Taxation Policy for Partnership Firms

Tax

A partnership firm is a type of business in which two or more people come together and decide to start an enterprise with the sole aim of making profit. However, a partnership firm is just as independent as any other entity and thus the income is calculated separately. Income of partners has no relation whatsoever with the income of partnership firm. What this actually means is that liability is calculated separately on the income of partners and partnership firm in Epfindia website.

Partnership firm accounts are maintained in the same way as any other business firm. Through this action, all the expenses will be booked within the stipulated rules and regulation limits. Nevertheless, the following details must be put into consideration when calculating the income tax of a partnership firm.

Deduction on Account of Interest to Partners on Capital

Despite the fact that any interest accrued can be shared to partners based on their initial capital while also being booked as business expenditure (As per the Indian Income Tax), the interest will only be allowed at the rate of 12% per annum. This means that any extra payment will not be allowed when calculating the income of a partnership firm if interest paid exceeds the set limit.

Salary & Other Remuneration to the Working Partners

A partnership is an independent entity that is run and managed by the partners. Therefore, all partners have a right to get remuneration in form of salary, bonuses or commission. However, any amount of money that a partner gets can be booked in a profit and loss account. When it comes to income tax purposes, there are some restrictions which are spelt out in the Indian Income Tax Act. These restrictions include:

  • A maximum of RS.150000 is allowed as remuneration in case of loss before booking the remuneration of partners.
  • 60% of book profit is set aside for the sole purpose of balancing book profit.
  • For the first RS.300000 of book profit, only Rs.150000 or 905 of the book profit is allowed as remuneration.

Rates of Income Tax for Partnership Firm

Below are the specific rates of Income Tax for a Partnership firm

  • All partnership firms shall be taxed at a flat rate of 30%.
  • Education Cess is placed at 2% on income tax together with an additional surcharge payable.
  • Long Term Capital tax is set at 20%
  • Secondary and Higher Education Cess at 15 on Income Tax with and additional surcharge payable.
  • Short Term Capital gains from mutual funds and shares subject to Security Transaction Tax will all have a tax of 15%.

Remember that the share of profit from a partnership firm is tax free and thus no tax is payable on it.  The reason as to why this is allowed is because the partnership firm has already paid income tax and thus it is necessary to avoid double taxation. We should also take note that the income of partners will only include the allowed payment to partners. This is because the disallowed income has already undergone taxation together with the partnership firm.

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