Section 40b describes the maximum amount of remuneration and interest on capital payable to a partner under Income Tax Act. Excess to this amount will not be allowed as a deduction from the income of the firm.

Remuneration in a partnership firm is allowed as a deduction if the following conditions are satisfied:

1. Remuneration is allowed only to working partners.
2. Remuneration must be authorized by the partnership deed and according to the terms of the partnership deed.
3. 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. If it is mentioned in the deed that salary is allowed to partners as per the maximum limit defined under this section then this condition is satisfied.
4. It should be related to the period of the partnership deed.
5. It is not allowed if the income of the partner ship firm is calculated on the basis of section 44AD or section 44ADA (Presumptive Income).
6. Remuneration should be within the permissible limits as mentioned below. This limit is for the total salary to all partners and not per partner.

Calculation of book profit

Profit as per Profit & Loss a/c –                                                                                      xxx
Add- Remuneration to partners if debited to Profit and loss a/c
Add- Brought forward business loss, deduction under section 80C
to 80U if debited to profit and loss a/c
Less – Income under house property, capital gain, other
sources if credited to profit and loss a/c
Book Profits                                                                                                                    xxx

Such Remuneration will be taxable in the hands of receiving partner as “Income from Business or Profession” but If such remuneration is not allowed as an expense in hands of the partnership firm then it will not be taxable in the hands of partners.