A partnership firm is one of the most popular business forms in India, providing joint responsibilities and financial benefits. Similar to any other business organization, the partnership firm is required to file an income tax return (ITR) every year to meet tax requirements. The taxation procedure of a partnership firm is different from that of sole proprietorships and companies, with special provisions under the Income Tax Act, 1961.
Filing an ITR for a partnership company has several steps involved, such as selecting the right tax form, keeping proper books of accounts, and complying with tax exemptions and deductions.
This blog gives a step-by-step guide to filing an income tax return for a partnership firm in order to have hassle-free tax compliance and to avoid penalties.
Introduction
A partnership firm is created when two or more persons enter into a legal contract to run and conduct a business in common and share profits and losses. The firm may be registered or unregistered, but for tax purposes, both are treated equally under the Income Tax Act, 1961.
As compared to proprietorships, in which income is taxed in individual slabs, a partnership firm is taxed independently as a business entity. The firm has to file an ITR even if there is no profit or income. Also, salaries of partners, interest on capital, and profit-sharing are governed by certain tax treatment.
Knowledge of the right procedure for filing an ITR keeps businesses compliant, lowers tax liabilities, and prevents penalties.
Documents Required for Filing ITR for a Partnership Firm
Filing an income tax return (ITR) for a partnership firm require these documents. It will ease the process of filing tax and minimize the chances of errors or penalties.
- Firm’s PAN Card – It is a requirement while filing ITR because it is the firm’s key tax identification.
- Partnership Agreement – It is the legal document that specifies the rate of profit sharing, partner remuneration, and interest on capital, which are important in tax computation.
- Financial Statement – The Profit and Loss Accounts and Balance Sheet are used to calculate taxable income, deductible expenses, and financial position.
- Bank Statements and GST Returns – These documents confirm financial transactions and confirm compliance with GST legislation (if applicable).
- TDS Certificates and Tax Audit Reports – Where tax has been deducted at source (TDS) on receipt of payments, TDS certificates (Form 16A/16B) are needed. Where the turnover of the firm is more than Rs 1 crore (or Rs 3 crore for digital transactions), a tax audit report (Form 3CA/3CB and 3CD) is necessary under Section 44AB.
Moreover, transactions of loans, advances, and investments undertaken by the company should be documented as they affect the calculation of tax.
Taxation of Partnership Firms in India
- Taxability of a Partnership Firm
A partnership firm is liable to income tax at a flat rate of 30% on its overall profits. Further, a cess of 4% (Health & Education Cess) is also charged on the overall tax payable. If the overall income of the firm is more than Rs 1 crore, an additional surcharge of 12% is charged.
This taxation is imposed on both registered and unregistered firms so that all partnership businesses adhere to the same tax framework.
- Taxation of Income of Partners
The compensation, salary, bonus, or commission received by partners is treated as tax-deductible by the firm provided it is made clear in the Partnership Deed and is within limits prescribed by Section 40(b) of the Income Tax Act. Nevertheless, the partners’ profit share is not subject to tax in their hands under Section 10(2A), since the firm has already borne tax on it. This prevents profits from being taxed twice, which financially benefits partners.
- Applicability of Presumptive Taxation (Section 44AD)
Small partnership companies with a turnover of up to Rs 3 crore (for companies having digital transactions) can avail the Presumptive Taxation Scheme (PTS) under Section 44AD. According to this scheme, the company can return 8% of its overall turnover as assessable income (6% in case of receiving payments digitally), without the requirement of keeping elaborate books of accounts and audits.
This is the best option for small businesses that want to make their tax filing easier and in accordance with tax regulations.
Step For Filing an Income Tax Return for a Partnership Firm
1. Choose the Right ITR Form
A partnership firm is required to file the income tax return on the correct ITR form. The following forms are used-
- ITR-5 – For partnership firms (other than presumptive taxation filers).
- ITR-4 – For companies choosing presumptive taxation under Section 44AD.
2. Calculate Taxable Income
Calculate total taxable income after deducting the allowable expenses, salaries of the partners, interest on capital, and depreciation from total revenue. Charge the flat rate of tax 30% with cess and surcharge (if any) to find tax liability.
3. Verify Tax Audit Applicability
In case the turnover of the company as a whole exceeds Rs 1 crore (for those companies who receive 95% of transactions electronically), they need to conduct tax audit in terms of Section 44AB. The tax audit report Form 3CA/3CB and 3CD has to be submitted while uploading the ITR.
4. File Income Tax Return Online
To file an Income Tax Return (ITR) for a firm of partnership, go to the Income Tax e-Filing site, enter login credentials with PAN and password for the firm, choose the corresponding ITR form (ITR-5 or ITR-4), complete business, income, salaries, and deductions fields, add documents such as reports of tax audits, check and authenticate the form with a Digital Signature Certificate, and file the return along with the Acknowledgment Number (ITR-V) for use.
5. Pay Tax Dues and Verify ITR
If any tax amount payable is due, pay it through net banking, challan, or UPI prior to the filing of the return. Once submitted, perform the e-verification through Aadhaar OTP, net banking, or DSC. If the verification is not performed online, a signed form ITR-V should be forwarded to CPC, Bangalore within 30 days.
Conclusion
It is a legal compulsion to file an income tax return for a partnership company and complies with Indian tax legislations. Using the right ITR form, keeping proper accounting books, and submitting returns in time will prevent penalties, entitlement of deductions, and a favorable tax history for the companies.
With the help of online tax filing websites, the process is made easy and streamlined. Companies should opt for professional help if necessary to avoid errors and reap the best tax benefits. Accurate tax planning not only assists in minimizing tax costs, but it also benefits the financial health and growth of the company.
ReferencesÂ
The Income Tax Rules, 1962
The Income Tax Act of 1961 (Act No. 43 of 1961)
