Partnership Firm Registration in Chennai, Form C registration in Chennai, Partnership deed preparation in Chennai
Partnership Firm is the most commonly used business form in India. Because of its simplicity and easy to organize it is
used by small and even big businessmen. As per legal framework partnership firms do not have separate legal entity from
its partners but under the income tax act a firm has separate entity, so a firm is taxed separately than its partners.
Income tax on partnership firm will be different from that of the partners. That’s why a firm must applied to separate
PAN of its own and file its separate return as per rules.
Income Tax Act doesn’t define Firm or LLP but sec section 2(23) provides clarification on this. As per section 2(23):
1. “Firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932.
2. “Partner” shall have the meaning assigned to it in the Indian partnership Act, 1932 and shall include-
1. Any person who, being a minor, has been admitted to the benefits of partnership ; and
2. A partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008;
3. “Partnership” shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall include a limited
liability partnership as defined in the Limited liability Act, 2008.
So the above discussion reveals following aspects about income tax on partnership firm:
• There must be two or more persons in to partnership
• There must be an agreement (which can be registered or not)
A Limited Liability Partnership (LLP) is also assessed like a partnership firm in income tax. So we can say income
tax on LLP is calculated same as income tax on partnership firm. Earlier, we showed how to get income tax refund in
Income tax act requires following conditions to be fulfilled to treat the firm as partnership firm:
• There must be a written agreement for firm or LLP.
• Shares of partners must be clearly specified in that agreement.
• A certify copy of that agreement must be attached with the return of the previous year in which the firm or LLP was formed.
• If in any previous year constitution of firm or LLP is changed or profit sharing ratio than a certified copy of that
amended agreement must be attached with the return of that previous year.
• If any notice is received than firm or LLP must respond.
If firm or LLP is not following any of above points then while calculating its income interest, salary or remuneration
of partner will not be allowed. We have seperate special article on changes to make in salary structure to save tax.
Remuneration to Partners:
One of the biggest problem or complication in calculating income tax on partnership firm or LLP to calculate allowed
interest, salary or remuneration to partners, because partners are the owner of the firm or LLP. So they can get as much
remuneration as they want, so to prevent them to do so, income tax has applied some limits for their remuneration under
A partner can claim maximum 12% p.a. (simple interest) on his capital invested in firm or LLP. If firm or LLP is giving more
interest than this, then it will not be allowed while calculating income of firm or LLP.
Only a working partner can get salary. No sleeping partner can get salary if firm is paying salary to a sleeping partner
then it is not allowed.
Remuneration of partners can be calculated on book profit of firm. Book profit is profit which is computed in accordance
to sec 28 to 44D. This amount will be increased with partner’s remuneration which is paid to them it means to calculate
book profit remuneration of partners will not be deducted. First book profit will be calculated then as per below
remuneration will be deducted to reach taxable profit.
Sr. No. Book Profit/Loss % of amount or deduction
1 In case of loss or profit upto Rs. 3,00,000/- Rs. 1,50,000/- or 90% of profit which is more
2 After profit of Rs. 3,00,000/- 60% of book profit
The simple procedure of calculating income tax on LLP/firm is; first calculate income as per sec 28 to 44D except
interest or remuneration to partners. Then reduce interest upto 12% only from this. Now this is book profit.
Calculate partner’s remuneration by above rules. Deduct remuneration from book profit. Rest is taxable income of firm.
These remuneration conditions must be mentioned in partnership deed else remuneration can’t be paid to partners
(Circular no 739 dt 25th March, 1996).
Income Tax of Partners:
Share of profit (not remuneration) received by partners by the firm is not taxable in their hands as this has been taxed
in hand of firm.
Remuneration and interest is taxable in hands of partners in their individual returns. If remuneration is more than
limits fixed by section 40(b) than excess remuneration is taxable in hands of partners. Point to be noted that it will
be taxable in hands of firms also. So it is advised that firm mustn’t give more remuneration else firm and partner both
will pay tax on it.
Some more points about Income Tax of LLP/firm:
Loss/unabsorbed depreciation can’t be distributed among partners, only firm can carry forward the losses.
Firm is not required to deduct TDS(read: what is tax deducted at source) on interest and remuneration paid to partners.
Due date for filing of return of firm is 31st July. But if the firm is required to get its accounts audited any section of
income tax act then the due date will be 30th September.
If partner is getting remuneration and firm’s due date of return is 30th September then partner’s return filing due date
will be 30th September also. It is because his income will depend on firm’s income. If partner is not getting remuneration
or firm’s due date of return is 31st July then partner’s return due date will be 31st July.
As stated above LLP’s tax calculation is same as partnership firm, so same procedure or rules which are used for calculating
income tax on partnership firm will be followed while calculating income tax on LLP
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Partnership Firm Registration in Chennai, Form C registration in Chennai, Partnersship deed preparation in Chennai