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Partner remuneration beyond 40 (b) limits

26 April 2025

If partners in the partnership firm withdraws remuneration more than the limit prescribed in 40(b) of the income tax act. Some one guide me what are the consequences.

FY : 2023_24 & FY 2024_25

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Rama chary Rachakonda (Master in Accounts & high court Advocate email ID:ramachary64@gmail.com voice no:9989324294) (7851 Points)
Replied 27 April 2025

Consequences of Exceeding Remuneration Limit under Section 40(b) If partners in a partnership firm withdraw remuneration exceeding the limit prescribed in Section 40(b) of the Income Tax Act, the excess amount will be disallowed while computing the firm's business income.

The limits are¹: - *On the initial ₹3,00,000 book profit or loss*: 90% of the book profit, or ₹1,50,000, whichever is greater. -

*On the remaining book profit*: 60% of the profit. Key Consequences - *Disallowance of Excess Remuneration*: The excess remuneration paid to partners will be disallowed while computing the firm's business income. -

*Tax Implications*: The disallowed amount will be added back to the firm's income, increasing its tax liability. -

*Partner's Tax Liability*: The partner's tax liability will not be directly affected, but they may need to adjust their individual tax returns to reflect the correct income. Important Considerations -

*Partnership Deed*: Ensure the partnership deed allows for remuneration to partners and specifies the terms and conditions. -

*Books of Accounts*: Maintain proper books of accounts to track remuneration payments and ensure compliance with tax laws. -

*Section 40(b) Limits*: Verify the limits prescribed under Section 40(b) and ensure remuneration payments are within these limits to avoid disallowance.² Action Plan -

*Review Partnership Deed*: Check the partnership deed to ensure it allows for remuneration payments and specifies the terms. -

*Verify Remuneration Payments*: Review remuneration payments to ensure they are within the limits prescribed under Section 40(b). -