Interest and remuneration to partners as per Income Tax Act 1961

• Applicable provisions of Income Tax Act 1961 relating to interest and remuneration to partners as per section 40B : Interest and remuneration payable to partners cannot be paid more than monetary limits specified under section 40B of Income Tax Act 1961.
• Only working partner can be paid remuneration : Meaning of working partner means explanation 4 to section 40(b) of Income Tax Act 1961 provides meaning of  working partner as an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.
• There should be authorization of interest and remuneration in partnership deed: Interest,remuneration,bonus,salary or any such payment to partners will be disallowed if it is not authorized by partnership deed.
• Remuneration must be quantified in the partnership deed: It is specified by central board of direct tax that remuneration must be quantified or manner of quantifying remuneration must be specified by partnership deed.
• Remuneration and interest falling prior to partnership deed will not be allowed: Remuneration and interest to partners will be allowed only from period specified in the partnership deed and not for any prior period.
• Remuneration exceeding limit specified under section 40B will be disallowed:Following is the limit for payment of the remuneration under section 40B.
  • 90% of the book profit on the first Rs.3lakh of the book profit or Rs.1.5lakh in case of loss whichever is more.
  • 60% on the balance of the book profit.
    • Where book profit as per Explanation 3 to section 40(b) defines “book-profit” as to mean the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
• Interest exceeding 12% p.a is disallowed: Simple interest at the rate of 12% p.a will be allowed to partners. Here it is not specified that whether partner should be working or not.Hence even non working partners if paid interest is allowed to be paid.

Thus above are provision relating to Interest and remuneration to partners as per Income Tax Act 1961.