Taxation of Partnerships: Assessment of Partners of a Firm

The share of the partner (including a minor admitted for the benefit of the firm), in the income of the firm is not included in computing his total income i.e. his share in the total income of the firm shall be exempt from tax [section 10(2A) of the Act].

If conditions of section 184 and section 40(b) of the Act are satisfied, then any interest, salary, bonus, commission or remuneration paid/payable by the firm to the partners is taxable in the hands of partners (to the extent these are allowed as deduction in the hands of the firm).

The points to be noted are :-

Remuneration from a firm is not taxable under the head “Salaries”. Hence, standard deductions cannot be claimed in respect of such remuneration.

Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For example, if a partner borrows money to make his capital contribution to the firm and he is paid interest on his capital contribution, the amount of such interest will be taxed under the head “Profits and gains of business or profession”, but the interest paid by him on the borrowed money will have to allowed as a deduction.

If the whole or a part of salary/interest is not allowed as deduction in the hands of the firm , than the whole or that part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners the entire remuneration/ interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is chargeable to tax

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