GST and Income Tax for Partnership Firms and LLPs — A Complete Tax Guide

Partnership firms (registered under the Partnership Act 1932) and Limited Liability Partnerships (LLPs, registered under the LLP Act 2008) are popular business structures in India — especially for professional practices. Their tax treatment differs from companies in several important ways. Here is the complete guide to GST and income tax compliance for partnerships and LLPs.

Income Tax for Partnership Firms and LLPs

• Tax rate: Flat 30% on total income (plus 4% health and education cess = 31.2%)
• Surcharge: 12% if income exceeds ₹1 crore
• No basic exemption limit (unlike individuals)
• Partners' share in firm profits: Exempt in the hands of partners (to avoid double taxation)

Deduction for Partner's Remuneration — Section 40(b)

Section 40(b) allows the firm/LLP to deduct salary paid to working partners — but only up to prescribed limits:

• On the first ₹3 lakh of book profit (or if there is a loss): 90% of book profit or ₹1,50,000 — whichever is higher
• On balance book profit above ₹3 lakh: 60% of such balance
• Remuneration must be authorised by the partnership deed and must be paid to working partners
• Partners pay tax on remuneration received at their individual slab rates (as salary income)

Interest to Partners — Section 40(b)

• Interest paid to partners is deductible up to 12% per annum on partner's capital
• Must be authorised by the partnership deed
• Interest paid above 12% — disallowed as firm's expense
• Partners pay tax on interest received at their individual slab rate

Alternate Minimum Tax (AMT) — Section 115JC

• Firms and LLPs are subject to AMT at 18.5% of "adjusted total income" — if the regular tax (30%) is lower
• AMT credit can be carried forward for 15 years — availed when regular tax exceeds AMT in future years
• Primarily hits firms/LLPs with large deductions under Chapter VI-A (80-IC, 80-IA etc.)

GST Compliance for Partnerships and LLPs

• GST registration: Same threshold as other entities — ₹20 lakh turnover (₹40 lakh for goods suppliers)
• Partners' remuneration and interest from the firm: Not a supply for GST purposes (not a taxable service between partners and firm in a genuine partnership)
• Services rendered by LLP to clients: Fully taxable under GST at applicable rates
• GSTR-1, GSTR-3B, GSTR-9 — same compliance as other registered persons
• ITR form: ITR-5

Conclusion

Partnership and LLP taxation involves careful management of Section 40(b) remuneration limits, partner interest and AMT computation — requiring expert CA advice. SPOTON provides complete tax and GST compliance for partnership firms, LLPs and professional practices across Kerala. Contact us for expert partnership tax services.