40 B of Income Tax Act (Latest Update)

When you are part of a firm or any corporation, as its member/employee you get a certain amount of money from time to time in a fiscal year. How do you pay taxes on such a source of income? Well, section 40 B of Income Tax Act, 1995 talks about remunerations, salary bonuses, commissions, or any additional sum of money given to the partners of a firm. This amount can be deducted as an expense w.r.t. the terms and conditions as specified under section 40 B.

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To Understand What is Section 40 B Keep Reading!

Section 40 B states that in the case of any firm assessable as such:

Any amount of money credited as salary, bonus, commission or remuneration or any other name, is allowed only to a working partner. However, in any case, any sum credited as remuneration to a non-working partner or to any person who benefits from a working partner (not authorized as per the contract/ partnership deed) will be disallowed.

The conditions to be fulfilled to claim deductions for remuneration received are

The interest paid as remuneration must be authorized by the partnership.
The payment date of the interest paid as remuneration must be after the partnership deed was authorized.
The interest rate must not be more than 12% charged as simple interest per annum.

Let’s look at the amount limit as per section 40 B for such remunerations.

So, the remuneration paid to the partners must be according to the rules and limits of the legal contract. And it should not be more than the following limit:

On first INR 3,00,000 of net profits or loss, INR 1,50,000 or 90% of the net profit, whichever is more;
On the balance of the net profit, up to 60% of the net profit.

Also, the interest paid as well as received by a firm from the same partner is chargeable to tax. But, if the interest is paid to the same partner, then it will not be taxed and can be claimed under section 40B deductions.

U/S 40(b) Income Tax Officer Disallow the Following

Remuneration paid by a partnership firm to its partners will be disallowed under the following conditions:

If it is paid to a non-working partner;
If the remuneration paid is not as per the authorized deeds criteria.
If the remuneration was given before the authorization of the deed signed by the partnership firms.
If the remuneration paid is more than the following permissible limits:

The first 3 lack of profit or loss in the book, whichever is more the INR 1.5 lakhs or 90% of the profit;
On the balance of the book profit, 60% of the book profit.

Any interest paid to any partner if more than 12%, it will not be allowed as a deduction.

How do You Calculate Allowable Remuneration?

To calculate the allowable remuneration under section 40 B of the IT Act go to this link and enter all your numbers in the remuneration calculator tool. This tool calculates the remuneration to partners in a jiffy.

The information you need to know to enter this tool is given below.

S.No.
Name of Partner
Rate
Amount of Interest
Action
Total Interest Paid to Partners
Remuneration to Partners
Salary to partners
Bonus to partners
Commission to partners
Total remuneration allowed
Depreciation
Interest paid to partners and other disallowances
Profit before interest, depreciation & remuneration
Less: Interest on capital to partners @ 12%
Depreciation allowable as per Income-Tax Act, 1961
Other allowable items
Book Profit

In the end, you will get

The Maximum Remuneration Allowable As per Section 40(b) of the Income Tax Act, 1961 (A) and

Total Remuneration Allowed As Per Books of Account (B).

The Remuneration inadmissible under section 40(b) /40(ba) (B – A) will be displayed at the bottom.

You can reset the values and check for different values to see the deductions. This tool is present on the official website of the income tax department as an initiative to save the taxpayer from the hassle of doing it manually. There are other tools as well to calculate deductions, income tax calculations, etc.

So, does partner remuneration fall under taxable income?

Yes, if the remuneration paid is shown as an expense in the hands of the business it is taxable income. The person receiving the remuneration is liable to pay tax as an income from a business or profession. However, if the remuneration is not shown as an expense, then it’s not taxable income for the partners.

FAQ- 40b of income tax act

What is the Allowable Deduction U S 40 B Towards Remuneration to Working Partners?

The remuneration permissible limit towards a working partner is explained under the 5th clause of section 40 B of the Income Tax Act. According to it any amount more than INR 3 lakhs will be charged at INR 1.5 lakhs or 90% of the book profit, whichever is more. And that, the balance book profit is 60% of the book profit.

Conclusion

Section 40 B of Income Tax Act is all about the permissible limit of the remuneration received by the partners of the firms. The remuneration is any payment made in form of compensation, bonus, salary, or commission given to the partners for their efforts. The remuneration is taxable if declared as an expense. This section is applicable to partnership firms, LLPs, etc. The permissible limit for deduction is only allowed to a working partner only if the remuneration was made according to the authorized deed, and the date of payment was post-deed authorization date.

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