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What are the rules for remuneration to Partners in a Partnership Firm Sec 40b

What are the rules for remuneration to Partners in a Partnership Firm Sec 40b

Remuneration To partners under section 40(b)

As per Section 40(b) of income tax act any interest, salary, bonus, commission or remuneration paid to partners by the partnership firm are allowed to be deducted as an expenses subject to such conditions mentioned in the income tax act. Remuneration means any payment made towards services rendered.

Conditions for payment of remuneration to partners

1. Remuneration shall be allowed as deduction only if it is paid to working Partner

2. Remuneration must be written/authorized and should be quantified in partnership deed

3. Remuneration must be related to the period after the partnership deed

4. Interest paid to partner should not exceed 12%

5. It should not exceed limits specified in section 40(b)

Working Partner

Working partner means an individual who is actively engaged in the affairs of business firm where he is a partner and he is not a sleeping partner who merely enjoys the profits of business of profession. Any remuneration paid to working partner is allowed as expense as per section 40(b) of income tax act.

Remuneration must be written or authorized

Payment of remuneration should be written and authorized according to the terms of partnership deed.It is allowed as expense only if the partnership deed is either specifies the amount of remuneration payable to the individual partner or even if it lays down the manner of quantifying the amount of remuneration payable to each individual partners.

Limits of Remuneration

Limit on the amount of remuneration payable to partners is specified in section 40(b) of income tax act. Remuneration is not allowed as deduction if total amount does not exceed following limits

a. On first 3 lakhs of book profit or loss Rs 1,50,000 or 90% of book profits
(whichever is higher)

b. On the balance book profit 60% of book profit

Calculation of Book profit

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 as increased by amount of remuneration paid to partners which is allowed as deduction in the profit and loss account. Book profit is calculated in the following way

1. Net profit as per profit and loss account

2. Add remuneration if already debited

3. Deduct interest if it is not deducted

4. Make adjustments for expenses as per section 28 to 44D


Conclusion:

Remuneration is one of the best possible way to avoid paying more taxes as we can claim it as expense in profit and loss account in order to avoid paying of more taxes. Remuneration is allowed as deduction only if it is mentioned in the partnership deed. So care must be taken while drafting the partnership deed. We filingmantra team will assist you to calculate and claim remuneration as per the limits specified in the section 40(b) of income tax act and file your partnership firm return online.

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