Remuneration paid to Partners by Partnership Firm :
As per Section 40(b) of Income Tax Act, Remuneration (Salary) and Interest paid to partners by a partnership firm are allowed as expenses only if all the specified conditions are satisfied.
The following conditions must be satisfied before claiming any deduction :
In respect of Remuneration :
1. Such remuneration should be paid only to the working partner.
2. It should be “in accordance with the partnership deed“. OR say, It must be authorized by the partnership deed i.e. the partnership deed must contain clearly the quantum of amount to be paid.
3. It should not “relate to a period prior to the date of partnership deed”.
4. It should not exceed the permissible limit. Any amount in excess of the below mentioned limit will be disallowed as expense :
- 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;
- On the balance of the book profit – 60% of book profit.
In respect of Interest :
1. It should be “in accordance with the partnership deed” OR say, It must be authorized by the partnership deed
2. It should not “relate to a period prior to the date of partnership deed”.
3. It shall not exceed 12% simple interest per annum.
(Note : Interest can be paid to both working or non-working partner.)
For your reference :
(a). Remuneration means any sum paid to a partner in form of Salary, Wages, Bonus or Commission
(b). Working Partner is an individual who takes active part/interest in running and managing the business.
***An Individual only can be a working partner. A partner other than an individual (Ex. Company, Firm, etc) cannot become a working partner.
(c). 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.
[Net Profit + Remuneration = Book Profit]
NOTE : Section 40(b) applies to all firms irrespective of whether they are registered or not.