Understanding Taxation under Partnership and Limited Liability Partnership

difference-between-taxation-under-partnership-and-LLP

It is not an easy game to understand the concepts of taxation. But to make you familiar, we at Centrik would like to convey some basic yet essential concepts of taxation.

We will be conveying taxation under Partnership and Limited Liability Partnership (LLP).

Firstly, let us understand difference between a partnership and LLP.

Partnership: These firms are divided into 2 categories i.e.

  • Registered Partnership (those having a registration certificates from the registrar of firms)
  • Unregistered Partnership

With reference to the Income Tax, a partnership firm is defined under Section 2(23) (i) which takes the meaning of the “Firm” from the Indian Partnership Act, 1932.

Firm under Indian Partnership Act, 1932 is defined as Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”

Limited Liability Partnership (LLP): It is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It is a legally separated entity from that of its partner.

Computation of Income

When computing the income tax, one must consider income from:

  • House Property(if any property owned by firm & received rent from that),
  • Capital Gains(at the time of dissolution of asset or firm as case may be) &
  • Other Sources(like interest on investments held by the firm)
  • The income earned from Business or Profession.

While calculating the total business income:

Deduct all the allowable expenses for business Expenses which are allowed for deduction under section of head Profit and Loss from Business or Profession” reduce allowable partner’s salary and interest from that profit.

Provisions for Partner’s interest:

  1. Payment of interest is authorized by the partnership deed
  2. Rate shouldn’t exceed 12 %
  3. Payment should be for the period after the partnership deed constitution.

Partner’s salary / remuneration (Section 40b):

  1. Remuneration should be paid to working partners
  2. It is authorized by the partnership deed
  3. It shouldn’t related to period prior to partnership deed
  4. Remuneration should be within permissible limit.

Permissible Limit for deduction of remuneration of partner –

 

Book Profit Amount deductible u/s 40(b) (maximum)
If book profit is Negative Rs 1.5 Lakhs

If book profit is Positive

On First Rs. 3 Lakhs

Rs 1.5 Lakhs or 90% of book profit whichever is more
On remaining balance 60 % of Book Profit

 

Book Profit: Net profit less other income and don’t adjust brought forward losses and deduction u/s 80C to 80U plus and partner’s remuneration.

Other income i.e. house property, capital gains and others sources– to be calculated similarly as calculated for Individual.

Aggregate all the income and need to deduct the allowable deductions under Section 80G, 80GGA, 80IA, 80IC, 80ID, 80IE, 80JJA & brought forward losses or unabsorbed depreciation as case may be, if any from the Income.

Finally we will get Net Taxable Income & hence tax is to be computed on this income.

Points to be kept in mind-

  1. The share of the partners in the total income of the firm is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership
  2. Losses of the firm should be carried forward and not allowed to allocate to the
  3. LLP’s can’t claim benefits of section 44AD by using presumptive taxation

Payment of Tax

Payment of tax can be made either in physical mode or e-payment mode.

** E Payment mode is mandatory for a firm who is liable to get its accounts audited under Section 44AB of the Income Tax Act, 1961.

  • It’s mandatoryfor every partnership firm to file the return of income irrespective of amount of income or loss.
  • E filing is mandatoryfor a firm with or without digital signature.
  • A partnership firm may also file return of income under Electronic Verification Code (EVC).
  • A firm bound to get its account audited under section 44ABshall furnish return electronically under digital signature.
  • Signing of IT Return– by Managing partner (in case of LLP – Designated Partner – however if for any unavoidable reason designated partner can’t sign or where there is not designated partner, any partner may sign the return)
  • Form to be filed is (ITR 5)

Taxation of partners

Interest on capital, remuneration received from firm is taxable in the hands of partner as Profits & Gains of Business or Profession.

However in the event that any sum is denied in the hands of firm, such sum would not be assessable in the hands of the accomplices. Tax liability of Firm on partners –

General Partnership Firm (Section 188A) Limited Liability Partnership (Section 167 C)
Each individual who was, amid the earlier year, an accomplice of a firm, and the legitimate illustrative of any such individual who is expired, should be mutually and severally subject alongside the firm for the measure of expense, punishment or other whole payable by the firm for the evaluation year to which such earlier year is significant, and every one of the arrangements of this Act, so far as might be, might apply to the appraisal of such assessment or burden or require of such punishment or other entirety. Notwithstanding anything contained in the Limited Liability Partnership Act, 2008 (6 of 2009), where any tax due from a limited liability partnership in respect of any income of any previous year or from any other person in respect of any income of any previous year during which such other person was a limited liability partnership cannot be recovered, in such case, every person who was a partner of the limited liability partnership at any time during the relevant previous year, shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership.

 

Note – Please note that the above article is for education purpose only. This is based on our interpretation of laws which may differ person to person. Readers are expected to verify the facts and laws.

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