• Apr
  • 03
  • 2015

All about Taxation of Partnership Firms /LLP

Posted In Income Tax | , | 11 Comments » Print Friendly and PDF

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. Loss Rs. 50,000 i. Loss Rs. 50,000
ii. Profit Rs. 50,000 ii. Profit
up to Rs. 50,000 Rs. 50,000 up to Rs. 50,000 Rs. 50,000
up to Rs. 1,00,000* 90% up to Rs. 75,000* 90%
next Rs. 1,00,000 60% next Rs. 75,000 60%
Balance profit 40% Balance profit 40%
*(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. 3,00,000 Rs. 1,50,000/- or 90% of Book Profit whichever is more
(ii) on the balance 60% 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


11 Responses to “All about Taxation of Partnership Firms /LLP”

  1. 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

  2. Rawal Singh Bhati says:

    @Rajendra Kumar

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

  3. 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

  4. Vinod Patil says:

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

  5. RANENDER KUMAR says:

    Dear Sir

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

    Thanks

    Rajender Kumar

  6. suleman says:

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

  7. SACHIN GUPTA says:

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

  8. 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” ?

  9. 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?

  10. 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..

  11. 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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