Conditions for Claiming Deduction of Remuneration to Partner’s under Section 40(b)

For claiming deduction u/s 40(b) following conditions shall be fulfilled:-

  • Payment should be made to working partner only
  • Remuneration must be authorized by partnership deed
  • It should not pertain to the period prior to partnership deed
  • Remuneration should not exceed the permissible limit-

If the above conditions are satisfied, remuneration to partner is allowable as deduction in the hand of the firm. However the maximum amount of such payment to all the partners during the previous year should not exceed the limit given below –

Book profit

Max permissible deduction in respect of remuneration to partner u/s 40(b)

If book profit is negative

Rs.1,50,000 /-

If book profit is positive-

  • On Ist Rs.3,00,000/- of book profit
  • On the remaining

  • Rs.150000 or 90% of book profit, whichever is more
  • 60% of book profit

How to compute book profit:-

  1. Compute net profit of firm as per profit & loss a/c
  2. Make adjustment as provided by section 28 to 44DB
  3. Add remuneration to partner if debited to profit and loss a/c.

The resulting amount is book profit.

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