Income Tax on Partnership Firms & LLP’s in India

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Although Partnership Firms don’t have a separate legal entity, for the purpose of Income Tax, they are treated as different from their partners. Partnership Firms whether registered or unregistered are therefore required to register with the Income Tax Dept. and obtain a PAN Card No. and Income Tax on Partnership Firms is levied in the manner as explained below.

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Moreover, for the purpose of Income Tax; LLP’s are treated the same as Partnership Firms and income tax on LLP’s is also levied in the same manner as Income Tax on Partnership Firms.

 

Tax on Income of a Partnership Firm and LLP

  1. Income Tax at a flat rate of 30% is levied on Partnership Firms and LLP’s. Computation of taxes as per Income Tax Slab Rates is not allowed as the benefit of Slab Rates is only available to Individuals and HUF’s. Education Cess @ 2% and SHEC @ 1% would also be required to be paid. Moreover, in case the income of the partnership firm is more than Rs. 1 Crore in any financial year, Surcharge @ 10% would also be payable.
  2. Capital Gains arising from the sale of any asset by the partnership firm are taxable under Section 112. Moreover, in case of sale of shares and mutual funds, in case the period of holding is less than 1 year – the income would be taxable under Section 111A at a flat rate of 15% and in case the period of holding of shares is more than 1 year – the income would be exempted from the levy of tax under Section 10(38).
  3. Remuneration and Interest is allowed to be paid to the partners. However, the tax deduction for remuneration and interest paid to the partners is allowed subject to the limits and conditions specified in Section 40(b)
  4. Remuneration and Interest received by the partners shall be taxed in their hands as income under head PGBP. However, the salary and interest which have not been allowed under Section 40(b) or any other section shall not be added to the income of the partners.
  5. The share of the partners in the total income of the firm is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership firm.
  6. Losses of the firm should be carried forward and not allowed to be allocated to the partners.
  7. Deductions under Chapter VI-A would be allowed from the Gross Total Income only for Donations or in case the business falls under the specified category of business.
  8. In case the partnership firm is unable to pay the tax dues, the partners can be held liable for recovery of the tax dues.
  9. It is pertinent to note that although LLP’s are treated in the same manner as Partnerships, there is only one section which does not apply to LLP’s and applies to Partnership Firms which is Section 44AD. LLP’s cannot claim benefits of Section 44AD by using Presumptive Taxation.

Transfer of Asset by a Partner to the Partnership Firm and Vice Versa

Many a times, partner introduces capital in the Partnership by way of transfer of assets to the Partnership Firm. In such cases, provisions of Section 45(3) would be applicable and the amount recorded in the books of accounts of the Partnership Firm would become the Sale Consideration received in the hands of the Partner and tax would be levied in the hands of the partner based on the Sale Consideration Received.

In some cases, at the time of dissolution, the partnership firm also gives assets to the Partners. In such cases, provisions of Section 45(4) would be applicable and income tax would be levied in the hands of the partnership firm on the sale of asset. The fair market value of the asset on the date of sale of asset would be taken as the sale price and tax levied thereon.

A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.