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?


Tax on partnership
Tax on partnership income

To calculate and understand income tax provisions for partnership income, we can divide partnership income in following parts:

  1. Share from partnership profit
  2. Remuneration from partnership
  3. Interest from loan given to partnership firm.
  4. 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.


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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