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Interest received from partnership firm

12 January 2021

if an assessee receives interest from partnership firm @ 18%, then is he liable to pay tax on entire interest amount or only to the extent of 12% as the rest is disallowed in the hands of the partnership firm

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7 Replies

Krishna Chaudhary (Accountant) (4531 Points)
Replied 13 January 2021

Remuneration and interest received by partner from firm is taxable as Business income. However, share of profits from firm is not taxable in the hands of partner.

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Jinesh Pamecha (38 Points)
Replied 13 January 2021

Yes it is taxable.. but only 12% interest is taxable or the entire 18%

Krishna Chaudhary (Accountant) (4531 Points)
Replied 13 January 2021

I am not say about it but to avoid double taxation,
exempted in the hands of partner.

read the below article for more information.

Interest on Partner’s Capital

For deduction of interest following conditions must be satisfied –

Payment of Interest can be made to working or non-working partner.

Payment of Interest must be authorized by the partnership deed and It should be related to the period of the partnership deed. If there is another partnership deed for another period then such deed’s provisions will be considered for that period.

The rate of interest should not exceed 12%. If the amount of interest exceeds 12% of the capital then such excess amount is disallowed.

It is not allowed if the tax is paid on presumptive basis under section 44AD or section 44ADA.

If a person is a partner in a firm on behalf or for the benefit of any other person then any interest paid to such person otherwise as a representative capacity shall not be taken into account for the purpose of this section. Interest paid to such person as a representative capacity and to person so represented is taken into account.

If interest is paid to a partner on behalf or for the benefit of any other person then such interest is not disallowed under this section.

If the firm receives interest on drawings from partner then it is taxable in the hands of the firm.

When it is said that remuneration or interest is not allowed, it means that it is not allowed as deduction for calculating net taxable profit. The firm can still pay it to the partner in cash, there is no restriction on it under partnership act.

The amounts which are deductible as remuneration or interest in the hands of the firm under section 40b are taxable in the hands of the partner which are receiving such amounts under the head Profit from business/profession. However, if the amount is disallowed in hands of firm, then such amounts are exempt in the hands of partner.

No TDS is to be deducted by partnership firm on salary or interest paid or credited to partner. TDS is not required to be deducted even when such salary or remuneration is taxable in the hands of partner. For more information, you can read – TDS on Salary to Partners

A partnership firm is assessed as a firm for income tax purpose when some conditions are fulfilled – Section 184

Working partner means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.

I will provide you the exact answer after sometime after consulting my few friends

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Kapadia Pravin (17254 Points)
Replied 13 January 2021

Interest taxable is 18% amount in partner's hands.

CA. Sourav Sarkar (Chartered Accountant ) (24583 Points)
Replied 13 January 2021

Total 18%

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Jinesh Pamecha (38 Points)
Replied 13 January 2021

The following para in the above article suggests that only 12% of interest must be taxable since only that much amount is allowed as deduction to the partnership firm. please also refer section 28(v) of the act and let me know if it has the same interpretation

The amounts which are deductible as remuneration or interest in the hands of the firm under section 40b are taxable in the hands of the partner which are receiving such amounts under the head Profit from business/profession. However, if the amount is disallowed in hands of firm, then such amounts are exempt in the hands of partner.