Daily Bites

Remuneration and Interest to Partner – Section 40(b) using IT

29 Apr 2022 By KDK Software

The process to enter disallowed partner’s interest and remuneration as per section 40 in Part OI Point no 8A h.
“Amount of interest salary, bonus, commission or remuneration paid to any partner or member”

As per section 40(b)(v) any payment of remuneration to any partner who is a working partner, authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as here under will be disallowed:

(a) on the first Rs.3,00,000 of the book-profit or in case of a loss Rs.1,50,000 or at the rate of 90 per cent. of the book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 percent.

Explanation 3 to section 40(b) defines “book-profit” as 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.

As per Section 40(b)(iv) any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of 12[twelve] percent simple interest per annum shall be disallowed. Thus payment of any simple interest to any partner is allowed only to the extent of 12% per annum as deduction as per section 40(b). Even if the partnership deed authorizes any payment of a higher rate of interest than 12% to any partner, the excess of interest will not be deducted.

To enter partner’s remuneration and interest value please follow the steps provided below:

Step 1:

Open the Income Tax software – Go to Transactions → Business & Profession Income option given in the menu bar

Step 2:

Under Business and Professional Income, Go to Remuneration U/S 40b → enter partner details and click on calculate button

NOTE:- The Calculate button calculates the remuneration U/S 40b and then automatically populates the disallowed partner’s remuneration under Other-Information-2 of General Information/P&L/BS Point 8A(h).