For Partnership firm,Income is taxable at flat rate of 30%
But Individuals get Income tax Slab Rate Benefit (Exempt upto 250000 and less rate upto 10 lacs)
Hence it is beneficial for Partnership firm to distribute Salary and Interest to partners to reduce its Profit and tax liability
Example 1
Suppose a Partnership firm earns profit of 10 lacs
What is tax Payable by it?
View answer
| Particulars | Amount |
| Profit and Gains of Business and Profession | 1000000 |
| TAXABLE INCOME | 1000000 |
| TAX 30% | 300000 |
| Surcharge | 0 |
| Tax + Surcharge | 300000 |
| Cess @ 4% | 12000 |
| Total Tax including Cess | 312000 |
Can it give Salary to its 2 Partners of 200000 each to reduce its profit?
View answer
Yes
Salary and Interest paid to partners by partnership firm is
Expense of partnership firm
and
Income of Partners.
What is the tax payable in this case by partnership firm?
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TAX COMPUTATION OF PARTNERSHIP FIRM
| Particulars | Amount |
| Profit Earned | 1000000 |
| Less | |
| Salary Paid to partners | -400000 |
| Profit and Gains of Business and Profession | 600000 |
| TAXABLE INCOME | 600000 |
| TAX 30% | 180000 |
| Surcharge | 0 |
| Tax + Surcharge | 180000 |
| Cess @ 4% | 7200 |
| Total Tax including Cess | 187200 |
What is the tax payable in this case by both Partners
View answer
TAX COMPUTATION OF PARTNERS
Partners follow Normal Income Tax Slab Rate
| INCOME TAX SLAB RATE | |
| INCOME | TAX |
| UPTO 250000* | 0 |
| 250001-500000 | 5%*(Income-250000) |
| 500000-1000000 | 20%*(INCOME-500000)+25000 |
| >1000000 | 30%*(INCOME-1000000)+125000 |
Rebate of 5000 if Income between 250000-500000 in 2016-17
| Particulars | Partner 1 | Partner 2 |
| TAXABLE INCOME | 200000 | 200000 |
| TAX | 0 | 0 |
| REBATE | 0 | 0 |
| NET TAX | 0 | 0 |
| Surcharge @ 12% | 0 | 0 |
| Tax + Surcharge | 0 | 0 |
| Cess @ 4% | 0 | 0 |
| Total Tax including Cess | 0 | 0 |
What is tax Saved by Giving Salary to partners
View answer
Tax Saved=
=Tax paid before giving Salary-Tax Paid after giving Salary
=312000-(187200+0+0)
= 124800
Note:- Similar tax planning can be done if interest on capital is given in place of Salary
What is Maximum Amount upto which Salary and Interest can be given?
Government has specified a Section 40(b) which tells maximum amount of deduction for Salary and Interest
Lets study 40(b) in detail