India: Types of Company
This page was last updated on 13 Dec 2018.
A partnership is the relationship between persons who have agreed to share the profits of the business or profession carried on by all or any of them acting for all. Under present Indian law, partners have unlimited liability and the number of partners must not exceed 20. Limited liability partnerships are now permitted and will be taxed essentially under the same structure as applicable to partnership firms (see below). Professional firms are typically organised as partnership firms.
The partnership is governed by the partnership deed which provides for the profit-sharing ratio among partners and salary, interest and remuneration payable to the partners. It is highly advisable for the partnership to be registered with the registrar of firms of the relevant state, as specified in the Indian Partnership Act, 1932.
A partnership is taxed as a separate entity from the partners. Salary, interest or other remuneration paid or payable by the partnership to a partner is allowed as a deduction in calculating the taxable profits of the partnership, subject to certain specified limits. The partnership’s profits are taxed at the rate of 30%; in addition there is an education cess (tax for a specific purpose) of 0.9%. After-tax profits are divided among the partners according to the profit and loss sharing ratio; such a share of profit is not taxable in the hands of the partner. The salary, interest or other remuneration received by the partner is taxed in the hands of the partner.
For tax purposes, the accounts must be audited if the turnover or gross receipts exceeds the following prescribed limits: if carrying out a business, total sales, turnover or gross receipts of INR6m; if carrying on a profession, gross receipts of INR1.5m.