firm shall not be regarded as salary.”
Therefore, no TDS is to be deducted from the salary paid to the partners.
Here it is to be noted that salary paid to any partner (working or non-working) is not liable to TDS.
Also Read- TDS on Salary: Section 192 of the Income Tax Act, 1961
Remuneration to partner in case of Loss in Partnership Firm
The maximum amount of salary, bonus, commission, or other remuneration to all the partners during the previous year should not exceed the limits. e.g. On first Rs. 3 Lakhs of book profit or in case of loss in partnership firm the amount is higher of Rs. 1,50,000 or 90% of book profits (whichever is higher) and on the balance of book profit it is 60% of the book profit.
As per above, it is clear that if a partnership firm has loss in any previous year then he may pay Rs. 1,50,000 as remuneration to its partner.
Frequently Asked Questions- FAQs
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How is the partner remuneration calculated?
Payment of remuneration to partners is an allowable expense, which is subject to certain limits. The calculation of maximum limit of remuneration to partners is as under-
a) On first Rs. 3 Lakh of book profits, or In case of loss– Rs. 1,50,000 or 90% of book profit, whichever is more
b) On the balance of book profit- 60% of the book profit -
What includes in remuneration of partners?
As per section 40b of the Income tax act, remuneration includes salary, bonus, or commission paid to the working partners. If it is paid to a non-working partner, the same shall be disallowed. However, there are certain limits up to which such deduction is available to allow as allowable expenditure under the Act. Amount paid above the limit is not allowed as a deduction to the partnership firm.
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What does remuneration means?
As per section 40b of the Income tax act, remuneration includes salary, bonus, or commission paid to the working partners. If it is paid to a non-working partner, the same shall be disallowed. However, there are certain limits up to which such deduction is available to allow as allowable expenditure under the Act. Amount paid above the limit is not allowed as a deduction to the partnership firm.
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Example of partners remuneration calculation?
For calculation purpose, it can be understood with an example-
Book Profit of a partnership firm is Rs. 9 Lakh
Maximum remuneration allowable as per section 40b of the Income Tax Act = 3 Lakh * 90% + 6 Lakh * 60% = 6.3 Lakh
Note- Remuneration which is allowed as expenses in the hands of partnership firm will be taxable in the hands of receiving partner as “Income from business and profession” and if such remuneration is not allowed as expenses in the hands of partnership firm then it will not be taxable in the hands of partners.
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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)