How Partners Share Profit: Capital, Interest and Salary

In a partnership firm, profit is not simply split by the profit ratio. The deed usually gives partners interest on their capital and a salary (remuneration) first, and only the rest is shared in the agreed ratio.

The order of appropriation

1. Net profit from the profit and loss account, before any partner payments.
2. Interest on capital to each partner, at the rate in the deed.
3. Remuneration to working partners, as in the deed.
4. Remaining profit shared in the profit sharing ratio.

Each partner's capital account then shows opening capital, capital added, drawings, interest, remuneration and profit share, giving the closing capital.

A worked example

A firm made ₹14,50,000 before partner payments. Interest on capital is 10 percent.

• Amit: capital ₹5 lakh, added ₹1 lakh during the year, remuneration ₹2,40,000, ratio 40 percent.
• Neha: capital ₹4 lakh, remuneration ₹2,40,000, ratio 35 percent.
• Rajiv: capital ₹3 lakh, added ₹50,000, no remuneration, ratio 25 percent.

Interest (opening capital plus half of capital added): Amit ₹55,000, Neha ₹40,000, Rajiv ₹32,500. Total ₹1,27,500.
Remuneration total: ₹4,80,000.
Profit left to share: 14,50,000 − 1,27,500 − 4,80,000 = ₹8,42,500.
Shares: Amit 40% = ₹3,37,000; Neha 35% = ₹2,94,875; Rajiv 25% = ₹2,10,625.

What the law and tax say

If there is no deed, or the deed is silent, the Partnership Act's default rules apply, which include equal sharing of profit and no interest on capital or salary. For income tax, a firm can deduct interest on capital (up to the limit set in Section 40(b), currently 12 percent) and remuneration to working partners within limits linked to book profit, only if the deed allows them. Your CA applies the current limits.

Drawings

Money a partner takes out during the year reduces their capital. Some deeds also charge interest on drawings; include it if yours does.

Capital accounts: fixed or fluctuating

Some firms keep fixed capital accounts, where capital changes only when a partner adds or withdraws capital, and a separate current account for interest, salary, profit and drawings. Others keep one fluctuating capital account for everything. Both are correct; follow what your deed and your CA use, and keep it the same every year.

Keep it written

Most disputes between partners come from unclear terms. Put the ratio, interest rate, remuneration and drawings rules in the deed, and update it when partners change.

Our Partnership Firm Capital & Profit Sharing Register applies these steps for up to 12 partners and prints the appropriation account.