Annual Compliance – Partnership Firm


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Partnership Firm Tax Return Filing

What is a Partnership firm?

A partnership firm is a type of entity where more than one person is carrying out business under one entity. Partnerships firms in India are of two types – Registered partnership firms and unregistered partnership firms.

Registering a Partnership is the right choice for small enterprises as the formation is straightforward and there are minimal regulatory compliances.

The Partnership Act has been in existence in India since 1932, making partnerships one of the oldest types of business entities in India. A partnership firm can even be registered after it is formed. There are as such no penalties for non Registration of a Partnership firm.

But unregistered Partnership firms are denied certain rights under section 69 of the Partnership Act that majorly deals with the effects of non Registration of Partnership firms.

The income tax defines a Partnership firm 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”. Hence, a firm that does not have a registration certificate from the registrar is an unregistered Partnership firm.

The tax rate for a Partnership firm

What is the tax rate for a partnership firm?

A partnership firm is required to file a partnership firm income tax return under the Income Tax Act,1961. Partnership firms are liable to pay income tax at the rate of 30% of total income. Besides, a partnership firm is liable to pay an income tax surcharge of 12% if the total income exceeds Rs.1 crores.

Additional to the income tax and surcharge a partnership firm must pay the education cess and the secondary higher education cess.

Education Cess is applicable on the amount of the income tax and the applicable surcharge at the rate of 2%. Secondary and higher education cess is applicable on the amount of the income tax and the applicable surcharge at the rate of 1%.

Alternative minimum tax

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.

The income tax calculation for Partnership firms

What are the allowed deductibles?

While calculating the payable income tax an individual must check the available deductible income

  • Remunerations or interest paid to the partners of the firm is not under the terms of the partnership.
  • Salaries, bonuses, remunerations, commissions paid to the non-working partners of the firm.
  • If remuneration paid to partners is following the terms of the partnership deed but such transactions were made or were concerning anything that pre-dates the partnership deed.

How to File Tax Returns for a Partnership Firm?

For Partnership income tax return filing should be done through Form ITR-5. This form ITR-5 is used to partnership firm income tax returns and not the tax returns for the partners.

Like all other income tax forms, ITR 5 is an attachment-less form and there is no requirement to submit any documents or statements along with the partnership firm tax returns. However, the taxpayers must save the records about business and produce the same before the tax authorities when requested.

ITR-5 can be filed online with the income tax department’s online portal. The documents need to be submitted only when they are asked for. While filing the Partnership firm tax returns the partners must have class 2 digital signatures for verification of the filing process.

Procedure for filing Income tax returns of a partnership firm.

The 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.

Audit Requirement for Partnership Firms

Partnership firms that satisfy any of the conditions below would be required to get accounts audited:

  • Carrying on business and total sales exceed Rs.1 crore in the previous year.
  • Carrying on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
  • Besides, there are other conditions applicable that 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 a tax return is 30th November.

Partnership Firm Tax Return Due Date

The due date for filing the partnership tax return filing is dependent on whether the firm is required to be audited or not. When the firm is not required to be audited the income tax returns should be filed by 31st July. When the firm is not required to be audited then the firm has to file its income tax returns by 30th September.

However, the cost of compliance is lesser as compared to the companies. Unlike companies, partnerships need not conduct meetings or maintain a register. Hence, it should be noted non – compliance can be costlier than meeting compliances.

Assessment of Partners

step:1 After the firm pays the tax, no tax will be payable by the partners on the share of income from the firm.

step:2 Interest amount or remuneration etc. received by a partner will be taxed as ‘Business or Professional Income’, excluding the amount disallowed in the hands of the firm being more than limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in S. 144 or non-compliance of S. 184.

step:3 The partner’s share (including a minor admitted for the benefit of the firm), in the income of the firm is not included in computing his total income i.e. his share in the total income of the firm shall be exempt from tax under section 10(2A) of the Act.

Annual Compliance – Partnership Firm FAQ’s

1. Are Partnership firms required to carry out auditing?

08 December 2021

Partnership firms are not required to make an audited financial statement each year. The tax audit may be necessary based on the turnover and other criteria.

2. What are the compliances for Partnership firms?

08 December 2021

The compliance for partnership firms mainly includes the income tax return filing unlike the corporate entities like the LLP and the company as they have to make income tax return filings as well as the annual return filing.

3. What documents are required for Partnership firm return filing?

08 December 2021

For filing the returns of a Partnership firm Invoices of sales and the purchases during a year, expenses invoice, bank statements of the partners, TDS return filed copy, GST returns filing copy is required.

4. What is the importance of a Partnership deed?

08 December 2021

The partnership deed contains all the Terms and conditions of the Partnership. It regulates the rights and the duties of each partner making the partnership deed a very crucial document.

5. Is a Partnership firm a separate legal entity?

08 December 2021

The partnership firm and the partners of this firm are considered to be the same. In the case of the partnership firms, the liability of the partners is also unlimited and all the partners are jointly responsible for the liabilities of the firm.

6. Is it necessary for the Partnership firm to file the income tax returns?

08 December 2021

Irrespective of the turnover and the profit or losses made by the partners, the partnership is required to file income tax returns.

7. Can a partnership deed be transferred?

08 December 2021

There are certain limitations on the transfer of ownership of a partnership. A partner cannot transfer the partnership without the consent of all the partners.

8. Can a partnership firm be converted into an LLP or a company?

08 December 2021

Yes, it is possible to convert a partnership firm into a company or an LLP. The process of conversion is very cumbersome. Hence, the entrepreneur should consider starting an LLP or a company instead of opting for a Partnership.

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