Taxation of Partnership Firms

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 tax –

Income Tax Rate: flat rate of 30%

Surcharge: 12% of taxable income if net income exceed 1 crore. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

Health and Education Cess: 4% of Income Tax Plus Surcharge

2. Interest to Partners –

Simple interest Not exceeding 12% p.a.

3. Remuneration to Partners –

1. Payment 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.

Allowability of Remuneration to the partners is as under :

4.  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.

5. Conditions for assessment as a firm

1. The partnership should be evidenced by an instrument in writing specifying individual share 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.

5. If any failure is made as mentioned in S. 144 (ex parte assessment) the firm shall be assessed as a firm without deducting interest and salary to partners.

6. 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 amount disallowed in the event of any failure as mentioned in S. 144 or non compliance of S. 184.

7. Losses of the firm

Unabsorbed loss including depreciation in respect of the firm will not be apportioned amongst the partners and will be carried forward by the firm only.

8. 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).

9. 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.

10. 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

Republished with Amendments