Having partnership firm is beneficial in business. Do you have one?  Then you must aware of calculation of income tax on partnership firm. Some provisions should be kept in mind while calculating of tax liability. Let’s see.

Income tax on partnership firm

How to calculate income tax on partnership firm income?

How to calculate income tax on partnership firm?

Calculate total business income of the firm:

Business income can be calculated in normal way.

Deduct all the allowable expenses for business: Expenses which are allowed for deduction under sections of head “profit and loss from business or profession”.

Reduce allowable partner’s salary and interest from that profit.

Provisions of partner’s salary and interest in income tax:

Conditions to get benefit of interest and salary (section 184):

  1. There must be partnership deed or other legal instrument for constitution of partnership.
  2. Share of partners are definite.
  3. Certified copies of partnership should be held by firm.
  4. Revised instrument should be made if there is any change in share or remuneration.
  5. No failure as in mentioned in section 144.
CA assisted  firm’s return filling

 

Partner’s salary/remuneration is allowed to reduce net profit if following conditions are satisfied: (section 40b)

  1. Remuneration should be paid to working partner.
  2. It is authorised by partnership deed.
  3. It should not related to period prior to partnership deed.
  4. Remuneration should be within permissible limit.

Permissible limit for deduction of remuneration of partner:

Book profitAmount deductible u/s 40(b) (maximum)
If book profit is negativeRs. 150000
If book profit is positive
On first Rs. 3 lakhsRs. 150000 or 90% of book profit whichever is more
On remaining balance60% of book profit

Book profit means Net profit less other income and do not adjust brough forward losses and deduction u/s 80C to 80U plus and partner’s remuneration.

Provisions for partner’s interest:

Partner’s interest is allowed for deduction if following conditions are satisfied:

  1. Payment of interest should be authorised by partnership deed.
  2. It should not exceed 12%.
  3. Payment should be for the period after the partnership deed constitution.

 

Calculation of other income of the firm:

Other income like capital gain, income from house property and other income can be calculated similarly as calculated for individual.

Deduct brought forward losses if any from the income.

Aggregate all the income:

Make sum of all the income calculated.

Deduct allowable deduction under section 80G, 80GGA, 80GGC, 80IA, 80IB, 80IC, 80ID, 80IE, 80JJA.

Finally, you can find net income. Now, it is time to calculate tax on all these income.

Income tax rates for partnership firm income:

Short term capital gain for sale of equity oriented fund and STT is paid15%
Long term capital gain20%
Other income30%

Please note that above rate is excluding surcharge and education cess. Surcharge is levied at 10% on the tax amount (income*rate= Tax) and education cess @ 3% on (Tax + surcharge)

In this way, you can calculate tax payable. You also has to consider AMT provision to determine tax liability.

Other important points:

  1.  The great thing is that section 44AD is available for partnership firm.
  2. If firm transfers assets to partners during dissolution, capital gain provisions become applicable at that time.

 

 

In above way, you can calculate income tax on partnership firm.Income tax return filling is mandatory for partnership firm irrespective of income. Let our expert handle all the worries about tax rules  by availing our CA assisted return filling service. Do you want to avail expert ‘s service to file your partnership firm return?

 

Yes, file my firm’s return