Under Section 40(b) of the Income Tax Act, a partnership firm can claim a deduction for remuneration paid to partners, but it must satisfy the following conditions: 1️⃣ Remuneration Must Be Paid to "Working Partners" Only Only working partners (actively engaged in business) are eligible for remuneraRead more
Under Section 40(b) of the Income Tax Act, a partnership firm can claim a deduction for remuneration paid to partners, but it must satisfy the following conditions:
1️⃣ Remuneration Must Be Paid to “Working Partners” Only
- Only working partners (actively engaged in business) are eligible for remuneration.
- Sleeping (non-working) partners are not entitled to remuneration deduction.
2️⃣ Must Be Authorized by the Partnership Deed
- The partnership deed must specify the remuneration amount or the calculation method.
- If the deed is silent on remuneration, the firm cannot claim a deduction.
3️⃣ Payment Should Be Within the Prescribed Limits
- Remuneration should not exceed the maximum limits prescribed under Section 40(b):
✅ Book profit ≤ ₹3 lakh → 90% of book profit or ₹1.5 lakh (whichever is higher)
✅ Book profit > ₹3 lakh → 60% of book profit
4️⃣ Remuneration Must Be Paid to an Individual Partner
- If a partner is a company or LLP, remuneration paid to them is not deductible.
5️⃣ The Partnership Deed Must Be in Effect
- The partnership deed should be signed and in force before the end of the financial year.
- If the deed is amended to change remuneration, the amendment must apply prospectively, not retrospectively.
6️⃣ Firm Must Be Assessed as a Partnership Firm
- The firm must be assessed as a partnership firm under the Income Tax Act.
- Firms taxed under presumptive taxation schemes (Section 44AD/44ADA) cannot claim this deduction.
✅ Conclusion:
To claim a deduction for partner remuneration, ensure it is paid to a working partner, authorized in the deed, within Section 40(b) limits, and in a firm recognized as a partnership under the Income Tax Act.
Section 40b determines the maximum amount of remuneration and interest on capital payable to a partner under Income Tax Act. The amount over the specified limit is not allowed as a deduction to a partnership firm. Remuneration To Partners Remuneration includes salary, bonus, commission .RemunerationRead more
Section 40b determines the maximum amount of remuneration and interest on capital payable to a partner under Income Tax Act. The amount over the specified limit is not allowed as a deduction to a partnership firm.
Remuneration To Partners
Remuneration includes salary, bonus, commission .Remuneration in partnership firm is allowed as a deduction if following conditions are satisfied
- Remuneration is allowed only to working partners.
- Remuneration must be authorised by partnership deed and according to the terms of partnership deed. 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 deed then no deduction is allowed. Normally people mentions in deed that salary is allowed to partners as per maximum limit defined under this section. This clause satisfies the condition for quantum of deduction.
- It should be related to the period of the partnership deed. If there is another partnership deed for another period then such deed’s provisions will be considered for that period.
- It is not allowed if tax is paid on presumptive basis under section 44AD or section 44ADA.
- Remuneration should be within the permissible limits as mentioned below. Please note that this limit is for total salary to all partners and not per partner.
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