Example 1

Suppose a Partnership firm earns profit of 10 lacs

What is tax Payable by it?

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Can it give Salary to its 2 Partners of 200000 each to reduce its profit?

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What is the tax payable in this case by partnership firm?

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What is the tax payable in this case by both Partners

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What is tax Saved by Giving Salary to partners

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Note:-Similar tax planning can be done if interest on capital is given in place of Salary


For Partnership firm,Income is taxable at flat rate of 30%

But Individuals get Income tax Slab Rate Benefit (Exempt upto 250000 and less rate upto 10 lacs)

Hence it is beneficial for Partnership firm to distribute Salary and Interest to partners to reduce its Profit and tax liability

What is Maximum Amount upto which Salary and Interest can be given?

Government has specified a Section 40(b) which tells maximum amount of deduction for Salary and Interest

Lets study 40(b) in detail

  1. Income Tax
  2. PGBP Income
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Davneet Singh's photo - Teacher, Computer Engineer, Marketer
Davneet Singh
Davneet Singh is a graduate from Indian Institute of Technology, Kanpur. He has been teaching from the past 8 years. He provides courses for Maths and Science at Teachoo. You can check his NCERT Solutions from Class 6 to 12.
  • Sandeep Pandey's image
    I have started a business first two month i issue invoice in personal name without charging service tax, third month I take service tax no & issue invoice from proprietor Name with service tax. Let me know when I filled my income tax return 
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