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

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

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

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CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 14 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.