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Annual Compliance of Partnership

Know the minimum annual compliances to be followed by your Partnership Firm

    partnership

    Partnership

    In India, Partnership Firms can be divided into two categories namely, Registered and Unregistered Partnership Firms. The burden of fulfilling annual compliances lies on only those partnership firms which are duly registered under The Partnership Act, 1932.

    Income Tax Rate

    The Income tax rate applicable to partnership firms is 30%. A surcharge of 12% is also chargeable on the tax amount if the Net taxable income exceeds Rs. 1 Crore during the relevant previous year.

    Expenses not available as deductions:

    There are certain expenses which may appear in the balance sheet but are not allowed as deductions under the Income Tax Act and hence required to be added back while calculating the Net taxable income. They are:

    • Salary, bonus, commission or remuneration paid to non-working partners.
    • Remuneration or interest paid to the partners which are not in accordance with the terms of the partnership deed.
    • Remuneration or interest paid to the partners in accordance with the terms of the partnership deed but they relate to any period prior to the date of the partnership deed.

    Interest to partner:

    A partnership firm may pay interest to its working partners. However the interest amount should not exceed 12% of the sum contributed by them.

    Remuneration to partner:

    The maximum amount of salary, bonus, commission or other remuneration to all the partners during the previous year should not exceed the limits given below:

    • On first 3 lakhs of book profit or in case of loss – Rs. 1, 50,000 or 90% of book profits (whichever is higher).
    • On the balance book profit – 60% of book profit.

    Calculation of Book profits

    Maximum remuneration allowable to partners is dependent on the book profits of the Firm. To calculate book profits, we have to follow the following steps:

    Step 1-Take Net profit as per profit and loss account

    Step 2- Add remuneration if already debited

    Step 3- Deduct interest if it is not deducted

    Step 4- Make adjustments for expenses as per section 28 to 44D

    Income Tax Return

    A Partnership Firm has to electronically file its Income Tax Return using ITR 5 at the income tax website. Such form needs to be digitally signed by the authorized partner. The Partnership Firms who are not required to get their accounts audited under the Income Tax Act have to file their ITR on or before 31st July. However, those firms who are liable for tax audit have to file their ITR on or before 30th September.For partnership firms who have entered intoany international transactions with associated enterprises or have undertaken specified Domestic Transaction are required to furnish Form 3CEB.For such Partnership Firms, the deadline for filing income tax return is 30th November.

    Audit of Books of Account

    A Partnership firm has to get its accounts audited under the Income Tax Act if it falls in any of the 2 categories:

    • It carries on business and total sales exceed Rs.1 crore in the previous year.
    • It carries on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
    Additionally, if a partnership firm has entered into an international transaction or specified domestic transactions, a report must be furnished in Form No. 3CEB under section 92E.