## Disallowances for Firms and LLPs — Section 40(b)
### Idea
A firm/LLP can deduct interest and remuneration paid to partners, but only within statutory limits. Anything beyond the limit is disallowed.
### Step-by-step computation of Income of the Firm
| Step | Particulars | Amount |
|---|---|---|
| 1 | Profit before interest & remuneration to partners (after all deductions u/s 30–37, unabsorbed depreciation, and disallowances u/s 40, 40A, 43B) | XXXX |
| 2 | Less: Interest on capital paid to partners (Note 1) | (XXX) |
| 3 | Book Profits (1 − 2) | XXXX |
| 4 | Less: Remuneration to working partners (Note 2) | (XXX) |
| 5 | Income of the firm (3 − 4) | XXXX |
> Unabsorbed depreciation is reduced while computing Book Profits. Brought-forward business loss is set off against Income of the Firm (after Step 5).
### Note 1 — Interest on capital / loan from partners
- Maximum deductible interest = 12% p.a. on the capital/loan.
- Where an individual partner represents another person, the 12% limit applies as follows:
| Loan given by | 12% limit applies? |
|---|---|
| Individual in personal capacity (not on behalf of partner) | No |
| Individual in representative capacity (on behalf of partner) | Yes |
| Loan given directly by the represented person | Yes |
### Note 2 — Maximum remuneration to working partners
| Particulars | Amount |
|---|---|
| A. Actual remuneration paid to working partners | XXXX |
| B. Maximum allowable: | |
| • On first ₹6,00,000 of Book Profit: higher of ₹3,00,000 or 90% of Book Profit | XXX |
| • On balance Book Profit: 60% | XXX |
| C. Deduction = Lower of A or B | XXXX |
Thumb-rule: A firm can pay up to ₹3,00,000 and claim it irrespective of book profit/loss. Apply the limit calculation only if remuneration exceeds ₹3,00,000.
### Taxability in partners' hands
- Interest & remuneration are taxable for partners under PGBP [Section 28(v)] only to the extent allowed as deduction to the firm. (If ₹2,00,000 interest is paid but only ₹1,00,000 is allowed to the firm, only ₹1,00,000 is taxable for the partner.)
- Share of profit distributed to partners is exempt u/s 10(2A).
### Conditions & clarifications
- Deduction allowed only if authorised by the partnership deed, and only prospectively from the date of the deed (no deduction for payments before the deed's date).
- No deduction for remuneration to a non-working partner.
- W.e.f. 1.4.2025, TDS @ 10% u/s 194T applies on remuneration/interest paid by a firm to partners if the sum exceeds ₹20,000.
- 'Remuneration' = salary, bonus, commission etc. (does not include interest).
- A working partner is an individual actively engaged in the firm's business.