How to Calculate Remuneration, Interest to Partners?

Every partnership firm declares partner compensation and interest as an expense. However, the income tax statute 1961 limits partner compensation and interest. Section 40(b) governs partner compensation and interest.

This document covers

1. Remuneration to Partners
1. The remuneration should be paid only to the working partner
2. The remuneration should be authorized by the partnership deed
3. The remuneration should not belong to a period prior to partnership deed
4. The remuneration should not exceed Permissible limit
2. Interest to partners

A. Remuneration to Partners

Conditions to be followed by Partnership Firm

1. The remuneration should be paid only to the working partner

• Working Partner means the person who is actively engaged in the conducting the affairs of business or profession of the firm of which he is a partner.
• A partner other than an individual cannot be a working partner.
• A partner will be deemed to be a working partner even if he devotes a part of his working hours.

Note: If the company is a partner in the firm and the director of the company or shareholder of the company is a employee of the Firm, it will be considered as Salary. It will not be considered as remuneration to partners.

2. The remuneration should be authorized by the partnership deed

• Any payment of salary, bonus, commission by whatever name called to a working partner will be allowed as deduction only if the payment is authorized by a partnership deed and in accordance with the terms of partnership deed.
• The partnership deed should either specify the amount of remuneration payable to each individual working partner or lays down the manner of qualifying such remuneration.
• Remuneration can also be a yearly payment.

3.The remuneration should not belong to a period prior to partnership deed

• The remuneration paid to the working partners will be allowed as deduction to the firm from the date of such partnership deed.
• It is not possible to give remuneration for the period prior to date of partnership deed.

4. The remuneration should not exceed Permissible limit

• The maximum amount of remuneration to all the partners during the financial year should not exceed the following limits

S.No	Book Profit	Quantum of Deduction
1	On the first Rs 3 lakhs of book profit or in case of loss	Rs 1,50,000 or 90% of book profit whichever is higher
2	On the balance of book profit	60% of profit

• Book Profit needs to be computed by adding the aggregate of remuneration paid or payable to partners to net profit.
• The above table only shows the maximum deduction the firm can claim. However the firm can pay remuneration to working partners beyond these limits.
• The above limit applies to all the working partners taken together and not to each individual partner.

B. Interest to partners

Interest can be allowed as deduction only if the following conditions have met

• The interest payable by a firm to its partners should be authorized by the partnership deed.
• The interest payable by a firm to its partners should not be for a period prior to the date of partnership deed.
• The rate of interest payable to partners should not exceed 12% simple interest per annum.