Treatment of Remuneration paid to a partner

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Treatment of Remuneration paid to a partner

Remuneration includes salary, bonus, commission paid to the partner. Such is included by whatever name it is called. Such remuneration paid to the partner is taxable in hands of partner as income under the head profit and gain of business and profession (PGBP) and NOT salary.

In case the Firm is ineligible for taking deduction of remuneration, the amount is not taxable in hands of partner. It may be treated as the share of profit.

As per Section 40(b) of income tax act any interest, salary, bonus, commission or remuneration paid to partners by the partnership firm are allowed to be deducted as an expenses subject to such conditions mentioned in the income tax act.

Remuneration means any payment made towards services rendered. As per the section amount of remuneration shall be deductible in hands of firm if and only if the remuneration is paid to the WORKING partner. If the remuneration is paid to a partner, other than working partner, than it is not deductible under the Income Tax Act.

Secondly, remuneration must be written/ authorized and should be quantified in partnership deed. Remuneration must be related to the period after the partnership deed.

Certain Terms for reference:

Working Partner

Working partner means an individual who is actively engaged in the affairs of business firm where he is a partner and he is not a sleeping partner who merely enjoys the profits of business of profession. Any remuneration paid to working partner is allowed as expense.

Remuneration must be written or authorized

Payment of remuneration should be written and authorized according to the terms of partnership deed. It is allowed as expense only if the partnership deed is either specifies the amount of remuneration payable to the individual partner or even if it lays down the manner of quantifying the amount of remuneration payable to each individual partner.

Limits of Remuneration

Limit on the amount of remuneration payable to partners is specified in section 40(b) of Income Tax Act. Remuneration is not allowed as deduction if total amount does not exceed following limits

  • On first 3 lakhs of book profit or loss limit is Rs 1,50,000 or 90% of book profits (whichever is higher)
  • On the balance book profit the limit is 60% of book profit

Calculation of Book profit

Book profit means the net profit as shown in the profit and loss account which is increased by amount of remuneration paid to partners which is allowed as deduction in the profit and loss account. Book profit is calculated in the following way

  • Net profit as per profit and loss account
  • Add remuneration if already debited
  • Deduct interest if it is not deducted
  • Make adjustments for expenses as per section 28 to 44D

One must carefully take care while making the partnership deed and computation of Book profit for proper calculation of Remuneration deductible i.

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