Taxability of Profit from Partnership Firm
Partnership Firm
A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all in the business. A partnership must be a result of an agreement between two or more individuals to share the common profits obtained from the business run by all or any of the partners.
The partnership firm is taxed as a separate entity under Income Tax Act. A partnership firm is required to submit a copy of the partnership deed in the first year of assessment and later years deed required to be submitted only if there is a change in the terms/constitution of partnership. In computing the total income of the partnership firm, any salary, remuneration and interest paid to a partner shall be deductible subject to certain restrictions and conditions as following.
Taxability of profit of partnership firm
Business profit partnership firm is taxable at tax rate of 30% and Surcharge is also applicable at rate of 12% if income exceeds 1 crore. However the provision of presumptive taxation scheme (section 44AD) where 6% or 8% deemed profit is taxable, not not applicable to LLP (Limited liability partnership)
Taxability of income in hand of partners
(1) Business Profit from partnership firm:- Any business income distributed by firm to partner are not taxable in hand of partner. Profit from the firm is exempt u/s 10(2A).
(2) Interest Income from partnership firm:- Interest Income from partnership firm taxable as Profit and gains of business or profession - to the extent of allowed under Section 40(b) in hand of firm (As mentioned below). So the amount which is not taxable in the firm will be taxable in the hands of partners.
(3) Remuneration income from partnership firm:- Remuneration Income from partnership firm taxable as Profit and gains of business or profession - to the extent of allowed under Section 40(b) in hand of firm (As mentioned below). So the amount which is not taxable in the hands of a firm will be taxable in the hands of partners.
Taxability of remuneration paid to partner in hand of firm
Remuneration allowed for deduction like a expenses on Book Profit Basis in following manner under Section 40(b):-
(a) On First 3 lakh Book profit- Higher of Rs. 1.5 Lakh or 90% of Book Profit shall allow for deduction.
(b) On Balance Book profit- 60% of Book Profit
Concept of book profit:- It can be calculated in the following manner.
|
Net profit computed under profit and gain from business & profession |
Amount |
|
Add- Remuneration if already reduce from P&L (Already debited) |
Amount |
|
Less- Depreciation (Current year and Brought forward) |
Amount |
|
Book Profit= |
Balance |
Taxability of interest paid to partner in hand of firm
(1) Interest received by a partner working in Individual capacity and receiving interest in Individual capacity then 12% Interest will allow as deduction to the firm. Interest above 12% will be taxable in hand of firm.
(2) Interest received by a partner working in Representative capacity and receiving interest in Individual capacity then the whole Interest amount will be taxable in hand of firm.
(3) Interest received by a partner working in Individual capacity and receiving interest in Representative capacity then the whole Interest amount will be taxable in hand of firm.
Setoff and Carry forward of losses of firm
(1) If there is retirement of partner or death of partner then firm shall not allow to carry forward shares of retired / deceased partner in the losses of firm. So firms can only carry portions related to partners available in the firm.
(2) Losses and unabsorbed depreciation of partnership firm can be carried forward by such firm only and cannot transfer to other firms.
Rate of tax on profit for Assessment Year 2022-23
For the Assessment Year 2022-23, a partnership firm (including LLP) is taxable at 30%.
Add:-
(1) Surcharge : The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief.
Note- Marginal Relief applicable where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).
(2) Health and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge.