Want to keep more of your hard-earned profits? Learn simple yet effective tips on how to save tax in partnership firm in India.
We take you through some of the most useful tax-saving opportunities that can help you minimize your tax burden as an Indian partnership firm.
How to Save Tax in Partnership Firm in India | 17 Tax Hacks
By strategically implementing the following tax-saving measures, a partnership firm in India can effectively reduce its tax liability while remaining compliant with tax laws:
Optimize Partner Remuneration:
Partners’ remuneration, such as salary, bonus, or commission, is a deductible expense for the firm. Properly structuring it can significantly reduce the firm’s tax liability.
The remuneration, however, must comply with the limits set under the Income Tax Act, which is based on the book profits of the firm.
Claim Deduction on Interest:
Partners can receive interest on their capital contributions, and the firm can claim a deduction for this interest.
The interest should not exceed 12% per annum as per the Income Tax Act. Ensure that the interest rate is within this limit to allow the firm to reduce taxable income.
Make Use of Rent and Other Allowances:
If a partner provides premises or assets for the firm’s use, the rent or lease amount paid by the firm can be claimed as a deduction.
This reduces the taxable income while compensating the partner for their contribution.
Consider Tax-Efficient Partnership Structure:
Choosing the right partnership structure is essential for tax efficiency.
For instance, an LLP (Limited Liability Partnership) may offer benefits like no dividend distribution tax and simpler compliance, which can lead to tax savings compared to a traditional partnership firm.
Seek Professional Advice :
Hiring a tax professional from trusted firms like PKC Management Consulting can help in identifying specific deductions and credits that the firm might otherwise miss.
A tax expert can provide advice that is customized to your firm’s unique circumstances, ensuring compliance while optimizing tax savings.
Explore Tax Benefits for Women Entrepreneurs
If the partnership firm is led by women, it may qualify for specific government schemes and incentives.
These schemes are aimed at promoting women entrepreneurship, which can include tax benefits.
Proper Planning of Partners’ Structure
By hiring family members as employees and paying them salaries, partnership firms can utilize the lower tax brackets for individuals.
Additionally, including non-resident partners can potentially benefit from lower tax rates or exemptions in their countries.
Take Advantage of Startup Deductions
If the partnership firm is a startup, it may be eligible for various deductions under the Income Tax Act.
These include deductions on expenses incurred before starting the business, as well as specific startup-related tax exemptions.
Leverage Research and Development (R&D) Benefits
Firms involved in R&D activities can claim deductions for expenses incurred on R&D, which can significantly reduce taxable income.
There are also additional benefits under Section 35 of the Income Tax Act for scientific research.
Capitalize on Export Promotion Incentives
Partnership firms engaged in export activities can avail of various government incentives.
These include duty drawback, export promotion capital goods (EPCG) scheme, and other incentives which can lead to substantial tax savings.
Utilize Investment Tax Credits:
Certain investments may qualify for tax credits, which can directly reduce the tax liability.
This includes investments in renewable energy projects or other government-specified sectors.
Look into Tax-Saving Investments
Partners can invest in tax-saving instruments like PPF, NSC, ELSS, etc., under Section 80C, which helps in reducing personal tax liability.
Additionally, the partnership firm can also invest in tax-saving bonds to reduce taxable income.
Utilize Depreciation on Business Assets:
The firm can claim depreciation on business assets, which is a non-cash expense.
This reduces the taxable income and allows for the deferred payment of taxes over the asset’s useful life.
Adopt Flexible Profit Distribution:
The partnership agreement should allow for flexible profit distribution based on the partners’ current tax situation.
Adjusting profit shares can help in optimizing overall tax liability, especially if partners are in different tax brackets.
Health Insurance Premiums
Partnerships can claim deductions for premiums paid on health insurance policies for partners and their families under Section 80D.
This can help in reducing taxable income.
Presumptive Taxation Scheme
Small partnership firms with turnover up to Rs. 2 crore can opt for the presumptive taxation scheme under Section 44AD.
It simplifies tax calculation and reduces tax liability by allowing the firm to declare profits at a prescribed rate.
Maintain Proper Books & Accounts
Proper bookkeeping and accounting practices are essential to claim all eligible deductions and avoid penalties.
Accurate records ensure that the firm is compliant with tax laws and can substantiate claims during assessments.
Frequently Asked Questions About Tax Saving for Partnership Firms
- What are the basic tax advantages of a partnership firm in India?
Partnership firms are not subject to Minimum Alternate Tax (MAT), and they benefit from pass-through taxation. This means profits and losses are passed through to the individual partners, who are taxed on their share.
- How can partnership firms in India maximize deductions?
A partnership firm can maximize deductions by claiming deductions for interest on capital, partner remuneration, rent, depreciation, and donations.
- What are some tax-efficient investment options for partnership firms?
Partnership firms can invest in eligible instruments like PPF, ELSS, and life insurance policies to claim deductions under Section 80C, 80D, and 80G of the Income Tax Act.
- Can partnership firms convert to other business structures for tax benefits?
Yes, partnership firms can consider converting to an LLP or one person company (OPC) if it suits their business needs and offers potential tax advantages.
- How can partnership firms ensure accurate record-keeping for tax purposes?
By maintaining detailed and organized records of all business transactions, partnership firms can support their tax claims and avoid penalties.
