How to calculate income tax on partnership firm : Section 40B

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

First you should keep in mind the important fact that partners and partnership firm are separate legal entity.

You have to file your partnership income tax return along with your personal tax return.

The tax rate and method to calculate income tax on partnership firm is slightly different than sole proprietorship. The income tax return form will be unique for partnership firm.

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How to calculate income tax on partnership firm income?

Step 1: Calculate total business income of the firm:

Business income can be calculated in usual way as per books of accounts.

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.

Step 2: Provisions of partner’s salary and interest in income tax as per section 40B:

Conditions to get benefit of interest and salary (section 40b):

  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.
  6. The assessee has not taken benefit of presumptive taxation and use section 44AD and 44ADA while filling return.

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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 authorized 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 profit Amount deductible u/s 40(b) (maximum)
If book profit is negative Rs. 150000
If book profit is positive
On first Rs. 3 lakhs Rs. 150000 or 90% of book profit whichever is more
On remaining balance 60% of book profit

Book profit =

Net profit

(-) Minus other income

+  Plus partner remuneration ( If deducted in profit and loss)

do not adjust brought forward losses and deduction u/s 80C to 80U while calculating Book Profit

Provisions for partner’s interest:

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

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

Deduct partner’s salary and interest as per explanation given above.

Step 3: Calculate 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.

Step 4: 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.

Step 5: Income tax rates for partnership firm income:

Short term capital gain for sale of equity oriented fund and STT is paid 15%
Long term capital gain 20%
Other income & Short term capital gain 30%

Please note that above rate is excluding surcharge and 4% education cess. 12% surcharge will be applicable for turnover more than Rs. 1 crore.

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. ( Not available to LLP) . The turnover should be less than 2 Crores ( For traders)
  2. Section 44ADA is also available to partnership firm if turnover is up to INR 50 Lakhs.
  3. If firm transfers assets to partners during dissolution, capital gain provisions become applicable at that time.
  4. Section 139(1) of Income Tax Act, 1961 makes it mandatory for Partnership Firms & Companies to file Return of Income regardless of the level of income earned.
  5. Due date for filling income tax return of partnership firm is 31 July. If your business is covered under Audit, the due date is 30 Sep.

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? Get filed your return by CA at INR 1500. Buy the service  here. 

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42 thoughts on “How to calculate income tax on partnership firm : Section 40B”

  1. Nice article and easy to understand explanation. Our firm is started as partnership firm with 2 partners in Nov 2013, and didn’t do any transactions till March 2014. In Mar/Apr 2014, our partner count increased to 4 and had done transactions till Dec 2014. After that the business is closed due to complete loss. But still the firm is not dissolved. While I was the working partner and didn’t get any salary in that period and I have no other income. We only paid salaries as cash to the employees of total 4 members from July 2014 till Dec 2014. Now, we are going going to close the firm. I need clarification on should I still do the income tax filing (which ITR Form should be used for electronic returns)and should show all the losses as firm or individual? If I do as firm what are need to be taken as consideration as it was complete loss and none of us got any money. As individual if I am filing what I should file under which ITR form (number) and what and all I have to consider to file.

    Kindly reply with all your suggestions possible.

    Thank you!

    1. Yes, it is mandatory to file return of firm irrespective of loss. for firm, you need to file ITR 5. For your self , you need to file ITR 3. You need to show all the expenses of firm. (as there is no income) and for yourself as you have not received anything from firm. No need to show anything from firm.
      You can avail our online tax filling services. Send inquiry on https://taxmasala.in/contact-us/ . to know more about our services.

      1. Hello admin,
        I have a question.
        we have a M/s firm registry .
        we have till no income source & no bank account.
        so is m/s firm to filling tax return.
        or create a bank account?

      2. You need to file income tax return. It is compulsory for partnership firm. Creating bank account is not mandatory. However, open bank account on partnership firms name when required.

    1. You can deduct business expenses and salary and interest paid to partners while calculating profit of partnership.

  3. Nice Article….Mam I want to know Is Provision of Income tax applicable to Partnership firms? If Yes, What will be the entries and where will the Income tax be adjusted? Is it be the same as in Company?

    1. According to section 43B, income tax will be allowed for deduction when actually paid. There is no compulsury requirement to make provision of income tax for partnership firm. If you make provision, you are required to added it back while calculating profit for income tax purpose. Better is that do not make provision.

  4. Hi ,
    I am starting a travel agency in partnership mode. please advise regarding taxs and gst limit.
    Thank You.
    Kind Regard,
    sai

  5. Great service. My Question. I had partnership firm 50% profit each. Our is contractorship firm, we got contract to do certain work from a company, we pay service tax and and TDS is deducted by company, my monthly billing is 12L. What is my income to be paid, weather income tax is more in partnership or proprietorship, shall I continue with partner or make proprietary firm. Which is better. Pls and also I will purchase a heavy machine on whose name shall I purchased firm or individual. Pls reply I am confused….

    1. Income tax rate is higher in partnership and you cannot use deductions to save tax.

      From point of view of business, partnership is considered good to deal with. For taxation purpose, it is costly.

      Heavy machine should be purchased on the name of partnership. You can avail depreciation deduction on the value of machinery.

  6. if the amount of remuneration is less than the allowable remuneration as said above, which amount will be allowed for deduction.

  7. Hi Ms. Tarannum,

    We have a partnership firm which was started 2 years back and we have not done any filling.
    Kindly assist us in getting all the formalities & documents required to do the filing.

  10. Madam

    Im running a retail business under sole proprietorship for last 10+ years & IT return is being filed every year. Now for last few years I am earning other income as salary from a Pvt employer & the same is being accounted in my capital as salary while filing IT returns. Now I wanted to convert my firm into Partnership by 3 members including me. If so then what wl b the impact on my IT part? During my last year return filing my net profit from business is 1.8L & from salary under taxable fig is 4L as per the Audit.

    1. I have already explained important points regarding partnership taxation. You have to pay 30% tax on partnership income and no basic exemption is available. For considering your individual return, you need to show salary income and salary , interest from partnership firm as taxable income.

  11. HI mam,
    i am a partner in a firm and my firm is covered under audit so return filling date of my firm is 30-09-,so if my individual return filling after 30-09 then there is any interest levied on it or not?

    1. If you are partner of auditable firm, your due date of return filling is 30th september. Now the date is extended to 31st October. No need to pay interest.

  12. Hi,

    I am planning to start a Bar with my brother-in-law as partner. The license for running a Bar will be both in my and my brother-in-law’s name. Do I need a partnership firm or we can just divide the income from business, salary of employees, rent, etc., on a 50:50 ratio and pay our individual income tax. Please guide me on this issue.

    Thanks.

    1. Go with partnership firm. However, the tax rate applicable to partnership firm is 30% and you need to file separate tax return for firm and individual partners.

      Or you can run business as proprietor and transfer share of profit to your brother in law as salary and commission. In this case, you can enjoy benefit of basic exemption limit and deductions applicable to individual.

  13. Dear Mam
    i had started a proprietorship firm in feb. 2015 and want to change it in partnership firm. guide me regarding the same.

    1. Get prepared partnership deed from lawyer.

      For income tax purpose, you need to apply for NEW PAN for your partnership firm. Consider points given in article for tax rules applicable to partnership firm.

  14. If tax payable by partnership firm 55,620 and cal. Ofincome of individual partner A & B:160000 each.calculate overall tax payable?

    1. No. There is no tax benefit. You cannot avail basic exemption limit while converting in partnership.

  16. We have created Partnership Firm for Investment Purpose.The Capital was invested in shares in which we have short term capital gain @15%(STT paid shares) .We have not provided any interest and remuneration to Partners.Shall the tax will be provided @15% or 30%

  17. we have started one partener ship firm for consultancy only. we are technical partners how much salary and expenses can be shown in consultancy partnership firm

    how we can take advantages of huf account in this firm

  19. Dear Madam, nice to see the topic and the way you give the solutions are outstanding, madam i have 3 questions
    1) Am a NRI and having partnership(50/50%) business trading basically, do i need to fill the income tax as an individual or not, and for business do i need to fill as an individual or my partner can fill the tax returns, our Turnover is not much in the financial year 2015-16, its only 3lac.
    2) I have taken a land worth of 20lac and registered on my name but the developer has not yet taken completion certificate how can i give the tax and notices are directly coming to me because the land is registered on my name.
    3) From my NRE account i have transferred to help my friends and family members on returnable basis around 10lac, now they wanted to return the money and i want it to be deposited to NRO or SB accounts do i need to pay the income tax on the value or not and how to show the income.

  20. Are partners salary and interest allowed as deduction in computing professional firms taxable profit for the assessment year 2016/17 as per the finance bill?

  22. HOW TO CALCULATE INCOME TAX DEPRECIATION FOR PARTNER SHIP FIRM, WHERE THE BOOKS ARE AUDITABLE

  23. we are partnership firm and my turn over is 75,00,000.00 net profit is 618750.00 less remuneration to partner

    460050.00 = net profit is 158700.00 (2.15%) it is liable to audit PLEASE HELP ME

    OR WHEN I SHOW NET PROFIT 8% BEFORE REMUNERATION IS IT LIABLE TO AUDIT

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