As per Section 40(b) of the Income Tax Act 1961, Interest & Salary paid to the Partners by the Partnership Firm are allowed to be deducted as an expense only in case all the specified conditions are being adhered to.

Remuneration paid to Partners

Payment of Salary, Bonus, Commission or Remuneration, by whatever name called (hereinafter referred to as Remuneration in this article) is allowed only to a Working Partner. If it is paid to be a non-working partner, the same shall be disallowed.

Moreover, the payment of remuneration should not exceed the following amounts. Any amount in excess of the below mentioned limits will be disallowed:-

ParticularsSalary Allowed
a. On the first 3,00,000 of book profits
or in case of a loss
Rs. 1,50,000 or at the rate of 90% of the book profit
(whichever is higher)
b. On the balance of book profitsat the rate of 60%


The computation of Book Profit for the purpose of Section 40b would be the net profit as shown in the P&L A/c for the previous year and increased by the aggregate of the remuneration paid or payable to all partners of the firm is such amount has been deducted while computing the net profit.

Payment of Interest to Partners

The payment of interest to a partner should not exceed the amount calculated at the rate 12% p.a simple interest. Any amount in excess of 12% will be disallowed. The payment of interest can be to any partner whether working or non-working.

If the firm pays interest to a partner and the partner pays interest to the firm on his drawings, then the interest shall not be netted off. The interest received by the firm from the partners on their drawings is taxable in the hands of the firm as income under head Profits & Gains of Business or Profession. The interest paid by the firm to the partners is allowable as per Section 40(b)

Interest paid by the firm to its partners on their fixed capital account, current capital account and loan account is allowable as deduction to the firm provided the partnership deed specifically authorizes the payment of interest on fixed capital account, current capital account 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.

Mentioned in the Partnership Deed

The payment of Remuneration to a working partner should be authorized by and should be in accordance with the terms of the partnership deed. Moreover, this amount would be allowed to be claimed as a deduction only if the partnership deed either specified the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.

Moreover, the payment of Remuneration and Interest should relate to a period falling after the date of partnership deed i.e. the partnership deed should not provide for payment of remuneration and interest from retrospective effect (i.e. any earlier period prior to the date of partnership deed).

All the above norms in relation to deduction of remuneration and interest for income tax purposes apply to all firms irrespective of whether they are registered or unregistered.

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