Partnership firms in India can be divided into two categories namely, registered partnership or unregistered partnership. Registered partnership firms are those firms having a registration certificate from the Registrar of Firms. All other partnerships that do not have a registration certificate would be classified as an unregistered partnership firm. Under Income Tax Act, a partnership firm is defined as "Persons who have entered into a partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name".
Partnership firms are liable to pay income tax at the rate of 30% of total income. In addition to the income tax, a partnership firm is liable to pay income tax surcharge on the amount of income tax at the rate of 12%, when total income exceeds Rs.1 crores. In addition to the income tax and surcharge, a partnership firm must pay education cess and secondary higher education cess.
Education Cess is applicable on the amount of income tax and the applicable surcharge at the rate of 2%. Secondary and higher education cess is applicable on the amount of income tax and the applicable surcharge at the rate of 1%.
Similar to a private limited company or LLP, partnership firms are also required to pay alternate minimum tax at the rate of 18.5% of "adjusted total income". Alternate minimum tax would be increased by the applicable surcharge, education cess and secondary and higher education cess.
While calculating the income tax applicable for a partnership firm, it is important to note that the following types of expenses paid by the partnership firm to the partners are not allowed as deductions:
1. Salary, bonus, commission or remuneration paid to non-working partners. 2. Remuneration or interest paid to the partners which are not in accordance with the terms of the partnership deed.
3. If remuneration or interest paid to the partners are in accordance with the terms of the partnership deed but they relate to any period prior to the date of the partnership deed.
In addition to the above, interest paid to partners is in accordance with the terms of the partnership deed should not exceeds 12% per annum. Also, remuneration paid to partners should be in accordance with the terms of the partnership deed and should not exceeds the following permissible limit:
1. On first Rs. 3 Lakhs of book profit or in the case of loss - Rs. 1,50,000 or 90% of book profit, whichever is more.
2. On the balance of the book profit - 60% of book profit.
Partnership firms are required to file income tax return in form ITR 5. Like all other income tax forms, ITR 5 is an attachment less form and there is no requirement for submitting any documents or statements along with a partnership firm tax return. However, the taxpayer must save all records pertaining to the business and produce the same before tax authorities when requested.
Income tax return of a partnership firm can be filed online through the income tax website or manually. If the income tax return is filed online, then a class 2 digital signature will be required for the Partner of the firm. Also, online income tax return filing is mandatory for partnership firms required to obtain an audit.
In case of manual filing, the assessee must print out two copies of Form ITR-V. One copy of ITR-V signed by the assessee, has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bengaluru-560100 (Karnataka). The other copy should be retained by the assessee for his/her record.
The income tax return due date for most partnership firms is July 31 of the assessment year. Partnership firms required to get its accounts audited under the income tax Act must file the income tax return before the September 30th deadline.
Partnership firms that conform to any of the conditions below would be required to get the accounts audited:
1. Carrying on business and total sales exceed Rs.1 crore in the previous year.
2. Carrying on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
In addition, there are other conditions applicable which could make an audit mandatory for a partnership firm.
If a partnership firm entered into international transactions or specified domestic transactions a report must be furnished in Form No. 3CEB under section 92E. For partnership firms required to furnish Form 3CEB, the deadline for filing tax return is 30th November.