Hello Folks!!!

Are you searching for Partner’s Remuneration and how it is calculated? 

If yes, then you’ve come to the right place!

Today, we are going to discuss this in detail.

So, let’s begin! 

A partnership firm is established to generate profit. So, there are two types of partners: an active partner who invests in the firm and oversees its operations, and a silent partner who invests without participating in daily management. Partners receive compensation proportional to their contributions. The payment terms are detailed in the remuneration clause of the partnership deed.

What is Partner’s Remuneration?

A partner’s remuneration consists of the bonus, salary, or commission paid by a partnership firm. Like regular employees, partners receive monthly payments for their contributions to the firm. Partners are compensated for their work in the following ways:

• Remuneration
• Interest on Capital Invested
• Share of Profit

Deduction of Partners Remuneration

Partnership firms are allowed to treat the interest and remuneration paid to partners as deductible expenses when determining their ‘Profits and Gains from Business and Profession’ (PGBP).

However, Section 40(b) specifies a maximum limit for these deductions on interest and remuneration amounts.

However, this deduction is not allowed if partnership firms opt to pay tax on a presumptive basis under Section 44ADA or Section 44AD.

Section 40(b) of the Income Tax Act: Remuneration and Interest to Partner

Section 40(b) of the Income Tax Act specifies the maximum limit for remuneration and interest on capital that can be paid to a partner. Any amount exceeding this limit is not eligible for deduction.

Conditions for Claiming Deduction of Partners Remuneration

Remuneration in a partnership firm includes bonus, salary, and commission. To qualify for the deduction of partners’ remuneration, the following conditions must be satisfied:

• Remuneration must be authorized by the partnership deed, which should specify the amount of salary or the method of its calculation. If the deed lacks these provisions, no deduction is allowed. Practically, it is common to state in the deed that the salary is permitted to partners within the maximum limit defined under this section, thus meeting the deduction requirement.

• Remuneration is paid exclusively to working partners.

• The remuneration should be calculated starting from the date the partnership was established (i.e., the date of the partnership deed) and not from any earlier period.

• The remuneration must be within the permissible limits (see the next paragraph for details).

• Interest on a partner’s capital is allowed at a maximum rate of 12% per annum, calculated as simple interest.

• The interest should correspond to the period specified in the partnership deed. If the partnership deed is renewed, the provisions of the renewed deed will apply for that new period.

Maximum Permissible Limit Under Section 40(b)

The maximum permissible limit under Section 40(b) is as follows:

(Note that this limit applies to the total salary of all partners, not individually per partner.)

Book Profit	Limit
On the first Rs.3,00,000 of book profit or loss	Rs.1,50,000 or 90% of the book profit, whichever is higher
On the remaining balance of book-profit	60% of the book-profit

Calculation of book profits:

Book Profit	Limit
(i) Profit as per Profit & Loss account (P&L)	xxxx
(ii) Add: Remuneration to partners, if debited in the P&L above	xxxx
(iii) Add: Interest paid to partners, if debited in the P&L above	xxxx
(iv) Less:  Interest as allowed under Section 40(b)	xxxx
Book Profits	xxxx

In simple terms, Book Profit refers to the Profits and Gains from Business and Profession (PGBP) before deducting remuneration.

Example on Partners Remuneration Calculation:

Situations	Book Profit/ (Loss)	Calculation	Max Remuneration Allowed
1	Rs. 900,000	Higher of  Rs.150,000 or Rs. 3,00,000 * 90% + Rs. 6,00,000 * 60% = Rs 630,000	Rs 630,000
2	Rs. 200,000	Higher of  Rs.150,000 or Rs. 2,00,000 * 90% Rs 180,000	Rs 180,000
3	Rs. 500,000	Higher of  Rs.150,000 or Rs. 3,00,000 * 90% + Rs. 2,00,000 * 60% = Rs 390,000	Rs 390,000
4	(Rs. 200,000)	Higher of  Rs.150,000 or Rs. 0 * 90% = Rs 0	Rs 150,000

Remuneration that is deductible as an expense for the partnership firm will be treated as taxable income for the receiving partner under Income from Business or Profession.

If the partnership firm cannot claim remuneration as an expense, then the partners will not be taxed on that remuneration.

Conditions for Claiming Deduction of Interest Paid to Partner

Interest on Partner’s Capital:

For interest to qualify for deduction, the following criteria must be satisfied:

• The interest payment must be sanctioned/approved in the partnership agreement.
• The interest rate should not exceed 12%. Any interest amount above this rate is disallowed.
• Deductions are not allowed if the partnership firm opts to pay taxes on a presumptive basis under section 44AD or section 44ADA.
• The remuneration must be for a period starting from the date the partnership was established (i.e., the date of the partnership agreement) and not for any earlier period.

Partner in Representative Capacity

If someone is a partner in a representative capacity (acting on behalf of another person instead of personally), any interest paid by the firm directly to that individual in their personal capacity is exempt from the disallowance conditions and limits. As a result, the full interest amount will be permitted as a deduction.

Partner Remuneration & Interest: Most Important Points to Note

When it is stated that remuneration or interest is not allowed, it means that it cannot be deducted when calculating the net taxable profit. However, the firm can still pay it to the partner in cash, as there are no restrictions under the Partnership Act.

The amounts that are deductible as remuneration or interest for the firm under Section 40(b) are taxable for the partner receiving them under the “Profit from Business/Profession” category. However, if the amount is disallowed for the firm, it is exempt for the partner.

Additionally, the partnership firm is not required to deduct TDS (Tax Deducted at Source) on the salary or interest paid or credited to a partner, even if that salary or remuneration is taxable for the partner.

Share of Profit

The Share of Profit refers to the percentage of profit allocated to each partner, whether they are active (working) or inactive (sleeping) partners. The partners mutually decide the ratio in which they will share profits. If the Partnership Deed does not specify this ratio, profits are distributed equally among the partners. For any queries contact us!

This ratio is used for both profit sharing and loss division. The entire profit does not have to be distributed among the partners; a portion can be set aside as a reserve and surplus.

Regardless of whether a partner is working or sleeping, the share of profit received is exempt from tax under Section 10(2A) of the Income Tax Act.

FAQ’s

1. Can sleeping partners get a salary? 

Sleeping partners exclusively contribute investments to a business and do not engage in administrative or managerial tasks. It is the working partner who is responsible for the daily operations of the firm. As a result, sleeping partners do not receive a salary; instead, they receive a share of the profits generated by the business. The distribution of these profits is based on each partner’s respective share in the business.

2. Is it mandatory for a partnership firm to pay interest on a partner’s capital? 

No, it is not mandatory for a partnership firm to pay interest on a partner’s capital. However, if interest is paid, it is considered a deductible expense for the firm when calculating its taxable income.

3. Can a partner claim deduction on interest paid by the firm on partner’s capital in his/her individual tax return? 

No, a partner cannot claim a deduction on the interest paid by the firm on their capital in their individual tax return. This deduction is available only to the partnership firm when calculating its taxable income.

4. Is interest on a partner’s capital taxable? 

Yes, interest on a partner’s capital is taxable. According to Section 28, the business partner will be taxed on the interest earned on their capital. This income will be taxable under profits and gains from business and profession.

5. What is the difference between salary and remuneration ? 

Remuneration is specifically reserved for working partners in a firm who actively participate in managing its affairs. Whether they are involved partially or fully, these working partners are entitled to receive remuneration. However, non-individual partners, such as companies, do not fall under the category of working partners and are therefore not eligible to receive remuneration.

6. What is book profit in income tax?

Book profit, in the context of income tax, refers to the profit reported by a company in its financial statements as per accounting principles. It is calculated according to the company’s accounting records before making any adjustments for tax purposes. Book profit is used to determine the eligibility for certain tax benefits and compliance under the Income Tax Act. It may differ from taxable income, which is calculated after making adjustments for tax laws and regulations.

7. What is remuneration as per Income Tax Act?

Under the Income Tax Act, remuneration refers to the payment made to working partners of a partnership firm for their services in managing the firm’s affairs. This includes salaries, wages, and other forms of compensation that are provided to partners who actively participate in the business operations. Remuneration is considered a deductible expense for the firm when calculating its taxable income, subject to limits and conditions specified in the Act.

8. How to show partner remuneration in ITR?

To show partner remuneration in the Income Tax Return (ITR), follow these steps:

1. Firm’s ITR: The partnership firm must report the remuneration paid to partners in its ITR. This is done in the section related to “Profit and Loss Account” where expenses are detailed. The remuneration paid to partners is listed as an expense and deducted from the firm’s income.

2. Partner’s ITR: Partners must declare the remuneration received in their individual ITR. This is reported under the head “Income from Business or Profession” in the ITR form. The remuneration received is included as part of the partner’s income and is subject to tax accordingly. File your ITR with us.

3. Details in ITR:
   • Firm’s ITR: Mention the total remuneration paid to each partner in the profit and loss account section. Ensure it is within the prescribed limits set by the Income Tax Act for deductions.
   • Partner’s ITR: Report the remuneration received under the appropriate section of the ITR form, usually under “Income from Business or Profession.” The partner must provide details of the income received from the firm.

4. Supporting Documents: Maintain and submit necessary supporting documents like the partnership deed, payment vouchers, and financial statements as required.

Properly categorizing and reporting the remuneration ensures compliance with tax regulations and accurate calculation of taxable income.

 9.  Is TDS applicable on partner remuneration?

No, TDS (Tax Deducted at Source) is not applicable on the remuneration paid to partners by a partnership firm. Although the remuneration paid to working partners is considered a deductible expense for the firm, there is no requirement for the firm to deduct TDS on this amount, even though it is taxable in the hands of the partner.

10. Is professional tax applicable on partners remuneration?

Yes, professional tax is applicable on the remuneration paid to partners in a partnership firm. Professional tax is a tax levied by state governments on individuals and entities engaged in professions, trades, or employment. When partners receive remuneration for their services, it is subject to professional tax, which must be paid according to the regulations of the respective state where the firm operates.