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Interest paid by a partnership firm to a partner, authorised by the partnership deed, is deductible under section 40(b) to the extent of:
A18 per cent per annum compound interest
B15 per cent per annum simple interest
C10 per cent per annum simple interest
D12 per cent per annum simple interest
Answer & Solution
Correct answer: D. 12 per cent per annum simple interest
1. Section 40(b)(iv) caps deductible interest to a partner at 12% simple interest per annum.
2. Interest must also be authorised by, and consistent with, the partnership deed and relate to a period after the deed.
3. Any excess over 12% simple interest is disallowed in the firm's hands, and that excess is not taxed in the partner's hands under section 28(v).
_Source: ICAI CA Inter P3(A) Income-tax SM (May 2026), Ch 3 Unit 3 PGBP, PDF p. 84_
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