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

Book profit - maximum salary.jpg

 

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)?

Answer

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)?

Answer

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
  1. Income Tax
  2. PGBP Income

About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 10 years. He also provides Accounts Tax GST Training in Delhi and Pune.