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This section covers
-
Remuneration paid to Partners
(Salary/bonus/commission/any other remuneration) - 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
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 |
