Taxation of Partnership Firm
The Partnership Firm is not a separate legal entity in the eyes of law, However, the partnership firm is a separate taxable entity. The partners Income is different from that of the partnership firm. The partnership business is subject to conditions, differential treatment of depreciation and other expenses in terms of the provisions contained in the Income Tax Act 1962 at par with other forms of the business. However the tax rate is applicable on the total income of the proprietor and is based on the flat rate of taxation
The Taxation is to a great extent dependent on the residential status of the assessee, normally a resident is taxed for all his income whether received in India or outside India, However subject to double taxation avoidance agreement.
The Tax Rates for Partnership Firms as under: (as amended by the finance Act of 2013)
On the whole of the total Income : 30%
Surcharge on Income Tax: there is a surcharge of 10% on the income tax in the case of every firm hyaving a total income exceeding one crore rupees.
There is additional 3% towards education Cess.
Under the Income Tax Act, a partnership firm may be assessed either as a partnership firm or as an association of persons (AOP). However, If the firm satisfies the following conditions, it will be assessed as a partnership firm, otherwise it will be assessed as an AOP :-
- The firm is evidenced by an instrument i.e. there is a written partnership deed.
- The individual shares of the partners are very clearly specified in the deed.
- A certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.
- If during a previous year, a change takes place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised partnership deed shall be submitted along with the return of income of the previous years in question.
- There should not be any failure on the part of the firm while attending to notices given by the Income Tax Officer for completion of the assessment of the firm.
It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm can claim the following additional deductions which the AOP cannot claim :-
- Interest paid to partners, provided such interest is authorised by the partnership deed.
Remuneration to Partners
The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of partnership, the limits of remuneration are outlined below :