Business / Partnership Firm Income Tax Filing Guide?

• A partnership firm is a business entity created by two or more individuals, where each individual is known as a partner.
• Such firms are required to determine their total income because the partnership firm tax rate is different for different types and amounts of income.
• You must know about the expenses eligible for tax deductions before calculating the partnership firm tax rate as claiming for deductions reduces your income tax liability.

A partnership firm is an entity formed by two or more individuals to start a single business enterprise. Each individual is known as a partner and all partners are called a firm. A partnership firm can be a registered or unregistered partnership.The Income Tax Act defines a partnership firm as " a group of persons who have agreed to share the profit and loss of a business moving on by all or any of them acting for all ".In this blog, you will find out how to calculate partnership firm tax rate, income tax return filing for a partnership firm, and what are the tax deductions allowed for partnership firms.

Every partnership firm in India is obligated to file income tax returns every year. According to the Income Tax Act 1961, a partnership firm has to pay different tax rates depending on the firm's income and other factors.The tax percentage that applies to a partnership firm is mentioned below:

• Tax Rate: Income tax is applicable at a rate of 30 per cent on the total taxable income.
• Surcharge: A surcharge of 12 per cent is applicable if the taxable income exceeds ₹1 crore.
• Interest on Capital: The interest paid on capital up to 12 per cent is allowed as a deduction.
• Health and Education Cess: Education and health cess at a 4 per cent rate is levied on the total tax amount, including surcharges.

Note : Even if the business makes no income during a financial year, filing an income tax return within the stipulated deadline is mandatory. A partnership firm has to pay tax on its income, regardless of whether it is registered or not.

If you are a taxpayer, you must be aware of the deductions allowed before calculating the partnership firm tax rate and payable income tax amount. Claiming for a deduction reduces your income tax liability.The following expenses are eligible for deduction when calculating the partnership firm tax rate:

• Remuneration of Non-Working Partners : Salaries, bonuses, commissions, or any other remuneration paid to the non-working partners of the firm.
• Payments Outside Deed Terms : Payments made to the partners that do not conform to the terms of the partnership deed.
• Transactions Before Deed Execution : If payments paid to partners comply with the partnership deed but are related to any transaction that happened before the partnership deed was executed.

You must know the following points before filing tax returns for a partnership firm:

• Form ITR-5 : To file tax returns for a partnership firm, you must use Form ITR-5. The Form ITR-5 is applicable for filing income tax returns by entities like firms, business trusts, investment funds, cooperative societies, and local authorities.
• Form ITR-5 Restrictions : Form ITR-5 cannot be used to file returns of individual partners. It can be filed online through the income tax e-portal.
• Supporting Documents : You do not need to attach any supporting documents while filing Form ITR-5. However, documents may have to be submitted to the Income Tax Department if required.
• E-Filing : It is compulsory to file the income tax return electronically with or without a digital signature. The partnership firm can also file income tax returns via Electronic Verification Code.
• Digital Signature : If a partnership firm is subject to audit under any section of the Income Tax Act, it must file Form ITR-5 with a digital signature and e-file the audit report. The entity's partners must also have a class 3 digital signature to verify the filing process.

A partnership firm must determine its total income as the partnership firm tax rate is based on its total income. You should be aware of the expenses that are eligible for tax deductions before you calculate the partnership firm tax rate. This helps in reducing your income tax liability and save money. Also Read: Beginner's Guide to Income Tax Filing in India: Step-by-Step Process