If you run a business with another person, you most certainly have a partnership firm. Regarding taxes, though, many people find themselves perplexed. We’ll simplify partnership taxes in plain terms on this blog so you know what to do, when to file, and how much tax to pay.
Description of Partnership Taxes
Partnership taxes are the income tax a firm formed under a partnership has to pay the government. In India, a cooperation is treated as a distinct legal entity. Consequently, the company pays taxes on its income rather than those of the individual partners.
Partnership firms come in two varieties:
- Registered partnership (with the Firms Registrar)
- Unregistered cooperation
Though registered companies have some advantages, both are taxed.
Tax Rate for Collaborative Businesses
The following formula is used to determine partnership taxes:
- Flat 30% tax on firm overall income
- 12% surcharge should income rise above ₹1 crore
- Education and health cess of 4% overall on the tax
Total tax thus is 30% plus surcharge (if any) plus 4% cess.
Approved Deductions
Before paying partnership taxes, the company can assert some deductions including:
- Salary or remuneration paid, per partnership deed, to working partners
- Capital’s interest, up to 12% annually
- Business costs including staff pay, utilities, rent, etc.
These deductions lessens the firm’s taxable income.
Tax Filings for Collaborative Enterprises
Whether or not a partnership makes a profit, all of them have to annually submit an Income Tax Return (ITR-5).
Keep in mind:
- Due date is July 31 (should an audit not be needed)
- Should turnover be more than ₹1 crore, audit is required; the due date falls on October 31
- Online filing of the return using the income tax portal is required
Do Partners Pay Taxes as Well?
Indeed, but not on the firm’s overall profitability.
Every partner pays taxes just on the compensation they get from the company.
- Regarding capital, interest
- Share of profit from the company; this is tax-free for the partner since the company already taxes it
Advantages of Registering the Partnership
Although partnership taxes apply to registered and unregistered businesses, a registered firm can:
- Claim deductions on salary and interest paid to partners
- Sue or be sued in court legally
- Build more confidence with clients and banks
Common Mistakes to Avoid
- Not writing a clear partnership deed
- Not registering the company yet still claiming partner payouts
- Oversaw the missing tax filing deadline
- Ignorance of audit when high turnover
Conclusion Notes
Running your company successfully depends on an awareness of partnership taxes. If things grow too complicated, keep your books neat, file your taxes on time, and see a tax professional. Good planning will help you to save money and steer clear of tax department problems.
