A partnership firm means two of you carry out a business in a single entity. Your partnership firms may be of two types – Registered and unregistered. Partnership firms are liable to pay income tax. Let’s know more about the Partnership Firm income tax calculator in this article.
Registering your partnership is the right choice for small enterprises as it is straightforward, and there is minimal regulatory adherence.
Since 1932, The Partnership Act has been in existence in India. Creating partnerships is one of the oldest types of business. You can register a partnership firm even after you form it. You are not liable for penalties if you fail to register your partnership firm.
But if you didn’t register your partnership firm, you are denied certain rights under section 69 of the Partnership Act. This act majorly deals with the effects of non Registration of Partnership firms.
The income tax department defines a Partnership firm as if two of you enter into a partnership, you are individually called partners and collectively a firm, and the name under which your business runs is called the firm name. Hence, if you do not have a registration certificate from the registrar, you are known as an unregistered Partnership firm.
Let us dive deep into the income tax for partnership firms and tax calculators.
How Is Income Tax Calculated for a Partnership Firm?
You should file a partnership firm income tax return under the Income Tax Act of 1961. In your partnership firm, you should pay 30% of your total income as income tax.
If your total income exceeds Rs.1 Crores, you should pay an income tax surcharge of 12%. In addition to income tax and surcharge, a partnership firm must pay the education cess and the secondary higher education cess.
Education Cess is functional on the amount of the income tax and the applicable surcharge at a rate of 2%.
Secondary and higher education cess is usable on the amount of the income tax and the applicable taxation at the rate of 1%.
Follow these steps while calculating income tax for a partnership firm.
- Calculate the total business income of the firm.
- As per books of accounts, calculate your business income.
- Deduct all the allowable expenses for the business. These expenses come under sections of the head “profit and loss from business or profession”.
- Reduce the partner’s salary and interest from that profit.
- Provision for partner’s salary and interest in income tax as per section 40(B).
- Calculate other income like income from property, capital gains, etc.
- Aggregate all the income.
Now, as you receive the gross income of your firm, 30% of your income is liable to pay as income tax.
How Do Partnership Firms Reduce Income Tax?
Partnership firms should pay 30% of their profit as income tax. However, the partnership has a few other benefits,
- Your portion of the total revenue is free from taxation as you have already paid tax for it under the partnership firm.
- You are liable to pay tax for any capital gains under Section 112, from the sale of any asset.
- A Partnership Firm and LLP have a fixed tax rate of 30%. Slab Rates are only available to individuals and HUFs. You need not worry about varying slab rates.
These are the benefits of taxation under a Partnership firm.
Is It Mandatory for a Partnership Firm to File Itr?
Yes, every partnership firm must file your return irrespective of the amount of income or loss.
A partnership firm must file income tax returns with or without a digital signature. If your firm is required to get an audit, you should do an e-filing of your income tax returns.
You should use the ITR-5 form to file tax returns for your partnership firm. You need not file the returns individually for the partners of the firm.
Also, while filing these returns, you need not attach any supporting documents unless the Income Tax Department asks for them.
What Is the Tax Slab for a Partnership Firm in India?
For a Partnership firm, 30% of total revenue should be liable for income tax.
An income tax surcharge of 12% is liable to pay if the total revenue exceeds Rs.1 Crores.
What Is the Basic Exemption Limit for Partnership Firms?
The exemption limit for partnership firms comes under section 10(2A) of the Income Tax Act.
Your share of profit in the total revenue is exempt from income tax.
The exemption is available only towards the share of your profit in the partnership firm. In other words, it will not cover the amount of interest on capital and your remuneration.
What Is the Deduction Allowed in a Partnership Firm?
Few deductions are allowed in partnership firms. Let us know about it,
- Your remunerations or interest you receive, are not by the terms of the partnership.
- Salaries, bonuses, remunerations, and commissions are paid to the non-working partners of the firm.
- If you pay remuneration to partners by terms of the partnership deed only but paid after the dates of the partnership deed.
These are some of the deductions available while filing returns in a partnership firm.
Salary Received by a Partner from the Firm Is Taxable under Which Head?
Yes, the salary received by a partner from the firm is taxable. This income comes under his PGPB income (Profits & Gains from Business or Profession). The partner should declare his salary and interest from the firm as taxable and should file ITR returns.
However, the salary and interest that have not been allowed under Section 40(b) or any other section shall not be added to the income of the partners.
Bottomline
A Partnership firm is the joining of two people doing business. It can be registered or unregistered. The partnership firm income tax calculator and slab rates for the partnership firm are given in detail above. A partnership firm has a benefit as your share of profit is not taxable. You are liable to pay tax only as a firm and on a fixed tax rate of 30%.