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Tax on profit received from a partnership firm

SamSue (Partner) (64 Points)

25 September 2024

Hello!

When a partner receives a share of profit in a partnership firm, is the partner required to pay tax on the profit received?

If so, I would appreciate it if you could share the link (URL) to the Income Tax Rule/Clause.

Thanks and Regards,

Sam Sue

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5 Replies

Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (5128 Points)
Replied 25 September 2024

Yes, a partner in a partnership firm is required to pay tax on their share of profit received from the firm. According to the Income Tax Act, 1961, partnership firms are taxed as separate entities, and the partners are taxed on their individual shares of profit. Here's the relevant section: "Section 28 - Profits and gains of business or profession (1) The profits and gains of any business or profession carried on by a person shall be chargeable to income-tax." And specifically for partnership firms: "Section 66 - Liability of partners for tax on firm's income (1) The income-tax payable by a firm shall be assessed and paid in the name of the firm. (2) The partners shall be jointly and severally liable for the payment of tax assessed on the firm." You can find more information on the Income Tax Department's website: https://www.incometax.gov.in

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (5128 Points)
Replied 25 September 2024

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SamSue (Partner) (64 Points)
Replied 25 September 2024

Dear Sir,

Thank you for your response.

Just to clarify further, is the partner liable to pay tax on profit in PAT scenario?

I would appreciate your advice on the PBT and PAT scenarios.

Thanks and Regards,

Sam Sue

Puneet Mittal (Sr. Officer Accounts) (212 Points)
Replied 25 September 2024

Share of profit received from partnership firm is not taxable in the hand of partner becuase firm had already paid tax on above profit (Refer Section 10 (2A) of Income Tax Act.

If partner received salary, Intrest on capital or any other amount from partnership firm that is taxable in the hand of partner.

Khushbu Bansal (student) (48 Points)
Replied 28 September 2024

In a partnership firm, the share of profits received by a partner is not taxed in the hands of the partner at the time of distribution. Instead, the partnership firm is required to pay tax on its total income, and the individual partners are taxed on their respective shares of the profits when they file their personal income tax returns.

Tax Treatment

Profit Share: The profit share received by the partner is exempt from tax under Section 10(2A) of the Income Tax Act, 1961. However, the partner must include this share in their total income when calculating their overall tax liability.
Taxation at Firm Level: The partnership firm is taxed on its net profits (after deducting allowable expenses) at the applicable tax rate. The partners then receive their share of the profits.

PBT and PAT Scenarios

PBT (Profit Before Tax): This is the profit earned by the firm before any tax is deducted. It reflects the firm's performance.
PAT (Profit After Tax): This is the profit that remains after paying tax. In a partnership, this is distributed among the partners as their profit share.