In India, Partnership Firms are taxed under the Income Tax Act, 1961 as a separate entity. The taxation of partnership firms is subject to specific provisions as provided by Income Tax Act, and here’s an overview of its working:
1. Applicable Tax Rate for Partnership Firms
The tax rate for partnership firms (including Limited Liability Partnerships or LLPs) is fixed at 30% of the firm’s total income.
For the Financial Year 2024-25, the tax rate is as follows:
- Normal tax rate: 30% of total income.
- Surcharge: A surcharge of 12% is applicable if the total income exceeds ₹1 crore but is less than ₹10 crore. If the income exceeds ₹10 crore, a surcharge of 15% applies.
- Health and Education Cess: 4% on the total tax payable.
2. Taxation of Partners
- Salary, Bonus, and Interest to Partners: Any salary, bonus, or interest paid to the partners by the firm is deductible from the firm’s taxable income, but only within the limits set by the Income Tax Act. The maximum amounts allowable are:
- Interest on capital: Maximum of 12% per annum on the partner’s capital contribution.
- Remuneration to partners: The total remuneration to partners (i.e., salary, bonus, commission) is restricted to the following:
- For a firm with a turnover of up to ₹1 crore: The remuneration is limited to 90% of the total income of the firm, after deducting remuneration and interest to partners.
- For a firm with a turnover exceeding ₹1 crore: The remuneration limit depends on the share of profits and the capital employed in the business.
- Taxation of Partner’s Income: Any income distributed to partners, such as salary or remuneration, is taxed in the hands of the partners individually, not at the firm level. The partners will include these incomes in their individual tax returns. However, profit share is not taxable in the hands of partner as the profit is already received after getting taxed in the firm.
3. Tax Deduction at Source (TDS)
- TDS on payments to the firm: If a partnership firm receives payments exceeding ₹30,000 in a financial year from a single source, the payer must deduct TDS (Tax Deducted at Source) at the applicable rate.
- TDS on payments made by the firm: The firm must deduct TDS on payments like salaries, rent, professional fees, etc., as applicable.
4. Filing of Income Tax Return
- A partnership firm is required to online income tax return filing in Delhi annually, regardless of whether the firm makes a profit or loss.
- The return should be filed using ITR-5, which is specifically for partnerships and LLPs.
- If the partnership has a turnover of ₹1 crore or more, it must also get its books of accounts audited under Section 44AB of the Income Tax Act subject to other prescribed conditions.
5. Audit Requirements
- Audit under Section 44AB: A partnership firm is required to get its accounts audited if its turnover exceeds ₹1 crore (or ₹50 lakh in certain cases involving professional income). If the firm is involved in a business where profits are calculated under the Presumptive Taxation Scheme (Section 44AD), the audit is not required if the turnover is less than ₹3 crore.
6. Presumptive Taxation Scheme (Section 44AD)
- If a partnership firm’s business turnover is less than ₹3 crore, it can opt for the Presumptive Taxation Scheme under Section 44AD. Under this scheme:
- Profits are presumed to be 8% of the total turnover or gross receipts (6% if the receipts are through digital transactions).
- The firm does not need to maintain detailed books of accounts.
- However, the firm must file an ITR and declare income under this scheme.
- If the firm opts for this scheme, it cannot claim deductions for expenses like rent, salaries, etc.
7. Deductions Available to the Firm
A partnership firm is allowed to claim various business-related deductions, including:
- Rent, salaries, and wages paid to employees.
- Interest paid on loans taken for business purposes.
- Depreciation on assets used for business.
- Expenses for repairs, maintenance, and business-related travel.
- Contribution to provident fund or other retirement benefits.
8. LLP vs. Partnership Firm
An LLP (Limited Liability Partnership) is a form of partnership firm but with limited liability for its partners. For taxation purposes, an LLP is treated the same way as a traditional partnership firm. However, LLPs have more flexibility and legal protections for their partners.
Conclusion
The taxation of partnership firm registration in Delhi India is straightforward, with the firm itself being taxed at a flat rate, and the partners being taxed on their share of the income. There are also tax benefits available under specific schemes like Section 44AD (presumptive taxation) for small businesses. The firm is required to comply with tax laws, including TDS, filing returns, and audits if applicable.
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Taxcellent helps you in getting partnership registered along with obtaining PAN, GST and opening Current Account in Bank. Taxcellent also assist you in filing GST returns and Income Tax Returns of Partnership Firms.