Despite the lack of a separate legal entity, partnership firms are treated differently by the Tax authority than their partners. As a result, all partnership firms, whether they are registered or not, must register with the Income Tax Department and obtain a PAN Card No., and income tax for partnership firms must be understood, This article assists you in understanding Income Tax for Partnership Firms.
What is a Partnership Firm?
A partnership firm is a business structure in which more than one individual is involved in the day-to-day operations of the company. Registered partnership businesses and unregistered partnership firms are the two forms of partnership firms in India.
For small businesses, registering a partnership is the best option because the creation process is simple and there are few legal requirements.
Partnerships have been in existence in India since 1932, making them one of the country’s oldest forms of commerce. Even after it has been founded, a partnership business can be registered. As such, failure to register a partnership business has no penalty.
Section 69 of the Partnership Act primarily deals with the repercussions of non-registration of Partnership businesses, however, unregistered Partnership firms are denied some privileges.
People who have engaged into a partnership with one another are termed partners, and the name under which their company is conducted is called the “firm name,” according to the income tax code. As a result, an unregistered Partnership company is one that lacks a registration certificate from the registrar.
Thus, Partnership Firm Registration is beneficial and you should get it if you are commencing business while collaborating with someone else.
LLP Registration is also a good option available
What are the Tax rates for a partnership firm?
According to the Income Tax Act of 1961, a partnership firm must submit a partnership firm income tax return. Partnerships are subject to a 30 percent income tax on their net profits. In addition, if a partnership’s total revenue exceeds Rs.1 crore, it will be subject to a 12.5% income tax surcharge.
In addition to income tax and surcharge, partnerships must pay education and secondary higher education cess.
Income tax and relevant surcharges are subject to a two percent education cess. One percent is added to the total amount of income tax and the relevant surcharge for students in secondary and higher education.
Like a private limited company or LLP, a partnership must pay 18.5% of “adjusted total revenue” as an alternative minimum tax. The appropriate surcharge, education cess, and secondary and higher education cess would raise the Alternative Minimum Tax.
What are the allowable deductibles allowed?
When figuring out how much tax is due, it’s important to factor in the amount of income that is deductible. Following are the permissible deductibles.
- Non-working partners of the company get a variety of compensation, including salaries, bonuses, and commissions.
- Firms that pay interest to their partners can deduct that interest from their overall revenue. However, a partner’s interest can only be accrued at a yearly rate of 12%.
- Alternate Minimum Tax of 18.5 percent (+SC+EC/SHEC or HEC) of “adjusted total income” is imposed on a limited liability partnership (as of the assessment year 2012-13) or any company (as of the assessment year 2013-14).
- Paying partners compensation in accordance with their partnership agreement, even if such payments were made prior to the agreement’s signing.
How do you pay income tax for Partnership Firm through Income Tax Returns?
If you’re a partnership, you must file your tax return using Form ITR-5. ITR-5 is used for partnership firm income tax returns, not for the tax returns of the partnership partners.
The partnership firm tax returns do not require the submission of any supporting papers or declarations, as is the case with all other income tax forms, including ITR 5. Taxpayers, on the other hand, must keep track of their business transactions and present them to the tax authorities when required.
The online gateway of the Income Tax Department accepts ITR-5 electronic filings. When requested, the documents must be provided. The partners of a partnership company must have a digital signature certificate in order to verify the filing of the partnership tax returns.
What is the procedure to file an income tax return for a partnership firm?
A partnership’s tax return can be submitted electronically via the Official website. A digital signature certificate will be required for the firm’s partner if the tax return is filed electronically. In addition, partnership businesses that must be audited must file their income tax returns online.
Due Date for Partnership Tax Return
Depending on whether or not the partnership firm is audited, the due date is different. If an audit of the company is not necessary, then the tax returns should be filed by July 31st. The company must file its income tax returns by the 30th of September if it is not audited.
Important things to know about Income Tax for Partnership Firm
- It is possible to hold the partners personally accountable for tax debts if the partnership business is unable to pay them.
- Accordingly, even though LLPs are regulated similarly to partnerships, there is one portion of the law that specifically excludes and applies exclusively to Partnership Firms: Section 44AD, which is only applicable to Partnership Firms. By utilizing Presumptive Taxation, LLPs cannot enjoy Section 44AD’s advantages.
- The partners’ portion of the business’s total revenue is free from taxation since it has already been taxed by the partnership firm.
- Under Section 112, the partnership firm is liable to pay taxes for any capital gains that result from the sale of any asset.
- Partnership Firms and LLPs are taxed at a fixed rate of 30%. Because Slab Rates are only available to individuals and HUFs, calculating taxes using Slab Rates is not permitted.
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