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 firm
- Unregistered partnership firm
A registered partnership firm 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 partnership.
Partnership Firm
A partnership firm is a business entity formed by two or more individuals working together under a single enterprise. There are two main categories of partnership firms:
- Registered Partnership Firm: A registered partnership firm is one that has undergone formal registration with the RoC and has received a registration certificate as evidence of its legal existence.
- Unregistered Partnership Firm: Any partnership that lacks a registration certificate from the Registrar of Firms is referred to as an unregistered partnership.
Partnership, in essence, is an agreement entered into by two or more persons who have mutually consented to share the profits or losses arising from a jointly conducted business. The individuals involved in a partnership arrangement are individually known as partners and collectively referred to as a firm. Partners need to be aware of the partnership firm tax rate and how it affects the distribution of profits. Partners are responsible for maximizing firm advantage, fair dealings, and maintaining accurate records with full transparency for all partners’ benefit.
Taxation of Partnership Firms
Under the Income Tax Act, 1961, a partnership firm is liable to pay the following tax percentages: –
- 30% income tax
- 12% surcharges where taxable income is above one crore rupees
- Up to 12% on interest of capital is allowed
- Health and Education Cess 4% of tax including surcharges
It is to be noted that a partnership firm has a different legal identity from that of its partners, unlike proprietorships. It is also important to know that for the purposes of paying income tax for a partnership firm it is immaterial whether the firm is registered or not. Just like LLPs and private limited companies, a partnership firm is also required to pay alternate minimum tax which cannot be less than 18.5% of the adjusted total income.
What are the deductions allowed for partnership firms?
Taxpayers must pay attention to the deduction allowed before calculating the Income tax amount that has to be paid. Claiming for a deduction may reduce your Income tax liability.
Expenses that are eligible for deduction:
- Salaries, bonuses, commissions, or any other remuneration paid to the non-working partners of the firm.
- Payments made to the partners that are not following the partnership deed
- Payments made to the partners related to any transaction before the partnership deed was executed.
How to file tax returns for partnership firms?
The Form ITR-5 is applicable for filing income tax returns by entities such as firms, LLPs, AOPs, BOIs, AJPs, business trusts, investment funds, cooperative societies, and local authorities. This form is not for individuals, HUFs, companies, or trusts eligible to file ITR-7. Form ITR-5 can be filed online through the income tax e-portal. This form is used for filing ITR for partnership firms and not for individual partners.
The Form ITR-5 does not require any attachments of supporting documents it. However, these documents may have to be submitted to the Income Tax Department if requested.
The Form ITR-5 must be filed electronically with or without a digital signature or Electronic Verification Code. However, if the entity is subject to audit under any section of the Income Tax Act, 1961, it must file Form ITR-5 with a digital signature and e-file the audit report. The entity’s partners must also have a class 3 digital signature to verify the filing process.
What is the due date for partnership tax filing?
The due date for filing an income tax return for a partnership firm varies depending on whether the firm needs an audit. The filing dates of the income tax return are as follows:
- For firms that do not need an audit – the income tax returns should be filed by 31st July.
- For firms that needs an audit – the income tax returns should be filed by the 31st of October.
FAQs
Who is eligible for 44AD?
The only resident of India who is an individual, HUF, or the partnership firms are eligible for a presumptive scheme of Section 44AD.
Is income tax audit compulsory for partnership firms?
An Income tax audit is mandatory for the partnership firm if the turnover and gross receipt exceeds ₹ 1 crore if the firm is involved in Business. If the partnership firm is involved in the profession, the income tax audit is mandated if the turnover exceeds ₹ 50 Lakh.
