## Interest and Remuneration to Partners — Sec. 40(b)
A firm/LLP gets a deduction for interest and remuneration paid to partners — but capped by Sec. 40(b) to prevent profit-shifting to partners.
### (1) Interest on Loan / Capital / Current A/c
```
Interest Paid to Partner
/ \
Not authorised Authorised
by partnership deed by partnership deed
| |
No Deduction Maximum 12% p.a. allowed
(100% disallowed) (Excess over 12% disallowed)
```
#### Special Cases (Representative Capacity)
Case A — Individual is partner in representative capacity:
If an individual is a partner on behalf of someone else (e.g., as Karta of HUF), the 12% cap does NOT apply to interest paid to that individual in his personal capacity.
> Example: Mohan HUF is partner (Mohan is Karta). Firm separately takes a loan from Mr. Mohan personally. Interest paid to him in personal capacity is fully allowed — no 12% cap.
Case B — Individual is partner in personal capacity:
If an individual partner receives interest on behalf of/for benefit of others, the 12% cap does NOT apply.
> Example: Mr. C is partner in firm in his personal capacity. Firm takes loan from Mrs. C (his wife). Interest paid to Mr. C for the loan taken from Mrs. C is fully allowed.
### (2) Remuneration (Salary / Bonus / Commission / Royalty)
```
Remuneration to Partner
/ \
Not authorised Authorised
by deed by deed
| |
No Deduction ┌──────────┴──────────┐
(100% disallowed) | |
Non-Working Working Partner
Partner |
| Lower of: Limit or
No Deduction Total remuneration paid
(100% disallowed) to all working partners
```
### Limit Calculation
| Book Profit Slab | Limit |
|---|---|
| On first ₹6,00,000 of book profit (or in case of loss) | Higher of: ₹3,00,000 OR 90% of book profit |
| On balance book profit | 60% of balance |
### Book Profit Computation
| ₹ | |
|---|---|
| Profit as per Income Tax Act (PGBP) | XX |
| (+) Remuneration to partners (if debited to P&L) | XX |
| (−) Unabsorbed depreciation (if any) | (XX) |
| Book Profit | XX |
### Other Important Points
- Sec. 40A(2) (excessive payment to related persons) does NOT apply to interest/remuneration covered by Sec. 40(b).
- Rent paid to a partner is NOT covered by Sec. 40(b), so Sec. 40A(2) DOES apply to such rent.
- Share of profit received by partner from firm/LLP is exempt u/s 10(2A) in partner's hands.
- Interest and remuneration received by partner is taxable as PGBP in partner's hands — but only to the extent allowed as deduction to the firm. (Excess that was disallowed to the firm is not taxable to partner.)