Introduction

Remuneration in Partnership firm, let’s talk about the issue of deducting compensation from partners’ earnings. Both personal and capital expenses are prohibited. Additionally, the compensation must be used solely and exclusively for the firm’s business operations. 

Remuneration to Partners as per Income Tax Act

The Income Tax Act’s Section 40(b) imposes certain limitations and requirements on deducting costs that an assessee assessable as a partnership firm may have regarding the compensation and interest the firm’s partners are entitled to. 

Terms to Adhere to for Salary to Partners in Partnership Firm

Only the working partner shall receive payment and remuneration in partnership firm

A working partner is an individual who actively manages the business or professional affairs of the company in which they both own shares. 

A working partner is an individual; a partner cannot be anything else. Even if a partner dedicates a portion of his working hours, he will still be considered a working partner.

It should be noted that salary will be applied if the company is a partner and its director or shareholder works for the firm. It won’t be regarded as payment to partners.

The partnership document should approve the payment and remuneration in partnership firm

Any compensation, bonus, or commission paid to a working partner under any other name may only be deducted if it is approved by a partnership deed and made in compliance with its provisions.

The partnership deed should outline the amount of compensation payable to each working partner or the criteria for qualifying for such compensation. An annual payment may also be used as compensation.

The compensation shouldn’t date back to before the partnership deed

From the date of the partnership deed, the compensation given to the working partners will be deductible for the company.

Giving compensation for the time leading up to the partnership agreement date is not feasible.

Interest in the Capital of the Partner

The following requirements must be met for interest to be deducted:

1. Interest payments may be provided to either a working or non-working partner.
2. The partnership agreement must permit interest payments and be connected to the agreement’s duration. 
3. The terms of any other partnership agreement will be considered for the duration of that agreement if there is one.
4. Interest rates shouldn’t go above 12%. The amount of interest that surpasses 12% of the capital is not permitted.
5. It is not permitted if the tax is paid under section 44AD or section 44ADA on an assumed basis.

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