TAXATION OF PARTNERSHIP FIRMS & LLP IN INDIA
TAXATION OF PARTNERSHIP FIRMS & LLP IN INDIA
TAXATION OF FIRMS & LLP
- What do you mean by Partnership Firm?
A partnership firm is a body of more than one person conducting business under one entity.
There are two types of partnership firms Registered partnership firms & unregistered partnership firms.
A registered partnership firms is a partnership firm that has been registered with the Registrar of Firms and has received a registration certificate for the same. Any partnership firm that does not have a registration certificate from the Registrar of Firms is an unregistered firm.
- Taxation of Firms/ LLP?
Taxation of Firms/ LLP is as follows:
Income of Firms & LLP is taxable @ 30% plus 12% surcharge if Net Taxable Income is more than Rs. 1 crore plus 4% Health & Education Cess.
Long Term Capital Gain is taxable @ 20% till 22nd July 2024 and with effect from 23rd July 2024 rate of tax will be @ 12.5%.
Short Term Capital Gain u/s 111A is taxable @ 15% till 22nd July 2024 and with effect from 23rd July 2024 rate of tax will be @ 20%.
Long Term Capital Gain is taxable @ 10% in excess of Rs. 1,00,000 till 22nd July 2024 and with effect from 23rd July 2024 rate of tax will be @ 12.5% in excess of Rs. 1,25,000.
LLP’s and Partnership Firms are required to pay alternate minimum tax which cannot be less than 18.5% of the adjusted total income.
- Payment of Interest, Bonus, Commission or Remuneration?
Interest and remuneration paid by the Firm/ LLP is allowed as deduction if the following conditions are satisfied:
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S.NO |
Explanation |
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Remuneration is to be paid to only Working Partners. |
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Remuneration & interest should be authorized by Partnership Deed. |
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Remuneration & interest should relate to period falling after the date of partnership deed. That it should not be retrospective. |
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Interest on partner’s capital & loan allowed to max @ 12% p.a. simple interest |
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Remuneration is allowed on Book Profit Basis.
Meaning of Book Profit
In simple terms: Book Profit means PGBP before depreciation. |
- Explanation to Section 40(b)?
If any individual is a partner in a Firm on Individual Capacity & receiving interest on Representative’s Capacity, then Section 40(b) not applicable on such interest.
If any individual is a partner in a Firm on Representative’s Capacity & receiving interest on Individual Capacity, then Section 40(b) not applicable on such interest.
Summary:
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Partner on |
Interest Received on |
Treatment |
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Individual Capacity |
Individual Capacity |
Maximum 12% interest allowed as per Section 40(b) |
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Representative Capacity |
Representative Capacity |
Maximum 12% interest allowed as per Section 40(b) |
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Individual Capacity |
Representative Capacity |
Limit of Section 40(b) is not applicable so even more than 12% interest is allowed. |
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Representative Capacity |
Individual Capacity |
Limit of Section 40(b) is not applicable so even more than 12% interest is allowed. |
NOTE:
The above explanation is applicable only for interest. If any individual is partner on representative capacity or Individual capacity and receives any remuneration, then on such remuneration limit of Section 40(b) shall apply.
- Carry forward & Set-off of losses u/s 78?
The losses and unabsorbed depreciation of the firm/ llp can be carried forward by the firm only. If there is Retirement of Partner or Death of Partner, then the firm shall not carry forward shares of retired/ deceased partner in the losses of firm.
NOTES:
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S.NO |
NOTE |
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Section 78 does not apply to unabsorbed depreciation, so it can be carried forward by the firm even if partner dies or retires. |
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If legal heir becomes partner after death of any partner of the firm, then the firm can carry forward & set-off losses. |
Example: X, Y & Z are partners in a firm on equal Profit-Sharing Ratio.
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Particulars |
Rs. |
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B/F losses for P.Y 23-24 |
8,00,000 |
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Unabsorbed depreciation for P.Y 22-23 |
1,10,000 |
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Profit for the current year i.e. P.Y 24-25 |
9,30,000 |
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Mr. Z retired on 30/06/24. Calculate taxable income for P.Y 24-25. |
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Loss that cannot be carried forward because of retirement of Mr. Z
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Share of Mr. Z in losses of Firm: 8,00,000/3 |
2,66,667 |
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Less: Share in current year profit 9,30,000/3 |
77,500 |
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Total loss that cannot be carried forward |
1,89,167 |
Computation of Total Income (P.Y 24-25)
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Net Profit of current year |
9,30,000 |
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Less: B/F losses of P.Y 23-24 (8,00,000 – 1,89,167) |
(6,10,833) |
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Less: Unabsorbed Depreciation |
(1,10,000) |
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Total Income |
2,09,167 |
- Miscellaneous Sections?
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Section |
Explanation |
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Section 184 |
Assessment of Firm: Firm shall be assessed as firm if:
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Section 185 |
If above condition of Section 184 is not satisfied or Firm has committed a default u/s 144 then interest & remuneration paid to partners will be fully disallowed in hands of firm & not taxable in hands of partners. |
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Section 187 |
Change in constitution of Firm:
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Section 188 |
Succession of Firm: Where a Firm is succeeded by another firm. In this case separate assessment shall be made on the predecessor firm & successor firm.
Example: ABC to AB = Change in constitution. AB to ABD = Change in constitution. ABC to DEF = Succession of firm.
Change in constitution: Only on return for P.Y. Succession: Two returns for P.Y. (Predecessor & Successor). |
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Section 188 |
Joint & Several liability of Partners: Every person who was partner of the firm at any time during the P.Y. shall be jointly and severally liable along with firm for amount of tax, penalty etc. of the firm for that P.Y. |
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Section 189 |
Firm dissolved or Business discontinued:
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Section 167c |
Liability of partners of LLP is not limited for the purpose of Income Tax Act. |
