Are you in partnership? Are you generating good income from partnership business? That’s great. Here I present rules for income tax on partnership income.
How to calculate income tax on partnership income?
To calculate and understand income tax provisions for partnership income, we can divide partnership income in following parts:
- Share from partnership profit
- Remuneration from partnership
- Interest from loan given to partnership firm.
- Capital gain on asset sold to partnership firm.
Share in partnership profit:
Share in partnership profit is exempt from tax. Reason is simple. The profit is already taxed in the hands of partnership firm. Similarly loss from partnership firm is only loss of firm and partner cannot set off loss from partnership from your personal income.
Remuneration from partnership:
Some firms give salary or remuneration to partners. Remuneration from partnership is taxable in the hands of partners. He is required to show that income under head of income from business or profession. Similarly partnership firm can claim deduction for salary paid to partners. It is allowable expenses.
Interest from loan given to partnership firm:
If you have given loan to your partnership firm and receives interest, it is taxable in your hand. You can show it in income from other sources.
Capital gains arisen by transfer of assets to partnership firm:
Sometimes partners bring asset instead of cash as capital contribution. In that case, capital gain or loss arisen to partners. We can calculate profit or loss by using following formula:
Capital gain/loss =
Amount recorded in the books of account
Less cost of acquisition of asset or indexed cost of acquisition
Less cost of improvement or indexed cost of improvement.
The capital gain is shown under head of capital gain or loss head.
Example:
Mr. Ram brings plot in partnership firm in year 2013-14. The firm records its value as Rs. 3,00,000. Mr. Ram purchased it in year 2001-02 for Rs. 10,000.
Calculation of capital gains:
| Particulars | Rs. | |
| Amount recorded in books | 2,00,000 | |
| Less indexed cost of acquisition | 10,000/426*939 | 22,042 |
| Capital gain | 1,77,958 |
Other points:
Taxation system always tries to avoid double taxation. That’s why there is provision that salary and interest which is not allowed as deduction u/s 40(b) to firm should not be taxed in the hands of partners.
Calculation of income from partnership:
Income from partnership business should be added under appropriate head of income tax. Partner may have or not have other income. He can show all the income in one return of income tax. No matter the income is from personal business or from partnership or from salary income. The partner can also claim deduction like insurance premium, housing loan installments to reduce tax liability.
Example for calculation of income tax on partnership:
| Estimated profit | 1000000 | 500000 |
| Maximum salary allowed | ||
| First 3 lakhs | 270000 | 270000 |
| Remaining 7 lakhs | 420000 | 120000 |
| Total deduction for salary | 690000 | 390000 |
| Net profit | 310000 | 110000 |
| Tax | 93000 | 33000 |
| cess | 2790 | 990 |
| Total income tax payable | 95790 | 33990 |
Due date of return filling for partner:
Partner should file income tax return by 31st July. If income tax audit is mandatory to firm, the last date of income tax return filling is 30 September for partner.
Which return is applicable to partner?
The partner should file income tax return in ITR 3 if he has not any other business except partnership in firm.
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