Section 40b of the Income Tax Act, 1961 specifies the maximum limit of interest on capital and remuneration payable to partners in a partnership firm. The Income Tax Department doesn’t allow any amount above the prescribed limit as a deduction. Keep reading to get all the details regarding this Section!
Remuneration comprises commission, bonus, and salary. For a partnership firm, remuneration is eligible as a deduction provided it satisfies the following terms and conditions:
|Book Profit||Sum Deducted as Remuneration|
|For negative book profit||Rs. 1.5 lakh|
|For positive book profit:On 1st Rs. 3,00,000 of book profit|
On the balance
90% of book profit or Rs. 1.5 lakh, whichever is higher 60% of book profit
You can calculate book profit in the following manner:
Profit in accordance with Profit and Loss Account: Rs. X
Add: Remuneration to respective partners if P&L A/C gets debited
Add: Brought forward losses, tax deduction as per Section 80C to Section 80U if P&L A/C gets debited
Less: Earnings under other sources, capital gain, house property if P&L A/C gets credited
Book profit: Rs. Y
Let’s simplify this calculation through the following example:
Book profit is Rs. 9,00,000
Maximum salary applicable = 60% x Rs. 6 lakh + 90% x Rs. 3 lakh = Rs. 6,30,000
Remuneration that is applicable as a partnership firm’s expenses is taxable as earnings from profession or business in the hands of a receiving business partner. In case such remuneration is not applicable as a partnership firm’s expenses, then there will be no tax implications for partners.
A partnership firm must satisfy the following terms and conditions to avail deduction on interest on capital:
When it’s pointed out that interest or remuneration is not applicable, it denotes that it’s not allowed as a tax deduction for computing net taxable profit. A partner can still receive payments from his/her firm in cash. As per the Partnership Act, there’s no limitation on it.
Partners will have to pay taxes for the amount of interest or remuneration that can be deducted in the hands of the partnership firm. Business partners receive this amount under the head of profit from profession or business. However, if a firm doesn’t consider such amounts, then there will be tax exemptions for partners.
Also Read: Section 111A Of The Income Tax Act
Section 40b of the Income Tax Act brings forth certain conditions and restrictions on the expenses deductible for a partnership firm. It focuses on the interest and remuneration payable to a firm’s partners. Hopefully, you can now understand how a partnership firm benefits from this section.
1. Is interest on a partner’s capital taxable?
Yes, as per Section 28, interest on capital will be taxable in the hands of a business partner. This denotes that interest income will be taxable under the head of profits and gains from business and profession.
2. Can sleeping partners get a salary?
Sleeping partners only make investments in a business and do not engage in any administrative or managerial work. Only a working partner manages the day-to-day activities of a firm. So, sleeping partners do not get any salary. They only earn profits from a business. A firm distributes such profits based on a partner’s share in the business.
3. Is it mandatory to pay remuneration to the partner?
A working partner who actively manages the affairs of a firm partly or wholly will receive remuneration from the firm. However, a partner who is not an individual (for instance, a company) is not a working partner. Remuneration is applicable for working partners only.
4. How is salary different from remuneration?
Salary denotes the exact amount, payment in cheque/cash, or money transfer that an individual receives for his/her service in a company. Remuneration, on the other hand, denotes the salary and privileges that a company offers to its employees. Besides, the amount of remuneration may differ from time to time, but the salary remains the same for an employee.
Before you go…