How to calculate income tax on partnership firm in India

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partnership firm

HOW TO CALCULATE INCOME

TAX ON PARTNERSHIP FIRM
By admin Posted On November 24, 2014
tax 12 Comments

income

Having partnership firm is beneficial in business. Do

you have one? Then you must aware of calculation
of income tax on partnership firm. Some provisions
should be kept in mind while calculating of tax
liability. Lets see.

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26-07-2015

How to calculate income tax on partnership firm in India

Page 2 of 10

How to calculate income

tax on partnership firm
income?

HOW TO CALCULATE INCOME TAX

ON PARTNERSHIP FIRM?
CALCULATE TOTAL BUSINESS
INCOME OF THE FIRM:
Business income can be calculated in normal way.

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Deduct all the allowable expenses for business:

Expenses which are allowed for deduction under
sections of head profit and loss from business or
profession.
Reduce allowable partners salary and interest from
that profit.

PROVISIONS OF PARTNERS SALARY

AND INTEREST IN INCOME TAX:
Conditions to get benefit of interest and salary
(section 184):
1. There must be partnership deed or other legal
instrument for constitution of partnership.
2. Share of partners are definite.
3. Certified copies of partnership should be held by
firm.
4. Revised instrument should be made if there is any
change in share or remuneration.
5. No failure as in mentioned in section 144.

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How to calculate income tax on partnership firm in India

Partners salary/remuneration is allowed to reduce

net profit if following conditions are satisfied: (section
40b)
1. Remuneration should be paid to working partner.
2. It is authorised by partnership deed.
3. It should not related to period prior to partnership
deed.
4. Remuneration should be within permissible limit.

PERMISSIBLE LIMIT FOR DEDUCTION

OF REMUNERATION OF PARTNER:
Book profit

If book profit is
negative

Amount deductible
u/s 40(b) (maximum)

TOP
POSTS

Form 15G / Form

15H : Detailed
guide

Service tax rate

chart for fy 201516 : with new
service tax rate
14%

Rs. 150000
Current service tax
rate chart for year

If book profit is
positive
On first Rs. 3 lakhs

Page 3 of 10

2014-15
Rs. 150000 or 90% of
book profit whichever
is more

Service tax on
manpower supply
service ( security

On remaining balance

60% of book profit

Book profit means Net profit less other income and

do not adjust brough forward losses and deduction
u/s 80C to 80U plus and partners remuneration.

service)

Reverse charge
mechanism in
service tax ( RCM)

Provisions for partners interest:

Partners interest is allowed for deduction if following
conditions are satisfied:
1. Payment of interest should be authorised by
partnership deed.
2. It should not exceed 12%.
3. Payment should be for the period after the
partnership deed constitution.

http://taxmasala.in/income-tax-partnership-firm/

SERVICE TAX ON
WORK CONTRACT

When will new

service tax rate
14% be applicable

26-07-2015

How to calculate income tax on partnership firm in India

Page 4 of 10

Wealth tax
exemption and

CALCULATION OF OTHER INCOME OF

THE FIRM:
Other income like capital gain, income from house
property and other income can be calculated similarly
as calculated for individual.
Deduct brought forward losses if any from the
income.

taxability

Service tax on good

transport agency
( GTA) : 9 Important
points

How to calculate

AGGREGATE ALL THE INCOME:

income tax on
partnership firm

Make sum of all the income calculated.

Deduct allowable deduction under section 80G,
80GGA, 80GGC, 80IA, 80IB, 80IC, 80ID, 80IE, 80JJA.
Finally, you can find net income. Now, it is time to
calculate tax on all these income.

INCOME TAX RATES FOR

PARTNERSHIP FIRM INCOME:
Short term capital gain for sale of
equity oriented fund and STT is
paid

15%

Long term capital gain

20%

Other income

30%

Please note that above rate is excluding surcharge

and education cess. Surcharge is levied at 10% on the
tax amount (income*rate= Tax) and education cess @
3% on (Tax + surcharge)
In this way, you can calculate tax payable. You also
has to consider AMT provision to determine tax
liability.

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26-07-2015

How to calculate income tax on partnership firm in India

Page 5 of 10

Other important points:

1. The great thing is that section 44AD is available
for partnership firm.
2. If firm transfers assets to partners during
dissolution, capital gain provisions become
applicable at that time.
Which form is applicable for income tax return filling?
Income tax form ITR 4 is applicable to partnership
firm. Firm which requires to get its accounts audited
under section 44AB has to file return in ITR 5
electronically.
If firm is filling return under section 44AD, form ITR 4S
should be selected for return filling.
You can download forms from income tax e filling site
or from our site.
In above way, you can calculate income tax on
partnership firm. Do you have any other questions on
this subject? Ask me in comments below.

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26-07-2015

How to calculate income tax on partnership firm in India

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About The Author

CA TARANNUM
KHATRI

Tarannum Khatri is Chartered

Accountant of India. She is
currently practicing as a CA.
She has deep interest in
taxation field. Besides practice, she loves music and
reading great minds..

Business Expense
Entry level job

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12 Comments

By Sastry Posted on March 25, 2015

Nice article and easy to understand
explanation. Our firm is started as partnership
firm with 2 partners in Nov 2013, and didnt do
any transactions till March 2014. In Mar/Apr
2014, our partner count increased to 4 and had
done transactions till Dec 2014. After that the
business is closed due to complete loss. But
still the firm is not dissolved. While I was the
working partner and didnt get any salary in that
period and I have no other income. We only

http://taxmasala.in/income-tax-partnership-firm/

26-07-2015

How to calculate income tax on partnership firm in India

Page 7 of 10

paid salaries as cash to the employees of total

4 members from July 2014 till Dec 2014. Now,
we are going going to close the firm. I need
clarification on should I still do the income tax
filing (which ITR Form should be used for
electronic returns)and should show all the
losses as firm or individual? If I do as firm what
are need to be taken as consideration as it was
complete loss and none of us got any money.
As individual if I am filing what I should file
under which ITR form (number) and what and
all I have to consider to file.
Kindly reply with all your suggestions possible.
Thank you!
Reply
By admin Posted on March 25, 2015Author
Yes, it is mandatory to file return of firm
irrespective of loss. for firm, you need to file
ITR 5. For your self , you need to file ITR 3.
You need to show all the expenses of firm.
(as there is no income) and for yourself as
you have not received anything from firm. No
need to show anything from firm.
You can avail our online tax filling services.
Send inquiry on http://taxmasala.in/contactus/ . to know more about our services.
Reply
By S.Karmakar Posted on May 16, 2015
is there any deduction will be taken after
getting net profit
Reply
By admin Posted on May 21, 2015 Author

http://taxmasala.in/income-tax-partnership-firm/

26-07-2015

How to calculate income tax on partnership firm in India

Page 8 of 10

You can deduct business expenses and

salary and interest paid to partners while
calculating profit of partnership.
Reply
By Nitish Posted on June 3, 2015
Nice Article.Mam I want to know Is Provision
of Income tax applicable to Partnership firms?
If Yes, What will be the entries and where will
the Income tax be adjusted? Is it be the same
as in Company?
Reply
By admin Posted on June 4, 2015

Author

According to section 43B, income tax will be

allowed for deduction when actually paid.
There is no compulsury requirement to make
provision of income tax for partnership firm.
If you make provision, you are required to
added it back while calculating profit for
income tax purpose. Better is that do not
make provision.
Reply
By sai Posted on June 14, 2015
Hi ,
I am starting a travel agency in partnership
mode. please advise regarding taxs and gst
limit.
Thank You.
Kind Regard,
sai
Reply
By admin Posted on June 15, 2015 Author
Gst is not implemented yet. Still income tax
and service tax are applicable to you.

http://taxmasala.in/income-tax-partnership-firm/

26-07-2015

How to calculate income tax on partnership firm in India

Page 9 of 10

Read my article
http://taxmasala.in/service-tax-on-touroperator-and-air-travel-agent/
Reply
By amar singh Posted on June 25, 2015
Great service. My Question. I had partnership
firm 50% profit each. Our is contractorship firm,
we got contract to do certain work from a
company, we pay service tax and and TDS is
deducted by company, my monthly billing is
12L. What is my income to be paid, weather
income tax is more in partnership or
proprietorship, shall I continue with partner or
make proprietary firm. Which is better. Pls and
also I will purchase a heavy machine on whose
name shall I purchased firm or individual. Pls
reply I am confused.
Reply
By admin Posted on July 22, 2015

Author

Income tax rate is higher in partnership and

you cannot use deductions to save tax.
From point of view of business, partnership is
considered good to deal with. For taxation
purpose, it is costly.
Heavy machine should be purchased on the
name of partnership. You can avail
depreciation deduction on the value of
machinery.
Reply
By GANARAJ Posted on July 23, 2015
if the amount of remuneration is less than the
allowable remuneration as said above, which
amount will be allowed for deduction.

http://taxmasala.in/income-tax-partnership-firm/

26-07-2015

How to calculate income tax on partnership firm in India

Page 10 of 10

Reply
By admin Posted on July 23, 2015

Author

actual amount of remuneration.

Reply

Comment here

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