Correct method of remuneration in amount or ratio% ????

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Ajay (Querist)
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13 September 2013 Can you pls advice :
Which method is correct to draft Remuneration in Partnership Deed
1) Show Ratio in % of Each partner or
2) Show Remuneration in Rs. like 50000/- P.M. etc.

Also advice if some one show remuneration in Rs. P.M. & he give Remuneration amount more then shown then only Extra Amount is taxable or other error are there.

Ajay

Ajay (Querist)
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24 September 2013 Any one?????

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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20 July 2024 In drafting a Partnership Deed, determining the method of remuneration for partners involves considerations of clarity, fairness, and compliance with tax regulations. Here’s a breakdown of the two methods you mentioned and their implications:

### 1. Showing Ratio in % for Each Partner

- **Advantages:**
- Provides transparency about how profits will be shared among partners.
- Aligns directly with the profit-sharing ratio, making it clear how each partner's efforts contribute to their share.
- Helps in determining the tax liability as it is directly linked to the profit-sharing ratio.

- **Considerations:**
- The profit-sharing ratio can be based on various factors such as investment, effort, seniority, etc.
- Changes in profit distribution may require an amendment to the partnership deed, which can be cumbersome.

### 2. Showing Remuneration in Rs. (e.g., Rs. 50,000/- per month)

- **Advantages:**
- Provides a fixed and predictable amount as remuneration to partners.
- Ensures partners receive a regular income regardless of the firm's profitability.
- Helps in budgeting personal finances as partners can rely on a fixed income.

- **Considerations:**
- The amount fixed should be reasonable and justifiable based on the partner’s contribution and market standards.
- Exceeding the fixed amount may require additional tax implications or adjustments.

### Tax Implications:

- **Fixed Remuneration and Additional Amounts:**
- If the partnership deed specifies a fixed amount of remuneration (e.g., Rs. 50,000/- per month) and the partner receives more than this amount, the excess amount may be treated differently:
- **Extra Amount Taxability:** Generally, any amount received beyond the fixed remuneration can be treated as a distribution of profits or additional income to the partner. This additional amount would typically be taxable as per the income tax laws.
- **Compliance:** It’s crucial to ensure that any excess payments are compliant with tax regulations and properly accounted for in the partnership’s financial records.

### Best Practice:

- **Clarity in Partnership Deed:** Whichever method you choose (percentage or fixed amount), ensure it is clearly specified in the partnership deed.
- **Regular Review:** Periodically review the remuneration structure to ensure it aligns with the partnership’s financial performance and goals.
- **Consultation:** It’s advisable to consult with a tax advisor or legal expert to draft or review the partnership deed, especially concerning tax implications and compliance.

In conclusion, both methods have their merits and should be chosen based on the specific needs and dynamics of the partnership. It’s essential to understand the implications of each method, particularly regarding tax compliance and financial transparency.

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