Income Tax
PGBP Income

This section covers

1. Remuneration paid to Partners
(Salary/bonus/commission/any other remuneration)
2. Interest on Capital paid to partners

#### Remuneration to partners

It is allowed as deduction,only to working partners.

If paid to non working partners,it is completely disallowed

Amount should be specified in Partnership deed,then only avaialble

Limit is as mentioned below

 Particulars Amt In Case of Loss or Profit upto 300000 90% of book profit  or 150000 which ever is higher On Balance Profits 60% of Book Profit

Book Profit Means

= Net Profit

+ Remuneration paid to partners

### Example

#### Interest Paid to Partners

It should not exceed 12% Simple Interest,

Amt exceeding 12% will be disallowed

Interest should be specified in Partnership deed,then only available

#### How is tax Computed

Limit of deduction is specified in Section 40 (b)

If deduction available to partnership regarding it,then it is PGBP income of Partners

However if deduction not available to partnership regarding it,then it is not taxable as PGBP of Partners

Question 1

Suppose a Partnership firm has Business Profit of 7 lacs
What is Maximum Salary it can give to 2 Partners as per Section 40(b)?

 Maximum Deduction Book Profit Deduction Profit Upto 3 lacs 90% of 300000=270000 Balance 4 Lacs profit 60% of 400000=240000 Total Maximum Salary 510000

If both Partners are working,then total salary to both should not be more than 510000
If one Partners is working,This Maximum 510000 salary can be paid to only working partner

Question 2

Suppose a Partnership firm has Net Profit of 1 lacs as calculated below

 Particulars Amount Sales 1000000 Less Expenses 300000 Profit 700000 Less Salary Paid to Partner A  (Working) 400000 Salary Paid to Partner B (Sleeping Partner) 200000 Net Profit 100000

What is Maximum Salary it can give to 2 Partners as per Section 40(b)?

Book Profit=100000+400000+200000=700000

 Maximum Deduction Book Profit Deduction Profit Upto 3 lacs 90% of 300000=270000 Balance 4 Lacs profit 60% of 400000=240000 Total Maximum Salary 510000

If one Partners is working,This Maximum 510000 salary can be paid to only working partner
Salary actually paid to working Partner=400000
Hence 400000 is allowed as deduction

Tax payable by Partnership firm in this case

 Particulars Amount SALES 1000000 LESS EXPENSES 300000 PROFIT BEFORE SALARY 700000 Max Salary 510000 Salary Actually given to Working Partner 400000 Salary Deduction Allowed 400000 PROFIT AFTER SALARY 300000 TAX 90000 SURCHARGE 0 TAX+SURCHARGE 90000 CESS 4% 3600 TOTAL TAX+CESS 93600