Home > Income Tax > Help Center > Business / Partnership Income Tax GuideLast Updated: Aug 31st 2024
Guide to Partnership Firm Registration: Reasons for and against launching a firm, income tax rates, capital gains, remuneration, losses and also compare other business types with the 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' ".
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Registration of the firm is optional and is not mandatory. It can be registered at any time after its formation. A registered Partnership firm can avail certain benefits like below
NOTE: Registration of partnerships Firms will be done by Local Registrar offices as these are State Specific registrations
The partners of the registered Partnership Firm can bring third parties to the court for resolution of disputes arise during the Business or any other matter relating to the Partnership Firm.
As none knows when the dispute between the Partners arises, whether for the sharing of profits or any other matter regarding operations of the Partnership Firm. The resolution of any dispute is best resolved by the Court of Law.
Compared to an unregistered Partnership Firm, a Partnership Firm which has completed Registration of Partnership Firm enjoys higher credibility. Although both registered and unregistered Partnership Firms are legal and valid under the given Act, the Registered Firm is highly preferred by authorities over unregistered one.
The conversion of the Partnership Firm into any other entity such as Private Company or LLP i.e. in corporate structure can be easily completed, except in the case of assets registered under the existing firm, which requires valuation and related complexity before moving them to the higher compliance entity such as LLP.
Flat rate of 30% on the total income after deduction of interest and remuneration to partners/Designated Partners at the specified rates + Surcharge of 12% if Total Income exceeds 1 Crore and will be further increased by Health and Education Cess 4% on Income-tax ( w.e.f AY 2019-20 education Cess secondary and higher education Cess @ 3% replaced by Health and Education Cess 4% )
For Comprehensive Understanding, refer at @ Rate of Income tax applicable to Partnership Firm
Flat 30% tax | 30,00,000 |
Surcharge 12% | 12,00,000 |
Health and educational Cess 4%( From A.Y 2019-20) | 1,20,000 |
Total Tax Payable | 43,20,000 |
If the Partnership Firm is having any income from Sale of Shares, Mutual Funds or properties or any assets, the taxation is below
Profit | Allowable Deduction |
---|---|
On the first Rs. 3,00,000 of the book profit or in case of a loss | Rs. 1,50,000 or 90% of book profit whichever is more |
Rest of the balance of the book profit | 60% of book profit |
NOTE: W.e.f AY 2025-26, the above allowable deduction has been increased in Budget 2024. The enhanced limits of allowable deduction of partnership remuneration are as follows
Profit | Allowable Deduction |
---|---|
On the first Rs. 6,00,000 of the book profit or in case of a loss | Rs. 3,00,000 or 90% of book profit whichever is more |
Rest of the balance of the book profit | 60% of book profit |
Unabsorbed loss including depreciation of the firm will not be apportioned amongst the partners and will be carried forward by the firm only.
Interested to start an Entity? Refer Business registration Plans & Pricing
Got an Idea ? Simple & Quick Comparison of different Business Registrations such as Private Limited, OPC, MSME, Shops, Proprietor, Small Business in India, and their obligations, requirements, costs involved. Understand to get a great head start in running your own business.
more @ Compare Business Registrations in IndiaDisclaimer: This article provides an overview and general guidance, not exhaustive for brevity. Please refer Income Tax Act, GST Act, Companies Act and other tax compliance acts, Rules, and Notifications for details.