Salary to Partner and Section 40(b)

By | July 7, 2015

Most of the partnership firms includes clause related to partners salary in their partnership treaty. Salary to partner can be amount specified or agreed by the partners and as specified in the partnership deed. However for income tax purpose the salary paid to the working partner needs to be calculated as defined under section 40(b). Salary calculated as per section 40(b) is allowed expenditure for the purpose of calculating the taxable income of the partnership firm. Before moving to see the section 40(b) provisions and its actual calculation let us understand some concepts related to book profit and the partner.

Book Profit means Net profit of the partnership firm after giving the true effect of section 28 to 44D added back by any partners salary debited to profit and loss account. For the purpose of giving the effect of section 28 to 44D following should be noted;

  1. Income which are chargeable under other head of income shall be excluded from net profit
  2. Any brought forward losses shall not be deducted from net profit
  3. Any deduction under chapter VIA shall not deducted from net profit

The resulted amount of profit is book profit for the purpose of section 40(b).

Working Partner means a partner of the firm who is actively engaged in conducting the affairs of the firms. Active participation shall include but not restricted to planning, organizing, directing, staffing and controlling the core business activities viz. marketing, production, finance and human resources etc. In other words any partner who does not work on routine basis for the affairs of the partnership firm is not an Working Partner for the purpose of section 40(b).

There are few conditions also which are to be fulfilled to claim the deduction of partner’s salary as expense while computing the taxable income of the partnership firm as per section 40(b). The conditions are as follows;

1. Partners Salary shall be paid to working partners only

Salary paid to working partner is only allowed to claim as deduction under section 40(b) of the Income Tax Act, 1961. Salary paid to other than working partner is not allowed. Any partner who is merely enjoying the profits and not actively engages himself in routing affairs of the firms is not a working partner for the purpose of section 40(b).

2. Partners Salary shall be authorized by the partnership deed

Any payment to working partner by whatever name called whether Commission, bonus, salary will not be allowed unless it is authorized by the partnership deed. It should also be in accordance of the payment outline as per the partnership deed.

For claiming the deduction of partners salary, quantum of deduction shall also be mention in the partnership deed. The partners salary clause should not be left undecided, undermined or to be decided basis refer to case Sood Briji & Associates vs. CIT.

3. Partners Salary shall be for the period after the commencement of partnership firm

All such payments shall be post the partnership existence. In other words any payment prior to partnership comes in existence would not be allowed as deduction.

4. Partners Salary shall not exceed the limits specified under section 40(b)

Section 40(b) defines the limits for the purpose of deduction of partner’s salary while calculating the taxable income of the partnership firms. This limits are applicable to both professional firm and non-professional firm. Also there is no specific difference between limited liability partnership.

From Assessment year 2010-11 onwards

Book profit Maximum Amount deductible
If the book profit is negative Rs. 1,50,000
a.      In case of positive book profita.      On first Rs. 3 lakhsb.      On the balance of the book profit Higher of Rs. 1,50,000 or 90%60% of balance book profit

 

Up to Assessment year 2009-10 onwards; Before AY 2010-11, the limits were defines separately for professionals and non-professionals.

In case of professional firm

a.      On first Rs. 1 lakhs of book profit or in case of loss Higher of Rs. 50,000 or 90% of book profit
b.      On the next Rs. 1,00,000 of the book profit 40% of balance book profit 
c.       On the balance of the book profit 60% of next Rs. 1 laks 

In case of any other firm

a.      On first Rs. 75,000 of book profit or in case of loss  Higher of Rs. 50,000 or 90% of book profit 
b.      On the next Rs. 75,000 of book profit  60% of next Rs. 75,000 
c.       On the balance of the book profit  40% of balance book profit 

 

 

29 thoughts on “Salary to Partner and Section 40(b)

  1. Shubham Jain

    The limit of Rs. 1,50,000 is for all the partners on cumulative basis or for each partner thereto.

    Reply
    1. TaxGuru Post author

      The limit of Rs. 1.5L is cumulative and applicable to all partners.

      Reply
  2. Mathew

    Profit used for Partner remuneration is before depreciation or after.
    ie;
    a} Profit – Depreciation
    b} Profit
    a or b?

    Reply
    1. TaxGuru Post author

      Book profit for partners salary is after depreciation booked in the books of accounts.

      Reply
  3. KUSHAL KAD

    SIR, A FIRM HAS INCOME FROM 1) REGULAR BUSINESS AND 2) FROM FDRS OF THE FIRM. WILL FDR INTEREST INCOME WILL BE TAKEN AS BOOKS PROFIT OF THE FIRM., FOR THE CALCULATION OF REMUNERATION TO PARTNERS LIMIT ALLOWED. U/S 40(b)
    OR CALCULATION WILL BE MADE ON BUSINESS INCOME.

    Reply
    1. TaxGuru Post author

      If the investments are made out of the business income of the firm then it will qualify for book profit purpose.

      Reply
  4. Rahul Radhakrishnan

    Dear Sir
    I was initially appointed under employee pay roll and subsequently made as Partner to the firm. However TDS was deducted from my salary every month. The company should duly refund TDS amount till date. Will the PnL of the firm in any way affect my TDS refund OR in other words, Can the company adjust my TDS towards PnL?

    Reply
    1. TaxGuru Post author

      There is no provision under which firm deducts TDS from partners salary. Whereas the TDS deducted before becoming partner was required by section 192 of Income Tax Act. The TDS deducted can be verified from form 26AS, which can be downloaded from Income Tax Portal login. If you see all the TDS deducted reflected in Form 26AS then firm can not adjust that towards tax due to firm.

      Reply
  5. N, Nagaraja

    can all partners draw salary on monthly basis and what is maximum amount permissible.

    If cannot draw due to less business whether we can accumulate and release when fun d position is positive.

    Reply
    1. TaxGuru Post author

      All partners can draw the salary from partnership firm based on the Deed of Articles of partnership agreement. But for income tax deduction purpose only salary paid to working partner is allowed as deduction for the purpose of sec 40(b).

      For the other query…….salary be accumulated by way taking the expenses benefit and added to capital account. Pay the salary to partners when you have the funds by debited to capital account.

      Reply
  6. Gaurav

    In an LLP, if a partner is getting 30,000 salary per month from his own LLP firm, How is the partner taxed as an individual ? Will he be taxed at the normal slap rate (10-20-30) like a normal employee or he has to pay 30 %+3% tax to govt from that 30,000 salary ?

    Reply
    1. TaxGuru Post author

      He will be taxes as per the normal tax slabs. If the income falls in 10% slab then applicable tax rate will be 10%.

      Reply
      1. Sreenivas D

        And the individual partner is also allowed for 80C exemption just as normal employee. Am I correct..?
        And can the individual also claim HRA exemption ?

        Reply
  7. Prakash Chand Daga

    stauts regarding the payment of remuneration to retiring partner. The partner retire from firm on 17-12-2015

    Reply
  8. Vishal Mittal

    Treatment of partner salary paid in excess of section 40b terms in hands of partner.

    Reply
  9. Mangesh

    how many partner can do work as a active partner for taking salary and wages

    Reply
    1. TaxGuru Post author

      There is no limit for active partners. All partners can be active partner but the salary has to be govern by the deed of partnership.

      Reply
  10. piyush modi

    Does the remuneration need to be actually paid out to the partner bank account or simply adding it to partner capital a/c in firm balance sheet will suffice??

    Reply
  11. dimple agarwal

    A LLP is having loss of 50 l before remunaration adjustment. there was provison of 7.5 l per month for partner remunaration. as per act llp can claim 1.5 l as expense.what would happen to remaining amount of rs.88.5 l provision

    Reply
  12. Akshay Sadawarte

    if my partnership firm having Turnover Rs 7000000/- and profit @ 8% is Rs 560000/-, capital balance stood in books Rs 10000000/- (1 Cr.) int on capital @ 6 % will be Rs 600000/- then what is the actual Remuneration and Interest as per sec 40(b) allowable to partner assuming that no any remuneration is being debited to profit and loss account during the year and there are two partner and both are working partner.

    reply as soon as earlier i want to revise my IT return for FY 2014-15
    with the above data

    Reply
  13. Mukul Kulkarni

    Sir in our partnership We get profit say 5lacs turnover 50lacs the whole profit get income tax 30percent or we deduct our salary and then we fill the income tax

    Reply
    1. TaxGuru Post author

      Taxable income for partnership firm is calculated taking into consideration for remuneration paid to partners as specified by the partnership Deed. Please check the partnership deed and reduce the salary to partner accordingly and calculate the taxable income of the partnership firm.

      Reply
    1. TaxGuru Post author

      You need to refer section 40(b).

      As per section 40(b) – maximum allowed amount will be
      90% of first 300000 + 60% of balance book profit. But make sure your partnership deed authorized the remuneration to partners.

      Reply
  14. shan

    As per section 40(b) – maximum allowed amount will be
    90% of first 300000 + 60% of balance book profit. But make sure your partnership deed authorized the remuneration to partners.

    pls explain with an example

    Reply
    1. TaxGuru Post author

      Thanks for your query. Let me explain the provision with calculations…. assuming profit as per profit and loss account before partners salary is Rs. 10L. Now maximum allowed amount of partners salary as per 40(b) will be 6.90L which will be shared by partners as per terms of partnership deep.

      In case if there is no clause about partners salary in partnership deed then firm can not get any deduction as per 40(b) for partners salary while calculating income from business and profession.

      Team IncomeTaxTips

      Reply
  15. santanu das

    firm loss rs.726000/- Ay -2017-18
    partner remuneration rs.900000/-
    how to calculate computation
    how to put tax audit which column 3cb-3cd

    Reply
  16. Shubham

    Can we debit salary paid to employee by crossed cheque for the purpose of calculating book profit in an partnership firm

    Reply

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