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Partnership - Taxation

Under the Income Tax Act, the Partnership firm is taxed as a separate entity, distinct from the partners. In the Act, there is no distinction between assessment of a registered and unregistered firms. However, the partnership must be evidenced by a partnership deed.

Under the Income Tax Act, a partnership firm may be assessed either as a partnership firm or as an association of persons (AOP). If the firm satisfies the following conditions, it will be assessed as a partnership firm, otherwise it will be assessed as an AOP:-

• The firm is evidenced by an instrument i.e. there is a written partnership deed.
• The individual shares of the partners are very clearly specified in the deed.
• A certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.
• If during a previous year, a change takes place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised partnership deed shall be submitted along with the return of income of the previous years in question.
• There should not be any failure on the part of the firm while attending to notices given by the Income Tax Officer for completion of the assessment of the firm.

It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm can claim the following additional deductions which the AOP cannot claim :-

• Interest paid to partners, provided such interest is authorised by the partnership deed.

Tax Rate

Partnership firms are required to pay tax on its taxable income @ 30% plus education cess of 3% Limits of Remuneration to

Steps for Computation of taxable income of a LLP

• Find out the income of firm under the different heads of income, ignoring the prescribed exemptions. The heads of income are:-Income from House Property
  • Profits and Gains of Business or Profession
  • Capital Gains
  • Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. ('Salary' income head is not included)
• The payment of interest to partners is deductible if allowed under the partnership deed.
• Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners, only if the said remuneration is approved by the deed and is paid only to the working partner. Any payment of remuneration in excess of limit prescribed by the Income Tax Act shall not be allowed as deduction for calculating taxable income. .
• Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the "gross total income".
• From the "gross total income", make the prescribed deductions and the balancing amount is the "net income" of the firm.
• Partners share from partnership is free from taxation and remuneration received by him is taxed as “Income from Business & Profession” in his hands.

Remuneration to Partners

The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of partnership, the limits of remuneration are outlined below:

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