Procedure to Compute Tax on Income from a Partnership Firm (Including LLP) under

the Income Tax Act, 1961

Under the Income Tax Act, 1961, partnership firms (including Limited Liability Partnerships - LLPs) are treated
as separate legal entities. The process of computing tax for a partnership firm involves several steps, including
determining book profits, applying allowable deductions, and finally calculating the tax liability as per the
prescribed tax rates.

1. Determine the Status and Type of Partnership Firm

• Registered Partnership Firm: Registered under the Indian Partnership Act, 1932.

• Limited Liability Partnership (LLP): Registered under the LLP Act, 2008.

• Unregistered Partnership Firm: Not registered under the Indian Partnership Act (subject to different
tax treatments in some cases).

Note: For tax purposes, registered firms and LLPs are taxed similarly, while unregistered firms may not get
certain deductions.

2. Compute the Firm’s Total Income under Different Heads

The income of the partnership firm is classified under the same five heads as for individuals:

1. Income from House Property

2. Profits and Gains of Business or Profession

3. Capital Gains

4. Income from Other Sources

Note: Salary income is not applicable to a partnership firm.

Step-by-Step Income Computation:

2.1. Income from Business/Profession

1. Start with Net Profit as per the Profit & Loss Account.

2. Add Back Disallowed Expenses under the Income Tax Act:

o Partners' Salary & Remuneration exceeding limits under Section 40(b).

o Interest on Capital paid to partners exceeding 12% per annum.

o Any other inadmissible expenses (personal expenses, penalties, etc.).

3. Deduct Incomes Not Taxable under Business Head:

o For example, interest on savings accounts, which is taxable under Income from Other Sources.

Net Business Income=Net Profit (as per books)+Disallowed Expenses−Non-Business Income

2.2. Income from House Property, Capital Gains, and Other Sources
 • Income from House Property:
Rental income after deducting municipal taxes and applying standard deduction (30%).

• Capital Gains:
Profit from the sale of firm’s assets (short-term or long-term).

• Income from Other Sources:

Interest, dividends, etc.

3. Compute Gross Total Income (GTI)

Gross Total Income (GTI)=Business Income+ House Property Income +Capital Gains+ Other Sources

4. Apply Deductions Under Chapter VI-A

Partnership firms can claim limited deductions under Chapter VI-A.

Common Deductions Available:

1. Section 80G: Donations to specified funds/charitable institutions.

2. Section 80-IA/IB: Deductions for firms involved in infrastructure development, certain businesses, etc.

3. Section 80JJAA: Deduction for employment generation.

Total Income=Gross Total Income−Deductions under Chapter VI-A

5. Apply the Tax Rate on the Firm’s Income

Tax Rates Applicable to Partnership Firms (FY 2024-25):

1. Flat Tax Rate:

Partnership firms (including LLPs) are taxed at a flat rate of 30% on their total income.

2. Surcharge:

o 10% if the total income exceeds ₹1 crore.

3. Health and Education Cess:

o 4% on income tax plus surcharge.

Final Tax Calculation Formula:

Tax Payable=(Total Income×30%)+Surcharge (if any)+4% Cess

6. Interest and Remuneration to Partners (Section 40(b))

Section 40(b) of the Income Tax Act governs the allowability of remuneration and interest to partners.

6.1. Interest on Partners’ Capital:

• Maximum Allowable Rate: 12% per annum on capital contribution.

• Any interest exceeding this is disallowed.

6.2. Remuneration to Working Partners:

Remuneration is allowed only to working partners (actively engaged in the business), and the limits are:

Book Profit Maximum Allowable Remuneration

On the first ₹3 lakh ₹1,50,000 or 90% of book profit, whichever is higher

On the balance (above ₹3 lakh) 60% of the remaining book profit

Note: Any remuneration exceeding these limits will be disallowed and added back to the firm’s taxable income.

7. Payment of Tax: Advance Tax Provisions

• Partnership firms are required to pay advance tax if the tax liability exceeds ₹10,000 in a financial year.

• Due Dates for Advance Tax Payment:

o 15th June: 15% of total tax liability

o 15th September: 45% of total tax liability

o 15th December: 75% of total tax liability

o 15th March: 100% of total tax liability

8. Taxation of Partners’ Share of Income

8.1. Exempt Income for Partners (Section 10(2A)):

• The share of profit received by partners from the firm is exempt from tax in the partners' hands, as the
firm has already paid tax on this income.

8.2. Taxable Income in Partners' Hands:

• Interest on Capital and Remuneration/Salaries received by partners are taxable in their individual
hands under Income from Business/Profession.

Example of Tax Calculation for a Partnership Firm (FY 2024-25)

Scenario:

• Firm Name: ABC & Co.

• Net Profit (as per books): ₹12,00,000

• Interest paid to partners: ₹2,50,000 (₹2,00,000 allowable @12%, ₹50,000 disallowed)

• Remuneration to working partners: ₹4,00,000 (Allowable as per Section 40(b): ₹3,00,000; ₹1,00,000
disallowed)

• Donation to a charitable trust (80G): ₹50,000 (eligible for 50% deduction)

Step-by-Step Calculation:

1. Net Profit (as per books): ₹12,00,000

 2. Add Disallowed Expenses:

o Excess interest on capital: ₹50,000

o Excess remuneration to partners: ₹1,00,000

Adjusted Profit=₹12,00,000+₹50,000+₹1,00,000=₹13,50,000

Less: Deductions Under Chapter VI-A (80G):

o Eligible donation deduction: ₹50,000 × 50% = ₹25,000

Total Taxable Income=₹13,50,000−₹25,000=₹13,25,000

4. Apply Flat Tax Rate (30%):

Income Tax=₹13,25,000×30%=₹3,97,500

5. No Surcharge Applicable (since income < ₹1 crore).

6. Add Health & Education Cess (4%):

Cess=₹3,97,500×4%=₹15,900

7. Total Tax Payable:

Total Tax Payable=₹3,97,500+₹15,900=₹4,13,400

Conclusion:

• Total Tax Payable by the Firm: ₹4,13,400

• Share of Profit Received by Partners: Exempt from tax in their individual returns.

• Interest and Remuneration to Partners: Taxable in their individual hands.