Calculation of interest in partnership firm

This discussion clarifies the tax treatment of remuneration paid to partners in a partnership firm. While a partnership deed may specify a remuneration amount, the deduction allowed for income tax purposes is governed by Section 40(b) of the Income Tax Act. This deduction is based on book profits, not necessarily the full amount stated in the deed. Remuneration paid is treated as an expense for accounting but is only deductible for tax up to the limits calculated based on book profits.