Partnerships and Limited Liability Companies (LLCs) are two common business entities that offer flexibility and tax benefits to their owners. However, they also have specific requirements and implications when filing their Income Tax Returns (ITRs) in India. This article will explain the basics of ITR filing for partnerships and LLCs and how to avoid common mistakes and issues.
A partnership is a business entity formed by two or more persons agreeing to share the profits and losses of a common business. A partnership can be registered or unregistered under the Indian Partnership Act 1932. A registered partnership has a legal identity separate from its partners, whereas an unregistered partnership does not.
An LLC is a business entity formed and registered under the Limited Liability Partnership Act 2008. An LLC combines the features of a partnership and a company, as it offers limited liability to its partners and flexibility in management and taxation.
Partnerships and LLCs have to file their ITRs using Form ITR-5, which is applicable for firms, associations of persons (AOPs), bodies of individuals (BOIs), artificial juridical persons (AJPs), local authorities, cooperative societies, trusts, estates, etc. Form ITR-5 can be filed online through the income tax department’s e-filing portal, with or without digital signature or electronic verification code (EVC).
Form ITR-5 requires the details of the income and expenses of the partnership or LLC, as well as the balance sheet and profit and loss account. It also requires the details of the partners or members of the partnership or LLC, such as their names, addresses, PANs, profit-sharing ratios, capital balances, remuneration, interest on capital, etc.
The partnership or LLC has to pay tax at the rate of 30% on its net income, plus surcharge and cess as applicable. The partnership or LLC may also have to pay alternative minimum tax (AMT) if its adjusted total income exceeds Rs. 20 lakhs. AMT is calculated at 18.5% of the adjusted total income, plus surcharge and cess as applicable.
The partnership or LLC has to file its ITR by July 31st of the assessment year if it is not subject to audit. If it is subject to audit under any law, it must file its ITR by September 30th of the assessment year.
ITR filing for partnerships and LLCs has some implications for the entity and its partners or members. Some of them are:
- The income of the partnership or LLC is taxed at the entity level only and not in the hands of the partners or members. However, if the partnership or LLC pays any remuneration or interest to its partners or members, then such payments are taxable in their hands as income from business or profession.
- The partners or members of the partnership or LLC must report their share of income from the entity in their respective ITR using Form ITR-3. They can claim a deduction for any remuneration or interest received from the entity under section 40(b) of the Income Tax Act, 1961.
- The partners or members of the partnership or LLC can also claim credit for any tax paid by the entity on their behalf under section 90/90A/91 of the Income Tax Act, 1961.
- The partnership or LLC has to deduct tax at source (TDS) on certain payments made to its partners or members, such as salary, commission, interest, rent, etc., as per the provisions of Chapter XVII-B of the Income Tax Act, 1961.
- The partnership or LLC has to maintain proper books of accounts and documents related to its income and expenses and its transactions with its partners or members. It also has to get its accounts audited if its turnover exceeds Rs. 1 crore in case of business or Rs. 50 lakh in the case of the profession.
ITR filing for partnerships and LLCs is an important and mandatory compliance that has to be done every year by the entity and its partners or members. It requires proper knowledge and understanding of the applicable laws, rules, and procedures and careful preparation and verification of the data and documents. Following the above tips, you can avoid common mistakes and issues in ITR filing for partnerships and LLCs and ensure a smooth and hassle-free process.