What is Partner’s Remuneration Under Income Tax Act?
Section 40(b) allows firms and companies to claim a deduction of interest & remuneration paid to Partners while computing their profits & gains. However, there is a limit on the maximum amount of remuneration and interest paid under Section 40(b).
What are the Conditions under which Partner’s Remuneration under Section 40(b) is Allowed
1. The Partnership Deed should authorise it
Any payment of salary, bonus, commission, or remuneration to a working partner is not admissible as a deduction if the payment is not authorised by the partnership deed or is not in conformity with the requirements of the partnership deed. The partnership agreement must include specific instructions for the amount of remuneration to be provided to the working partners.
2. It should not apply to a time period prior to the Partnership Deed.
The income paid to the working partners will be permitted as a deduction to the company only from the date of the partnership deed and not from any previous period.
3. It must not exceed the allowable limit.
The total amount of salary, bonus, commission or other remuneration paid to all partners during the previous year shall not exceed the following limits:
1. On the first three lakhs of book profit or, in the event of a loss, one lakh fifty thousand rupees, or 90 percent of book profit (whichever is higher).
2. On the, balance book profit (after excluding above 3 lakh) it will be 60% of book profit.
4. Should be paid only to the working partner.
1.Section 40(b) defines a working partner as someone who is actively involved in the business or profession of the firm in which he is a partner.
2.To be a working partner, the partner must be actively involved in the management of the firm’s business or profession.
3.A partner might be said to be actively engaged in the firm’s business even if he/she just spends a portion of his working hours on it.
