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Income-Tax-on-Partnership-Firm-and-LLP

 

Income Tax on Partnership Firm and LLP

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There is no change in Income Tax rates on Partnership Firms & LLP’s in budget 2018, Income of partnership firm can be taxed under the two ways-
  1. Under Normal Course of Business
  2. Under Presumptive Taxation Scheme (Not applicable on LLPs and Profession under section 44AA (1) or Commission & Brokerage Income and Agency Business)

 

1. Under Normal Course of business-

How to calculate Total Business income of the firm-

Net profit as per Profit & loss Account –

Add: Calculated Income from House Property (Net of brought forward losses if any)
Add: Calculated Income like Capital Gain (Net of brought forward losses if any)

Add: Income from Other Sources etc. (Net of brought forward losses if any)

Balance : Net Income calculated tax at below rates

 

Rate of Taxes for the A.Y. 2018-19

Particulars

Rate of Tax

Long Term Capital Gain

20%

Short Term Capital Gain U/s 111A

15%

Other Income

30%

Surcharge:

  • If Total Income up to Rs. 1 Crore – No Surcharge
  • If Total Income is greater than Rs. 1 Crore – 12% of Income Tax

Education Cess & Secondary & Higher Education Cess: 4% (on the amount of income-tax and surcharge

Minimum Alternate Tax

Similar to a private limited company or LLP, partnership firms are also required to pay tax @ 18.5% (+SC+EC+SHEC) of adjusted total income as per section 115JC.
See the related post : How to Pay Taxes Online
 

Points related to Income Tax Rates on Partnership Firms-

  • The partners are individually taxed under the partnership firm
  • There is no requirement to deduct TDS on Interest and Salary paid to partners.
  • In case of partnership Firm, the share of profit is exempted from income tax
  • When the total income of the firm, any remuneration (like salary, commission & bonus etc.) & Interest paid on capital is allowed as deduction subject to certain limits prescribed under section 40(b) as under (Note 2).
  • The provision relating to Alternate Minimum Tax introduced for Limited Liability Partnership. Now, also covers all the partnership firm. The deduction under section 80HH to 80RRB is called for only by paying minimum tax @ 18.5% on adjusted total income of partnership firms or LLPs.

 

Note 2- ( Detailed as under)

Limit prescribed under section 40 (b) for payment of Remuneration (includes i.e. Salary, Bonus, Commission etc.) and Interest on Capital is as under and allowed when it is clearly mentioned in Partnership deed.
  1. In case of loss (book profit is negative)- Rs. 1,50,000
  2. In case of book profit up to Rs. 3 lakhs - Rs 1,50,000 or 90% of book profits* (whichever is higher)
  3. On the balance book profit- 60% of book profits*.

* Book Profits means

Net Profit as calculated after debiting expenditure like remuneration (like salary, commission, bonus etc.) and Interest paid or payable to partners

+

Remuneration (Salary, Bonus, Commission etc.) paid or payable to Partners (if debiting profit & loss account earlier)

+

Interest paid or payable to Partners (if debiting profit & loss account earlier)
 

Interest paid to partners whether working or non-working is allowed up to the extent of 12% under section 40(b). Any excess amount paid to partners are disallowed under Income Tax Act. If the firm charged interest on drawings it is taxable in the hands of the firm.

Conditions-

  1. Remuneration includes salary, bonus, commission etc. is allowed when it is clearly mentioned in Partnership deed made under Partnership Act.
  2. No Interest & Remuneration to partners are allowed, if it’s related to any period falling prior to the date of such partnership deed
  3. Remuneration paid to working partners only are allowed as deduction, subject to the limit prescribed under Section 40(b) of Income Tax Act.
  4. Remuneration paid to non-working partners (i.e. sleeping partners) is disallowed under income tax.
  5. Interest paid to partners whether working or non-working (sleeping partner) are allowed to the extent of 12%, if it is clearly mentioned in the partnership deed.
  6. It is not allowed if tax is paid on presumptive basis under section 44AD or section 44ADA.

 

2. Under Presumptive Taxation Scheme-
  • For Small Business under section 44 AD having Turnover up to Rs. 2.00 Crore (Not applicable on LLPs and Profession under section 44AA (1) or Commission & Brokerage Income and Agency Business). Deemed Profit –
  1. 6% of Gross Receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year.
  2. 8% of Gross Receipts other than those covered in para (a) above.
 

 

Partnership firms are required to file income tax return in form ITR 3 under Normal Course of business or under Presumptive Taxation schemes file form ITR 4.

See the related post : How to E file Income Tax Return
 

Audit Requirement for Partnership Firms

Partnership Firms Are required to get their accounts audited if they meet any criteria listed below:

  • Carrying on business and total sales, turnover or gross receipts exceed Rs.1 crore in the previous year.
  • Carrying on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
 



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