Rate of tax :-Flat rate of 30% on the total income after deduction of interest and remuneration to partners/Designated Partners at the specified rates + Surcharge of 10% if Total Income exceeds 1 Crore and will be further increased by education cess secondary and higher education cess @ 3% on Income-tax.

Interest to Partners:- (Simple interest) Not exceeding 12% p.a. from 1-6-2002 (18% p.a. up to 31-5-2002).

Remuneration to Partners/Designated Partners

1. Payment of Remuneration to a non-working partner will not be allowed as a deduction

2. A ‘working partner’ is an individual who is actively engaged in conducting the affairs of the business or profession of the firm.

3. Quantum of allowance is to be determined with reference to ‘book profit’ which is defined to mean an amount computed in accordance with the provisions of sections 28 to 44D of the Income-tax Act, as increased by the amount of remuneration to partners if deducted in determining book profit.

4. Maximum permissible deduction for payment of remuneration to working partners. Upto A.Y. 2009-10, the maximum permissible deduction was as under :

Professional firms
Business firms
Book Profit/Loss % or amount of deduction Book Profit/Loss% or amount of deduction
i. LossRs. 50,000i. LossRs. 50,000
ii. Profit Rs. 50,000ii. Profit
up to Rs. 50,000Rs. 50,000up to Rs. 50,000Rs. 50,000
up to Rs. 1,00,000*90%up to Rs. 75,000*90%
next Rs. 1,00,00060%next Rs. 75,00060%
Balance profit40%Balance profit40%
*(higher of Rs. 50,000 or prescribed percentage)
From A.Y. 2010-11, deduction for payment of remuneration to working partners for both Business as well as professional firms  has changed as under:
Book Profit/Loss% of amount of deduction
(i) loss or profit upto Rs. 3,00,000Rs. 1,50,000/- or 90% of Book Profit whichever is more
(ii) on the balance60% of book profit

Conditions for allowance of remuneration and interest to partners

1. Remuneration should be to a working partner.

2. Payment of remuneration and interest should be authorised by and should be in accordance with the terms of the partnership deed and should relate to any period falling after the date of such partnership deed.

3. No deduction u/s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration — Circular No. 739 dt. 25-3-1996.

Conditions for assessment as a firm

1. The partnership should be evidenced by an instrument in writing specifying individual shares of the partners.

2. A certified copy of the instrument signed by all the partners (not being minors) shall accompany the return of the firm for the first assessment as a ‘firm’.

3. In case of any change in the constitution of the firm or shares of the partners in any previous year, the firm shall furnish a certified copy of the revised instrument of partnership signed by all the partners (not minors) along with the return of income for that A.Y.

4. If any default is made in compliance with the above provisions, the firm will be assessed as a firm without deducting interest and salary to partners from A.Y. 2004-05 onwards and as an AOP up to A.Y. 2003-04.

5. If any failure is made as mentioned in S. 144 (ex parte assessment) the firm  shall be assessed as a firm  from A.Y. 2004-05 without deducting interest and salary to partners and as an AOP up to A.Y. 2003-04.

Partners’ assessments

1. Once tax is paid by firm , no tax will be payable by the partners on share of income from the firm .

2. Amount of Interest and/or remuneration etc. received by a partner will be taxed in his hands as ‘Business or Professional Income’, excluding the amount disallowed in the hands of the firm  being in excess of limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in S. 144 or non compliance of S. 184.

Losses of the firm

Unabsorbed loss including depreciation in respect of A.Y. 1993-94 onwards of the firm  will not be apportioned amongst the partners and will be carried forward by the firm  only.

Allowability of remuneration and interest vis-a-vis presumptive taxation

Remuneration and interest will be allowed as deduction from the presumptive income computed at prescribed rate u/ss. 44AD, 44AE & 44AF.

Due dates for filing return of firm

a. 30th September, where accounts of the partnership firm  are required to be audited under Income- tax Act or under any other law for the time being in force.

b. 31st July in any other cases.

Due dates for filing of returns of partners

a. 30th September in case of a  working partner of a firm  (whether or not he is entitled to remuneration) where due date for filing return of firm  is 30th September.

b. 31st July for other partners

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4 responses to “All about Taxation of Partnership Firms /LLP”

  1. HemantAgarwal says:

    Hi all, I have small partnership firm service industry…..My accountant told me that it is must to show profit 10% of total income…..Please suggest me is it must or any other option is there

  2. HemantAgarwal says:

    Hello all, i have small partnership firm…..service industry…My accountant said that service industry must to show 10% profit for tax……..is it right please suggest me

  3. jugangsu says:

    I want to know is there any legal obligation/ tax calculation problem partnership between husband & wife

  4. Jignesh Gohil says:

    Hello All , I want to know that are the small scale partnership firm pays more tax than proprietorship firm in India OR both the Firm has the same Tax Laws ?? Please reply me your Answer.

  5. Christopher DSouza says:

    I have joined a LLP as Partner and paid a contribution to said firm. Is TDS applicable to this contribution?

  6. Ravi Gupta says:

    Long term profit in property & equity is taxable?

  7. Hiren Prajapati says:

    I have a partnership firm incorporated in 2009. It has been idle since then. What shall be done to activate it once again? Kindly guide…

  8. bg maheswar says:

    can the partners give their vehicle to partnership firm, in case of logistics firm

  9. Vikesh Sharma says:

    1) What all kind of taxes for partnership firm(Construction Firm)?
    2) What all kind of deduction in income tax a partnership firm can claim(Construction Firm)?

  10. juhi says:

    I wish to set up business in India with a foreign partner ,the foreign wants to have 90% profit sharing ration ,please tell me is private ltd a good opt or LLP and alaso the taxes for each and repatriation of profits to USA

  11. achin says:

    IF WANT ANY TYPE INCOME TAX RETURN CALL-8273980693

  12. Rawal Singh Bhati says:

    @pavan: under business head [no case law needed simply defination of capital asset itself exclude stock in trade]

    @kaddy :rs 150000

    @Ashoka :not allowed

    @sachin: no, since only individual can clain 80C

    @suleman: parter will shows as drawings in firms books and claim deduction u/s 80C

  13. Rawal Singh Bhati says:

    @Rajendra Kumar

    There is no such specefic format, you may use any format either T form or Vertical form

  14. Rawal Singh Bhati says:

    @Vinod

    Calculate 8% or higher % of Turn over and

    Further deduct salary interest to partner

    Amount you get is business income

    Example. Firm T/o 10lac rs. You declare 8% i.e, rs 80000 , now salary and interest to partner is say 74000.

    So now firm have to pay tax on rs 6000 only

  15. Vinod Patil says:

    How to calculate taxable income of a partnership firm u/s 44AD of income tax Act,1961.

  16. RANENDER KUMAR says:

    Dear Sir

    I want the P&L Format of partner ship firm if possible please send

    Thanks

    Rajender Kumar

  17. suleman says:

    How can partners show insurance investments as expenses/deductions??
    Any alternative to show the same as expenses/deductions??

  18. SACHIN GUPTA says:

    if the firm purchese a lic policy for his partner and  the firm clain of this amount in incometax. 

  19. ASOK SAHA says:

    A proprietor can submit his Income tax return in the name of his Company’s Name ?

    Mr. A Saha is Proprietor of ” Universal Trader”
    Is it possible to get a PAN card in the name of ” Universal Trader” ?

  20. kaddy says:

    hello sir..
    I’ve a really stupid doubt..

    while calculating the taxable income of a partnership firm, we need to disallow the remuneration paid to the partners by the firm.
    then after calculating the correct amount of partners’ remuneration, which amount should be taken in case the revised amount exceeds the amount actually paid…?

    I mean, if firm paid rs. 1,50,000 to two partners. firm’s income before partners remuneration is 5,00,000.. then the salary payable would be(2,70,000+1,20,000) Rs. 3,90,000.
    so which amount should be taken?

  21. pavan says:

    3 partners formed partnership firm in 2006,
    Purpose of business as per deed: Dealers in land
    But actully they purchased single land and after 3 years they sold it..
    in 2007, 2008 int loss return filed..

    Querry
    Profit on sale of land whether it is taxable under pgbp or as capital gain ..
    Please if possible refer case law..

  22. Maulesh Bhatt says:

    Depreciation rate For Vehicle For The AY 2009-10 , If Rate 50% before New Vehicle Pur For 30 Sep, What rate after 30 sep Please Expline me

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