How a partner of partnership firm is taxed in India

Partners are individuals joined hands to form a partnership firm by signing a contract or agreement with all the terms and conditions that they are agreed to.

In india, a partner is taxed as an individual. All the tax provisions applicable to an individual is applied to a partner for calculating his/her tax liability.

A partner generally receive following incomes from the Partnership firm:

  • Share of profit
  • Interest on capital contributions
  • Salary, bonus, commission or any remuneration

By taking above incomes (if taxable) incurred from a partnership firm in addition to other taxable incomes under different heads of income, you can arrived at the gross total income.

From partner’s gross total income, tax deduction under section 80C to 80U has to be deducted based on eligibility in order to find out taxable income.

Applicable Tax deductions under chapter VI-A

Chapter VI-A tax deductions are deducted out of the gross total income of the partner to arrive at taxable income.

Tax deductions applicable to an individual can also be claimed by a partner.

Here is a list of tax deductions that a partner can claim from his gross total income if terms and conditions to the respective sections are satisfied.

  • Section 80C – Life insurance premia, contributions to PPF, Tuition fees etc
  • 80ccc – in respect of pension fund
  • 80ccd – Contribution to national pension system
  • 80ccg – Investment made under any equity saving scheme
  • 80d – Medical insurance premia
  • 80dd – Maintenance including medical treatment of a dependent being a person with disability
  • 80ddb – Medical treatment of specified diseases
  • 80e – Payment of interest on loan taken for higher studies
  • 80ee – Interest on loan taken for residential house property (first time home buyers)
  • 80g – Donation to certain funds, charitable institutions etc.
  • 80gg – Deduction in respect of rent paid
  • 80gga – In respect of certain donations for scientific research or rural development
  • 80ggc – in respect of contribution given to political parties
  • 80ia – in respect of products and gains from industrial undertaking or enterprises engaged in infrastructure development.
  • 80iab – in respect of profits and gains by an undertaking or enterprise engaged in development of special economic zone.
  • 80ib – in respect of profits and gains from certain industrial undertaking other than infrastructure development undertaking.
  • 80iba – in respect of profits from housing project
  • 80ic –  in respect of profits and gains of certain undertaking in certain special category of states
  • 80id – in the case of hotels and convention center in NCR
  • 80ie – in respect of undertaking in north-eastern states
  • 80jja – in respect of profits and gains from the business of collecting and processing of biodegradable waste.
  • 80jjaa – in respect of employment of new employees
  • 80qqb – in respect of royalty income of authors
  • 80rrb – in respect of royalty of patents
  • 80tta – Interest on deposits in saving accounts
  • 80ttb – deduction for senior citizens on interest on deposits
  • 80u – in case of a person with disability

Basic Exemption Limit

After arriving at total taxable income, you need to check whether it crosses the basic exemption limit.

If total income is more than the basic exemption limit, then up to the limit of basic exemption, tax rate is zero.

Basic Exemption Limit For Financial Year 2019-20 (AY 2020-21)

Age limit of a proprietor being a resident in India Basic Exemption Limi in INR
who is less than 60 years of age 2,50,000
who is of the age of 60 years or more but less than 80 years 3,00,000
who is of the age of 80 years or more 5,00,000

On above basic exemption limit, you have to pay tax at the rate of 5%, 20% and 30% based on your income.

Rate of Tax applicable to partners

Rate of tax as applicable to an individual is also applied to a partner.

For a partner who is below the age of 60 years, up to the basic exemption limit, tax rate is nil.

Total Income between Rs 2,50,000 to Rs 5,00,000, tax rate is 5%.

Total income between Rs 5,00,000 to Rs 10,00,000 tax rate is 20%.

Any income above Rs 10,00,000 is taxable at the rate of 30%.

If partner’s age is between 60 to 80 years, then up to total income of Rs 3,00,000 tax rate is Nil. From Rs 3,00,000 to Rs 5,00,000 tax rate is 5%. From Rs 500000 to 1000000, tax rate is 20%. Above Rs 10,00,000, tax rate is 30%.

For a super senior citizen who is a partner in partnership firm, up to a total income of Rs 5,00,000, he is not required to pay any tax. Between total income of Rs 5,00,000 to 10,00,000, you are required to pay 20% tax. Above Rs 10,00,000, tax rate is 30%.

Tax Rate of a proprietor being a resident in India

Total Income Slabs in INR When the proprietor is less than 60 years of age When the proprietor is of the age of 60 years or more but less than 80 years When the proprietor is of the age of 80 years or more
Up to 2,50,000 Nil Nil Nil
2,50,001 to 3,00,000 5% Nil Nil
3,00,001 to 5,00,000 5% 5% Nil
5,00,001 to 10,00,000 20% 20% 20%
Above 10,00,000 30% 30% 30%

Rebate Under Section 87A

For the financial year 2018-19, a partner can claim tax rebate under section 87A of up to Rs 2500 when total income for the financial years is not crossing Rs 350000.

This means if your total income for the financial year 2018-19 is less than Rs 3,50,000, then tax liability as calculated on your total income or Rs 2500 whichever is lower will be allowed as tax rebate.

In our budget 2019, government has proposed to increase the rebate from Rs 2,500 to Rs 12,500 if partner’s total taxable income is Rs 5,00,000 or less.

Surcharge

Surcharge to a partner is applicable when total income crosses Rs 50,00,000. If total income crosses Rs 50,00,000, then surcharge rate is 10%. If it crosses Rs 1 Crore, then surcharge rate is 15%.

Surcharge is charged on the basic tax rate. This means before charging cess and allowing rebate under section 87A.

Health and Education cess

For the individual, Health and education cess at the rate of 4% is charged on tax liability. If surcharge is applicable, then you are required to charge it after charging surcharge or else it will be charged on tax liability.

There is no minimum or maximum limit to it. You need to charge irrespective of your tax bracket.

Return of Income and due date of filing

A partner of a partnership firm is required to file his tax return in ITR-3. He cannot use any other form.

The due date of filing income tax return is 30th July of the assessment year relevant to the previous year for which return of income is filed.

If the due date has been extended by CBDT, then such extended date will be considered as the date of filing.

In case, the partner has some other income from business or profession, due to which he has to undergo tax audit under section 44AB of income tax act,1961, then audit report, form 3CD along with balance sheet and profit and loss account has to be filed with government in addition to return of income.

In addition to above provisions a partner may be liable to comply to other provisions of income tax act based on different factors.

For instance, if in addition to income from firms, he also runs business as a proprietor then provisions of presumptive taxation scheme can be availed.

The partner may also be liable to deduct tax at source and pay advance tax.

We suggest you to consult a finance professional or tax expert to guide you in tax planning.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.