Article explains Taxation of Partnership Firms /LLP which includes Income Tax Rate applicable, Provisions related to Interest and Remuneration to Partners/Designated Partners, Conditions for assessment as a firm, Partners’ assessments, Losses of the firm, Due dates for filing return of firm, Allowability of remuneration and interest vis-a-vis presumptive taxation , Due dates for filing return of firm and Due dates for filing of returns of partners.

1. Rate of Income tax applicable to Partnership Firm / LLP

Flat rate of 30% on the total income after deduction of interest and remuneration to partners/Designated Partners at the specified rates + Surcharge of 12% if Total Income exceeds 1 Crore and will be further increased by education cess secondary and higher education cess @ 3% on Income-tax (Wef A.Y. 2019-20 health and education cess @ 4% shall be levied in lieu of education cess secondary and higher education cess @ 3% )

a. Income Tax Slabs for Partnership Firm / LLP

F.Y. 2017-18 F.Y. 2018-19
Tax Rate 30% 30%
Surcharge If income is greater than Rs.1,00,00,00 12% of income tax amount. Subject to marginal relief. If income is greater than Rs.1,00,00,00 12% of income tax amount. Subject to marginal relief.
Education Cess 2% extra – charged on the amount of income tax + surcharge being paid.

 

N.A.
Secondary and Higher Education Cess  1% extra – charged on the amount of income tax + surcharge being paid.

 

N.A.
Health and Education cess N.A. 4% extra – charged on the amount of income tax + surcharge being paid.

2. Rate of Interest to Partners of Partnership Firm / LLP 

from 1-6-2002 up to 31-5-2002
Simple Interest Rate 18% p.a. 12%

3. 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. As per section 40(b)(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder will be disallowed:

Slab of Remuneration to Partners/Designated Partners

Particulars Salary Allowed
a. On the first 3,00,000 of book profits or in case of a loss Rs. 1,50,000 or at the rate of 90% of the book profit (whichever is higher)
b. On the balance of book profits at the rate of 60%

Explanation 3 to section 40(b) defines “book-profit” as to mean the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net 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.

4. 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. Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.

5. 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.

6.  If any failure is made as mentioned in Section 144 (ex parte assessment) the firm shall be assessed as a firm without deducting interest and salary, bonus ,commission, remuneration paid to partners by the firm and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.

5. 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.

3. The share of the partner (including a minor admitted for the benefit of the firm), in the income of the firm is not included in computing his total income i.e. his share in the total income of the firm shall be exempt from tax  under section 10(2A) of the Act.

6. 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.

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

Remuneration and interest shall not be allowed as deduction from the presumptive income computed at prescribed rate u/s. 44AD, 44ADA. However for section 44AE , remuneration and interest to partners shall be allowed as a deduction subject to sec 40(b).

8. Due dates for filing return of firm

1. 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.

2. 31st July in any other cases( extended to 31stAugust 2018)

9. Due dates for filing of returns of partners

1. 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.

2. 31st July for other partners (extended to 31stAugust 2018 for A.Y. 2018-19)

(Republished With Amendments)

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26 Comments

  1. Rameshchandra Gohil says:

    Hello all, I have small partnership firm total income for 2017-18 is 230000 My accountant said that service industry must to show 10% profit for tax What is limit of income after deduction of Remuneration to partners & expenses.

  2. ambuj gupta says:

    Dear sir,
    article is very informative . what is situation if another llp is an investing partner in the main LLP i understand that the Main llp will be taxed but the income transferred to the partner will not be taxed in the hands of the partners

    please confirm

  3. MD FAZAL says:

    MY CLIENT HAS GROSS RECEIPS OF RS.25 LAC FROM HIS FIRM A.Y.2017-18 HIS TOTAL INCOME WILL BE LESS THAN 5% SHALL HE HAST TO FILE AUDIT REPORT PLEASE CLARIFY

  4. CS SADASIVAN says:

    Allowability of Remuneration to Working partners and Interest to their Capital in case Profit is declared U.S 44 A E . Can it be deducted from the Profit declared for Computing Tax ?

  5. 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

  6. 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

  7. 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.

  8. 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…

  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. 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

  12. 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

  13. 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” ?

  14. 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?

  15. 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..

  16. 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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