Article explains about Taxation of Partnership Firms and LLPs and includes discussion on Computation of Income of Partnership Firms and LLP’s, Income Tax Rates for Partnership Firms and LLP’s, Tax Payment method for Partnership Firms and LLP’s, Return Filing Provisions for Partnership Firms and LLP’s, Due dates for filing of return for Partnership Firms and LLP’s and Taxation of Partners of Partnership Firms and LLP’s.
Income Tax –
A charge imposed by government on the annual earnings (either earned* or unearned** Income) of a Person (Section 2(31)).
* Money, we earn from working (like wages, salaries, tips & net earnings from self-employment income & So on…)
**Like annuity payments, pension income, distributions from retirement accounts, capital gains, interest income, dividends & son on…
Firm is also included in the definition of Person as defined under Section 2(31) of The Income Tax Act, 1961.
In this article, we look at the procedure of taxation of a Partnership Firm and LLPs.
Partnership Firms can be divided into two categories namely,
a) registered partnership (those having a registration certificates from the registrar of firms) or
b) unregistered partnership.
Under Income Tax Act, a partnership firm is defined under Section 2(23) (i) which takes the meaning of the “Firm” from the Indian Partnership Act, 1932.
Section 4 of Indian Partnership Act, 1932 defines – Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”
Limited Liability Partnership (LLP):
The firm shall include a limited liability partnership as defined in the Limited Partnership Act, 2008.
“Section 2(1) (n) of the Limited Liability Partnership Act, 2008 defines “limited liability partnership” as a partnership formed and registered under the Act”
A Limited liability partnership (LLP) is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It is a legally separated entity from that of its partner.
A LLP is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
“Since the liability of the partners is limited to their agreed contribution in the LLP, it contains elements of both a corporate structure as well as a partnership firm structure”
While computing income tax for a partnership firm and LLPs, we should consider the income from House Property (if any property owned by firm or LLP & received rent from that), Capital Gains (at the time of dissolution of asset of firm or LLP as case may be) & Other Sources (like interest on investments held by the firm or LLP) also in addition to the income earned from Business or Profession.
√ At the time of calculating the total Business Income –
Deduct all the allowable expenses for business “Expenses which are allowed for deduction under section of head Profit and Loss from Business or Profession” reduce allowable partner’s salary and interest from that profit.
Provisions for partner’s interest in case of Partnership Firm-
Allowed for deduction if the following conditions are satisfied:
1. Payment of interest is authorized by the partnership deed
2. Rate shouldn’t exceed 12 %
3. Payment should be for the period after the partnership deed constitution.
Partner’s salary / remuneration (Section 40b) in case of Partnership Firm –
Allowed to reduce net profit if following conditions are satisfied:
1. Remuneration should be paid to working partners
2. It is authorized by the partnership deed
3. It shouldn’t related to period prior to partnership deed
4. Remuneration should be within permissible limit.
Permissible Limit for deduction of remuneration of partner in case of Partnership Firm –
|Book Profit||Amount deductible u/s 40(b) (maximum)|
|If book profit is Negative||Rs 1.5 Lakhs or 90% of book profit whichever is more|
|If book profit is Positive|
|On First Rs. 3 Lakhs||Rs 1.5 Lakhs or 90% of book profit whichever is more|
|On remaining balance||60 % of Book Profit|
Book Profit – Net profit less other income and don’t adjust brought forward losses and deduction u/s 80C to 80U plus add partner’s remuneration.
√ Other income say house property, capital gains and others sources– to be calculated similarly as calculated for Individual.
Aggregate all the income and need to deduct the allowable deductions under Section 80G, 80GGA, 80IA, 80IC, 80ID, 80IE, 80JJA & brought forward losses or unabsorbed depreciation as case may be, if any from the Income.
Finally we will get Net Taxable Income & hence tax is to be computed on this income.
1. The share of the partners in the total income of the firm is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership
2. Losses of the firm should be carried forward and not allowed to allocate
3. LLP’s can’t claim benefits of section 44AD by using presumptive taxation but partnership firm can claim the same benefit while filing return
|Long – term capital gain||20||%|
|Short – term capital gain u/s 111A||15||%|
Tax can be paid in any of the following mode – Physical Mode (payment by furnishing the hard copy of the challan at the designated bank) & E Payment Mode (making payment by using the electronic mode)
Note – E Payment mode is mandatory for a firm who is liable to get its accounts audited under Section 44AB of the Income Tax Act, 1961.
Advance Tax – to be calculated on the basis of expected tax liability of the year. Advance tax is to be paid in installments as given below –
|Status||By 15th June||By 15th September||By 15th December||By 15th March|
|Taxpayers (other than who opted for presumptive scheme)||Up to 15 % of advance tax||Up to 45 % of advance tax||Up to 75 % of advance tax||Up to 100 % of advance tax|
|Taxpayers (who opted for presumptive scheme Sec.44AD)||Nil||Nil||Nil||Up to 100 % of advance tax|
* Any tax paid till 31st March is treated as Advance Tax.
|Particulars||Due Date of filing of Return|
|A firm who is required to get its accounts audited under the Income Tax Act or under any other law||September 30th of the AY|
|A firm who is required to furnish a report in Form No. 3CEB under section 92E||November 30th of the AY|
|In any other cases||July 31st of the AY|
# As per LLP Act, 2008 provides every LLP having turnover exceeds Rs. 40 Lakhs or whose Capital contribution exceeds Rs. 25 Lakhs are required to annually get their accounts audited by a chartered accountant. As per Income Tax Act, 1961 provides every LLP having turnover exceeds Rs. 100 Lakhs are required to annually get their accounts audited by a chartered accountant
1) Interest on capital, remuneration received from firm or LLPs is taxable in the hands of partner or designated partner as Profits & Gains of Business or Profession.
However in case any amount is disallowed in the hands of firm, such amount would not be taxable in the hands of the partners.
2) Due date for filing of returns of partners in case of Firm:
i. In case of working partner – 30th September of the Asst. Year (where due date for filing the return for firm is 30th September)
ii. Other partners – 31st July of the Asst. Year
3) Tax liability of Firm or LLPs and their partners or designated partners –
|General Partnership Firm (Section 188A)||Limited Liability Partnership (Section 167 C)|
|Every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year to which such previous year is relevant, and all the provisions of this Act, so far as may be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.||Notwithstanding anything contained in the Limited Liability Partnership Act, 2008 (6 of 2009), where any tax due from a limited liability partnership in respect of any income of any previous year or from any other person in respect of any income of any previous year during which such other person was a limited liability partnership cannot be recovered, in such case, every person who was a partner of the limited liability partnership at any time during the relevant previous year, shall be jointly and severally liable for the payment of such tax unless he proves that the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership.
Explanation –For the purposes of this section, the expression “tax due” includes penalty, interest or any other sum payable under the Act
The partners/ designated partners in a partnership or in LLPs can make several elections that can impact the amount of taxable income recognized by the partnership or LLPs, because they alter the timing of either revenue or expense recognition.
These elections are –
(Author Abhinava Bhavani Prasad is a CA-Final Student, currently serving as an Article Trainee at Ganesh Prasad Chartered Accountants, Chennai & serving as an executive committee member of Chennai SICASA.)
(Republished with Amendments)