Section 10(2A) Exemption towards share of income from firm/LLP

Provisions of section 10(2A) of the Income Tax Act exempts share of profit received by a partner in the total income of the partnership firm/LLP. The main objective of granting the exemption,under section 10(2A) to the share of profit received by the partner, is the avoidance of double taxation.

The present article meticulously explains the exemption available under section 10(2A) of the Income Tax Act.

Meaning of the term ‘Firm’:

Before understanding the exemption available under section 10(2A) of the Income Tax Act, let us first understand what the term ‘Firm’ means under the Income Tax. The term ‘Firm’ is defined under section 2(23)(i) of the Income Tax Act. As per the said definition, ‘Firm’ includes the following –

1. The firm, as defined in the Indian Partnership Act, 1932; and

2. Limited Liability Partnership, as defined in the Limited Liability Partnership Act, 2008.

Exemption available under section 10(2A) of the Income Tax Act

Section 10(2A) of the Income Tax Act provides the following exemption –

• The share of profit, received by a partner, in the total income of the firm is exempt from income tax in the hands of the partners.
• The share of profit, received by a partner, in the total income of Limited Liability Partnership is exempt from income tax in the hands of the partner.

It is important to mention here that the exemption is available only towards the share of profit received by the partner of the firm or Limited Liability Partnership. In other words, it doesn’t cover the amount of interest on capital and remuneration received by the partner of the firm or Limited Liability Partnership.

Analysis of Provision of section 10(2A) of the Income Tax Act with an example –

Suppose M/s. ABC is a partnership firm which consists of three equal partners Mr. A, Mr. B and Mr. C. During the year, the total income of the firm is INR 3 Lakhs and remuneration paid to each partner is INR 10,000 per month. Accordingly, profit credited to each partners account is INR 1 Lakhs. Tax treatment under Income Tax would be –

• The share of profit of INR 1 Lakh credited to each partner would be exempt in the hands of partners in terms of provisions of section 10 (2A) of the Income Tax Act.
• The amount of remuneration of INR 10,000 per month received by each partner would be taxable in the hands of respective partners. Provisions of section 10(2A) don’t provide an exemption to the amount of remuneration received by the partners from the firm.

Important notes worth referring related to Section 10(2A) Exemption

• Income exempt or deductible under various provisions of the Income Tax Act is to be included, while interpreting the term ‘total income of the firm/Limited Liability Partnership’.
• Referring exemption provision of section 10(2A) of the Income Tax Act, it can be concluded that the income of the firm/Limited Liability Partnership is taxable only in the hands of the firm/Limited Liability Partnership. It cannot be taxed for the second time in the hands of the partners.
• The entire amount of profit credited to partners account would be exempt in terms of section 10(2A) even if in case, due to any exemption, the income chargeable to a tax of the firm/Limited Liability Partnership is NIL.

Table – Articles on Section 10 Exemptions