Paying Salary to Partner is not always business expense

Being an employee everyone wants consideration for their efforts; similarly partners want remunerations for time they invest in firm. Every firm pays salary to their partners but they may not be aware about provision of income tax act.

Merely passing an entry in books of accounts and withdrawal of salary is not enough. There are conditions under which remuneration paid to partners is allowed.  Now following conditions must be satisfied by partnership firm before claiming deduction as business expenditure.

  1. Remuneration is allowed when it is paid only to working partner. If you are a sleeping partner and withdrawing salary, these expenses would not be considered business expense.Working partner means an individual who is actively engaged in conducting the affairs of the business or profession.
  1. Partnership deed should contain provision of salary to partners.
  2. Salary must be quantify in partnership deed, however if “Remuneration shall be paid as per the provision of the income tax act’’ is specified in partnership deed then this will also be acceptable.
  3. At last Salary to partner is only allowed subject to the limit specified in section 40(b)

Keep reading! And reach out to us if you have any queries and you are looking for an CA in Gurgaon, Faridabad, Delhi for further clarification.

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