Understand the income tax rules, deductions, and filing process applicable to partnership firms in India with clear examples and guidelines.
A partnership firm is one of the most preferred forms of business entities in India due to its simple setup and minimal compliance. However, once the firm is registered and operational, understanding its tax obligations becomes essential. This blog will walk you through the taxation structure for partnership firms in India, including income tax rules, available deductions, and return filing procedures, with practical examples for better clarity.
In India, a partnership firm—whether registered or unregistered—is taxed as a separate legal entity. The income tax is levied at a flat rate of 30% on the total income of the firm. Additionally, a surcharge and cess are applicable as follows:
Surcharge: 12% if the total income exceeds ₹1 crore.
Health and Education Cess: 4% on the income tax plus surcharge.
Example:
If a partnership firm earns ₹20 lakhs in a financial year, the tax calculation would be:
30% of ₹20,00,000 = ₹6,00,000 (income tax)
4% of ₹6,00,000 = ₹24,000 (cess)
Total Tax Payable: ₹6,24,000
A firm can pay remuneration (salary, bonus, or commission) to its working partners. This amount is allowed as a deduction from the firm’s taxable income, provided:
The payment is made to a working partner.
The payment is authorized by the partnership deed.
The payment amount complies with Section 40(b) of the Income Tax Act.
Allowable Remuneration as per Section 40(b):
On first ₹3 lakhs of book profit or in case of loss: ₹1.5 lakhs or 90% of book profit, whichever is higher.
On the balance of book profit: 60%
Example:
Book profit of the firm = ₹10 lakhs
Remuneration on first ₹3 lakhs = ₹2.7 lakhs (90% of ₹3 lakhs)
Remuneration on balance ₹7 lakhs = ₹4.2 lakhs (60% of ₹7 lakhs)
Total allowable remuneration = ₹6.9 lakhs
If the firm pays ₹7 lakhs to partners, ₹6.9 lakhs is deductible, and ₹10,000 will be disallowed.
Interest paid to partners on their capital contribution is also allowed as a deduction under Section 40(b), provided:
The rate does not exceed 12% per annum.
The interest is specified in the partnership deed.
Any excess interest beyond 12% is disallowed.
Example:
If a partner has contributed ₹5 lakhs and receives 15% interest, then:
Allowable interest = ₹60,000 (12% of ₹5 lakhs)
Disallowed interest = ₹15,000 (3% excess)
Just like other businesses, partnership firms are eligible for several deductions under the Income Tax Act. These include:
Business expenses like rent, salaries, electricity bills, stationery, etc.
Depreciation on business assets.
Interest on loans taken for business purposes.
Donations under Section 80G, if applicable.
However, deductions like Section 80C (which apply to individuals) are not available to firms.
All partnership firms are required to file an income tax return using Form ITR-5. The due date depends on whether the firm is subject to audit.
Without audit: 31st July of the assessment year.
With audit (turnover above ₹1 crore): 31st October.
The return must be filed electronically using a valid PAN and DSC (Digital Signature Certificate) of one of the partners.
A partnership firm is required to get its accounts audited under Section 44AB if:
The annual turnover exceeds ₹1 crore (business) or ₹50 lakhs (profession).
The firm declares profits lower than the prescribed rate under the presumptive taxation scheme.
Eligible partnership firms (excluding LLPs) engaged in business can opt for the presumptive taxation scheme under Section 44AD.
Income is presumed at 8% of turnover (6% if digital transactions).
No need to maintain books of accounts.
No deduction for salary or interest to partners is allowed.
This is ideal for small firms with turnover up to ₹2 crores.
Understanding the taxation structure is vital after completing your Partnership Firm Registration. From knowing the flat tax rate to understanding allowable deductions and filing returns correctly, each step impacts your compliance and profitability. Firms should maintain proper records and consult professionals during tax filing to avoid penalties and ensure smooth operations.
If you plan to register a partnership firm or are already running one, keeping tax rules in mind from the start helps in better planning and growth.
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