What is Section 40B of income tax under Income Tax Act in India?

Section 40B of the Income Tax Act in India pertains to the deductions and limits on interest, salary, bonus, commission, or remuneration paid to partners by a partnership firm or a Limited Liability Partnership (LLP). The provisions under this section aim to regulate the amount of deduction a firm can claim in respect of the payments made to its partners, ensuring that these payments are within reasonable limits and meet certain conditions to be allowable as expenses.

Key points of Section 40B include:

1. Interest Payments to Partners: Interest paid to partners is allowable as a deduction, provided it is authorized by the partnership deed and does not exceed 12% per annum. Interest paid above this limit is disallowed.
2. Remuneration to Partners: Any salary, bonus, commission, or remuneration paid to partners is only allowable as a deduction if it is authorized by the partnership deed, is payable only to a working partner, and does not exceed the prescribed limits. The deduction limits are based on the book profits of the firm:

• On the first ₹3,00,000 of book profit or in case of a loss – ₹1,50,000 or at the rate of 90% of the book profit, whichever is more.
• On the balance of the book profit – at the rate of 60%.

1. Payment Timing: The partnership deed must specify the amount or formula for calculating the interest and remuneration. It should exist before the due date for filing the income tax return of the firm for the relevant assessment year.
2. Disallowance of Excessive or Unauthorized Payments: Any payment of interest or remuneration to partners that does not comply with the conditions outlined above is not allowable as a deduction for the firm.
3. Implications on Taxable Income: The amounts disallowed under Section 40B are added back to the income of the firm and are not deductible when computing its taxable income.

Section 40B ensures that the payments made to partners by a firm are within reasonable limits and are for genuine business purposes, thereby preventing firms from reducing their taxable income through excessive or unauthorized payments to partners.