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.
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):
- There must be partnership deed or other legal instrument for constitution of partnership.
- Share of partners are definite.
- Certified copies of partnership should be held by firm.
- Revised instrument should be made if there is any change in share or remuneration.
- No failure as in mentioned in section 144.
- The assessee has not taken benefit of presumptive taxation and use section 44AD and 44ADA while filling return.
Get filed your return by CA. Send inquiry here.
Partner’s salary/remuneration is allowed to reduce net profit if following conditions are satisfied: (section 40b)
- Remuneration should be paid to working partner.
- It is authorized by partnership deed.
- It should not related to period prior to partnership deed.
- 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 =
(-) 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:
- Payment of interest should be authorized by partnership deed.
- It should not exceed 12%.
- 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:
- 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)
- Section 44ADA is also available to partnership firm if turnover is up to INR 50 Lakhs.
- If firm transfers assets to partners during dissolution, capital gain provisions become applicable at that time.
- 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.
- 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? Contact here.