Although Partnership Firms don’t have a separate legal entity, for the purpose of Income Tax, they are treated as different from their partners. Therefore, partnership firms, whether registered or unregistered, are required to register with the Income Tax Dept. and obtain a PAN Card No. and Income Tax on Partnership Firms is levied in the manner as explained below.

Tax on Income of a Partnership Firm

1. Income Tax at a flat rate of 30% is levied on Partnership Firms. Education Cess @ 2% and SHEC @ 1% would also be required to be paid. Moreover, in case the income of the partnership firm is more than Rs. 1 Crore in any financial year, Surcharge @ 10% would also be payable. Computation of taxes as per Income Tax Slab Rates is not allowed as the benefit of Slab Rates is only available to Individuals and HUFs.

1. Capital Gains arising from the sale of any asset by the partnership firm are taxable under Section 112. Moreover, in case of sale of shares and mutual funds, in case the period of holding is less than one year – the income would be taxable under Section 111A at a flat rate of 15%, and in case the period of holding of shares is more than one year – the income would be exempted from the levy of tax under Section 10(38).

1. Remuneration and Interest are allowed to be paid to the partners. However, the tax deduction for remuneration and interest paid to the partners is allowed subject to the limits and conditions specified in Section 40(b).

1. The partners' remuneration and interest shall be taxed in their hands as income under head PGBP. However, the salary and interest that have not been allowed under Section 40(b) or any other section shall not be added to the partners' income.

1. The share of the partners in the firm's total income is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership firm.

1. The firm's losses should be carried forward and not allowed to be allocated to the partners.

1. Deductions under Chapter VI-A would be allowed from the Gross Total Income only for Donations or if the business falls under the specified business category.

1. If the partnership firm cannot pay the tax dues, the partners can be held liable for the recovery of the tax dues.

1. It is pertinent to note that although LLPs are treated in the same manner as Partnerships, only one section does not apply to LLPs and applies to Partnership Firms, which is Section 44AD. LLPs cannot claim benefits of Section 44AD by using Presumptive Taxation.

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Created & Posted by Pooja

Income Tax Expert at TAXAJ

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