Partnership Firm or LLP: Understanding Taxation for AY 2024-25

With the arrival of Assessment Year (AY) 2024-25, businesses structured as Partnership Firms or Limited Liability Partnerships (LLPs) need to understand their tax obligations to ensure compliance and optimize their financial strategies. Both types of entities offer unique advantages, and while they share some similarities, they also have distinct legal and tax treatments under Indian law. This blog will cover the key aspects of taxation for Partnership Firms and LLPs for AY 2024-25, as well as insights into their compliance requirements.

Understanding the Structure

Partnership Firm:

A Partnership Firm is an agreement between two or more individuals who agree to share profits and losses in a business. The structure of a partnership is governed by the Indian Partnership Act, of 1932. The firm’s partners bear unlimited liability, meaning they are personally liable for the business’s debts and obligations.

LLP:

A Limited Liability Partnership (LLP), on the other hand, is a relatively newer structure, governed by the LLP Act, 2008. An LLP combines the benefits of a partnership firm with limited liability for its partners, meaning each partner’s liability is limited to their contribution to the business. This structure is ideal for businesses seeking the flexibility of a partnership with the legal protection of limited liability.

Taxation of Partnership Firms for AY 2024-25

For the Assessment Year 2024-25, the tax provisions applicable to partnership firms remain similar to those applicable to the previous year, with some updates in compliance and tax rates. Key aspects of partnership firm taxation include:

1. Flat Tax Rate: Partnership firms are taxed at a flat rate of 30% on their total income. There is no slab benefit for these firms like there is for individuals or HUFs.
2. Surcharge: If the total income exceeds ₹1 crore, a surcharge of 12% is applicable on the income tax.
3. Health and Education Cess: All firms are required to pay an additional 4% Health and Education Cess on the total tax liability, including surcharge, if applicable.
4. Remuneration and Interest to Partners: Deductions can be claimed for remuneration paid to work partners and interest on capital paid to partners, as per Section 40(b) of the Income Tax Act, provided they fall within the prescribed limits. Excessive payments beyond the limits cannot be claimed as a deduction.
   • Maximum deductible remuneration:
     • On the first ₹3 lakh of book profit, 90% or ₹1.5 lakh, whichever is higher.
     • On the balance of book profit, 60% of the profit.
   • Interest on capital is deductible up to 12% per annum.

Taxation of LLPs for AY 2024-25

The taxation system for LLPs is almost identical to that of partnership firms, with a few nuances:

1. Flat Tax Rate: Like partnership firms, LLPs are also taxed at a flat rate of 30% on total income.
2. Surcharge: LLPs are subject to a surcharge of 12% if their total income exceeds ₹1 crore, similar to partnership firms.
3. Health and Education Cess: LLPs are also required to pay a 4% cess on the total tax and surcharge.
4. Remuneration and Interest: LLPs can also pay remuneration and interest on capital to their partners, but unlike partnership firms, LLPs have stricter regulatory compliance requirements under the LLP Act, 2008.

Key Compliance Requirements for AY 2024-25

1. Filing of Income Tax Return (ITR)

Both partnership firms and LLPs must file their Income Tax returns (ITR) using ITR Form 5. The due date for filing returns is July 31, 2024, unless the entity is required to undergo a tax audit.

2. Tax Audit

Firms and LLPs with a turnover exceeding ₹1 crore in the previous financial year (₹10 crore if all transactions are digital) must have their accounts audited under Section 44AB of the Income Tax Act. The audit report must be submitted before September 30, 2024.

3. Advance Tax

Entities with an annual tax liability of more than ₹10,000 must pay advance tax in instalments during the financial year to avoid penalties. These installments are due on June 15, September 15, December 15, and March 15.

4. TDS (Tax Deducted at Source)

Partnership firms and LLPs are also required to comply with TDS provisions. They must deduct tax at source on payments such as salary, rent, contractor payments, and professional fees if these payments exceed the threshold limit specified under the Income Tax Act.

5. GST Compliance

Partnership firms and LLPs engaged in the sale of goods or services are also required to register under GST if their annual turnover exceeds the threshold limit of ₹20 lakh (₹40 lakh for goods in some states). Timely filing of GST returns is critical to avoid penalties.

Key Differences Between Partnership Firms and LLPs

While the taxation of partnership firms and LLPs is similar, their legal structure and compliance requirements differ significantly:

1. Liability: In a partnership firm, partners have unlimited liability, meaning personal assets can be used to settle business debts. In an LLP, the liability of partners is limited to their capital contribution, protecting personal assets from business risks.
2. Regulatory Requirements: LLPs are subject to stricter compliance under the LLP Act, 2008, including mandatory filing of annual returns with the Ministry of Corporate Affairs (MCA), which does not apply to partnership firms.
3. Perpetual Succession: LLPs enjoy perpetual succession, meaning the business can continue even if partners change. Partnership firms, however, may dissolve upon a change in partners.

Conclusion

Choosing between a Partnership Firm and an LLP for the Assessment Year 2024-25 depends on the nature of your business, the scale of operations, and the level of legal protection you require. Partnership firms offer simplicity in terms of legal structure, while LLPs provide limited liability and are ideal for businesses seeking legal protection from personal liability. Regardless of the structure, both entities must comply with taxation and regulatory requirements to avoid penalties and optimize their financial standing.

By ensuring compliance with tax laws, meeting audit requirements, and adhering to GST and TDS regulations, partnership firms and LLPs can efficiently manage their tax liabilities for AY 2024-25. Understanding the nuances of each business structure will enable you to make informed decisions that best suit your business needs.