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Which ITR to file for Partnership Firms?

Partnership firms, defined as individuals who have entered into a partnership and collectively operate a business under a firm name, are subject to income tax regulations just like individuals, Hindu Undivided Families (HUFs), and companies. Here are some key aspects related to filing Income Tax Returns (ITR) for a partnership firm.

Tax Rates for Partnership Firm

Partnership firms, whether registered or unregistered, are subject to specific income tax rates and additional levies as per the Income Tax Act. Here’s a breakdown of the tax rates and applicable surcharges for partnership firms:

1. Income Tax Rate: Partnership firms are liable to pay income tax at the rate of 30% on their total annual income.
2. Surcharge: If the total income of the partnership firm exceeds INR 1 crore, then the firm is also liable to pay a surcharge at the rate of 12% on the income tax amount.
3. Education Cess and Secondary and Higher Education Cess: In addition to income tax and surcharge, partnership firms must pay education cess and secondary and higher education cess. The education cess is 2% and the secondary and higher education cess is 1%.
4. Alternate Minimum Tax (AMT): Partnership firms may also be liable to pay Alternate Minimum Tax (AMT). The AMT rate cannot be less than 18.5% of the adjusted total income.

It’s important for partnership firms to accurately calculate their tax liabilities, including income tax, surcharge, cess, and AMT, to ensure compliance with tax regulations and avoid penalties or interest charges. Seeking professional advice from tax consultants or chartered accountants can help partnership firms navigate complex tax calculations and optimize their tax planning strategies.

Audit Requirement for Partnership Firm

A partnership firm will require a tax audit if it falls under the following categories:

1. Business Sales: If the partnership firm is engaged in business activities and the total sales exceed INR 1 crore in the previous financial year.
2. Professional Gross Receipts: If the partnership firm is engaged in a profession and the gross receipts in the profession exceed INR 50 lakhs in any previous financial year.

Income Tax Calculation for Partnership Firm

those are important considerations for calculating the total taxable income of a partnership firm. Here’s a breakdown of the deductions:

1. Remuneration or Interest Paid to Partners:
   • If the remuneration or interest paid to partners is not in accordance with the terms of the partnership deed, it may not be deductible.
2. Pre-Partnership Transactions:
   • If remuneration paid to partners is in accordance with the terms of the partnership deed but is related to transactions that occurred before the partnership deed was in effect, it may affect the deductibility of such payments.
3. Salary, Bonus, Commission, or Remuneration to Non-Working Partners:
   • Any salary, bonus, commission, or remuneration paid to non-working partners should also be considered for deduction. However, it’s important to ensure that these payments are genuine and reasonable based on the partnership agreement and the nature of their involvement in the firm’s activities

ITR Form for a Partnership Firm

Partnership firms in India are required to fulfill their income tax obligations by filing Form ITR-5, as mandated by the Income Tax Department. This process is facilitated through the Department’s e-filing portal, offering a convenient digital platform for compliance. Although initially, there’s no compulsion to attach supporting documents, they must be furnished if requested by the tax authorities.

Notably, partnership firms have the flexibility to file their returns offline if they do not meet the criteria necessitating a tax audit. However, opting for online filing is generally more expedient and preferable. During the filing process, it’s essential for partners to possess a Class 2 digital signature to verify the authenticity of the submitted documents.

It’s crucial to recognize that while Form ITR-5 is designated specifically for partnership firms, individual partners are required to file their own income tax returns using Form ITR-3. This distinction ensures proper compliance with tax regulations and facilitates accurate reporting of financial affairs.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/