Section 40b of the Income-tax Act- Remuneration to Partners for AY 2020-21

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 for Remuneration to Partners for AY 2020-21.

Section 40b of 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 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 in this post, we will discuss the provision for remuneration to partners for AY 2020-21 only.

Remuneration to Partners for AY 2020-21

The Remunerations paid to partners include salary, bonus, and commission. The maximum limit of remuneration for allowable deduction is given as under-

Book ProfitThe maximum amount of deduction allowable as remuneration
On first Rs. 3 Lakh of book profits, or In case of lossRs. 1,50,000 or 90% of book profit, whichever is more
On the balance of book profit60% of the book profit

Also read- Read Complete Section 40b of Income Tax For calculation of Interest paid to partner as well.

For calculation purpose, 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 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

For payment of remuneration to partners for AY 2020-21, the question is how to calculate book profit and the solution is here-

ParticularsAmount
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***
Book Profit for Remuneration to Partners for AY 2020-21

However, for claiming the deduction of Remuneration to Partners for AY 2020-21, the following condition must be satisfied-

👉 Such remuneration should be paid only to the working partners.

👉 Payment of Remuneration must be authorized by the partnership deed and it should be related to the period of partnership deed. If there is another deed for another period then such provisions shall be considered for that particular period. Also, the amount of salary or manner of its computation is to be mentioned in the deed. If there is not any such provision in the deed then no deduction is allowed.

👉 If tax is paid on presumptive taxation basis e.g section 44AD or section 44ADA then interest will not be allowed.

👉 No TDS is to be deducted by the partnership firm on salary or interest 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.

👉 No TDS is to be deducted by the partnership firm on salary or interest 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.

Also Read-

Section 44AD of Income Tax Act- Presumptive Scheme

Section 44ADA of Income Tax Act- Presumptive Scheme for professionals

Section 44AB Applicability for Partnership Firm AY 2020-21

Some FAQ in relation to remuneration paid to partners

  1. How do you calculate remuneration to partner with an example?

    👉 Book Profit of a partnership firm is Rs. 9 Lakh.
    👉 Maximum remuneration allowable as per section 40b of Income Tax Act = 3 Lakh*90% + 6 Lakh*60% = 6.3 Lakh

  2. What includes in remuneration of a partner?

    Remuneration to partner includes salary, bonus, and commission.

  3. Is remuneration from partnership firm taxable?

    Remuneration and Interest received by partner from firm is taxable as business income. However, share of profits from from is not taxable in the hands of partner.

  4. Is it compulsory to give remuneration to partner?

    Section 40b defined only maximum limit for payment of remuneration and it does not defined any lower or minimum limit. Accordingly it is not compulsory to give remuneration to partner?

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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)

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