Limits on Deduction of Partner Payments in a Firm - (New) Section 35(e) / (Old) Section 40(b)

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.... • Any remuneration (salary, bonus, commission, etc.) paid to a partner who is NOT a working partner: Clause (ii) - Conditions for Allowability (Working Partner Remuneration & Interest) • Even for valid payments, deduction is denied if: • (A) not authorised by the partnership deed applicable for the period for which such remuneration or interest is paid; or • (B) authorised by and is as per the terms of partnership deed but • relates to the period prior to the date of such partnership deed, or • which was not authorised by the earlier partnership deed; • A working partner is an individual (not a company/firm) Actively engaged in the busines....

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.... individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause; • (B) Partner acts personally but funds belong to someone else • where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person; Under Section 40(b) of the Income Tax Act, 1961 [ Upto 31.03.2026 ] Interest and remuneration paid to the partners by a firm are not deductible. However, the interest and rem....

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....count and loan account. If the partnership deed authorizes the payment of interest on fixed capital account then interest on current capital account and loan account shall not be allowed as deduction to the firm.  • The payment of interest to a partner should not exceed the amount calculated at the rate of 12% per annum simple interest (any interest in excess will be disallowed). • Following three conditions for allowability of interest to the partners of a firm: • a)  the payment should be in accordance with the terms of the partnership deed; and • b)  it should relate to any period falling after the date of such partnership deed; and • c)  it should not e....

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.... shall not be added back. CONDITIONS FOR ALLOWABILITY OF REMUNERATION AND INTEREST PAID BY THE FIRM TO ITS PARTNERS S.No Allowability of Remuneration Allowability of Interest 1. To a working partner. To a working/ non-working partner. 2. To an individual only. To any partner. 3. Should be authorized by partnership deed. Should be authorized by partnership deed. 4. In the partnership deed: • either specify the amount of remuneration payable to each partner or • lay down the manner of quantification of remuneration to each partner. Rate of interest should be specified in the partnership deed. 5. Remuneration should not be retrospective. Interest should not be r....