Previous Year of Partner Share Under Previous Year

Previous Year of Partner Share Under Income Tax

Under the Income Tax Act, the income of a firm is taxed separately from the income of the partners. Each partner is required to pay tax on their share of the firm’s income, which is computed based on the firm’s total income for the previous year. In this article, we will discuss the concept of the previous year of partner share under income tax, and the relevant legal provisions in India.

Definition of Previous Year under Income Tax

The Income Tax Act defines the previous year as the financial year immediately preceding the assessment year. For example, if the assessment year is 2022-23, the previous year would be the financial year 2021-22. The previous year is the year in which the income is earned and accrued, and it serves as the basis for the assessment and taxation of income in the subsequent assessment year.

In the case of a firm, the previous year refers to the financial year in which the firm’s income is earned and accrued. This is important in the context of computing the partner’s share of the firm’s income for the purpose of income tax.

Computation of Partner’s Share of Firm’s Income

The Income Tax Act provides specific rules for computing the partner’s share of the firm’s income. The share of the firm’s income is determined based on the partnership deed, which specifies the manner in which the profits and losses are to be shared among the partners. The share of the firm’s income is computed separately for each partner, and each partner is required to pay tax on their respective share of the firm’s income.

The partner’s share of the firm’s income is determined based on the firm’s total income for the previous year. The firm’s total income includes various components such as profits and gains from business or profession, income from capital gains, income from house property, and income from other sources. Each partner’s share of the firm’s income is computed in accordance with the partnership deed, taking into account the profits and losses allocated to each partner.

Taxation of Partner’s Share of Firm’s Income

Once the partner’s share of the firm’s income is computed, it is included in the partner’s total income for the assessment year. The partner is required to pay tax on their share of the firm’s income at the applicable income tax rates. The partner’s share of the firm’s income is taxed as per the individual income tax slab rates, and the partner is entitled to claim any deductions or exemptions available under the Income Tax Act.

The taxability of the partner’s share of the firm’s income is determined based on the residential status of the partner. If the partner is a resident individual, their global income, including their share of the firm’s income, is taxable in India. If the partner is a non-resident individual, only income received or deemed to be received in India is taxable.

Legal Provisions Governing Taxation of Partner’s Share of Firm’s Income

The taxation of partner’s share of firm’s income is governed by specific provisions of the Income Tax Act. Section 2(23) of the Income Tax Act defines the term “firm” and includes a partnership firm, limited liability partnership (LLP), or any other association of persons engaged in a business. The definition of “firm” and “partner” is crucial for determining the taxability of the partner’s share of the firm’s income.

Section 4 of the Income Tax Act provides for the charge of income tax, and it applies to the total income of the assessee for the previous year. The term “assessee” includes an individual, Hindu undivided family (HUF), company, firm, association of persons (AOP) or body of individuals (BOI), among others. The partner’s share of the firm’s income is included in the total income of the partner, and the provisions of Section 4 are applicable for the taxation of such income.

The determination of the partner’s share of the firm’s income is governed by the provisions of Section 67 of the Income Tax Act. Section 67 provides the method for computing the partner’s share of the firm’s income, based on the terms of the partnership deed. It specifies that the share of profits and gains of the firm is to be apportioned among the partners in accordance with the partnership deed.

Claiming Deductions and Exemptions on Partner’s Share of Firm’s Income

Partners are entitled to claim deductions and exemptions available under the Income Tax Act on their share of the firm’s income. Deductions such as those under Section 80C for investments, Section 80D for health insurance premiums, and Section 80G for donations to specified funds or charitable institutions can be claimed by partners to reduce their tax liability on their share of the firm’s income.

Exemptions such as those under Section 10 for agricultural income, Section 54 for capital gains on sale of residential property, and Section 10(38) for long-term capital gains on transfer of equity shares or units of equity-oriented mutual funds can also be claimed by partners to reduce the taxability of their share of the firm’s income.

Conclusion

In conclusion, the previous year of partner share under income tax is determined based on the firm’s total income for the financial year in which the income is earned and accrued. Each partner’s share of the firm’s income is computed in accordance with the partnership deed, and they are required to pay tax on their respective share of the firm’s income. The taxation of partner’s share of the firm’s income is governed by specific legal provisions of the Income Tax Act, and partners are entitled to claim deductions and exemptions to reduce their tax liability. It is essential for partners to understand the tax implications of their share of the firm’s income and comply with the relevant legal requirements to avoid any tax-related issues.