Section 10(2A)-Partner’s Share in the Total Income of a Partnership Firm

Section 10(2A) of the Income Tax Act, 1961 in India exempts a partner’s share in the total income of a partnership firm from income tax in the hands of the partner. This provision ensures that the income of the firm, which is already taxed at the firm level, is not taxed again in the hands of the partners, avoiding double taxation.

Key Points of Section 10(2A)

• Applicability: The exemption applies to a partner’s share in the total income of a partnership firm that is separately assessed as a taxable entity under the Income Tax Act.
• Total Income of the Firm: This refers to the firm’s income after deducting all allowable expenses, losses, and deductions under the Act, as computed for tax purposes.
• Exemption Scope: The partner’s share of profit (as per the partnership deed) is exempt from tax in the partner’s hands, provided the firm has already paid tax on its income.
• Conditions:
  • The firm must be a registered partnership firm or a firm assessed as a partnership under the Income Tax Act.
  • The share of profit must be determined as per the partnership deed.
  • The exemption applies only to the profit share and not to other payments like salary, interest, or commission received by the partner from the firm, which are taxable under other heads (e.g., “Income from Business or Profession” or “Income from Other Sources”).

Taxation of Partnership Firms

• A partnership firm is taxed as a separate entity at a flat rate (currently 30% plus applicable surcharge and cess for FY 2024-25).
• The firm’s total income is computed after allowing deductions for expenses, including salary, interest, or commission paid to partners (subject to limits under Section 40(b)).
• The profit remaining after tax is distributed to partners as per their profit-sharing ratio, and this distributed share is exempt under Section 10(2A).

Example of Section 10(2A)

Scenario:

• A partnership firm, ABC & Co., has two partners, Mr. A and Mr. B, with a profit-sharing ratio of 60:40 as per the partnership deed.
• For FY 2024-25, the firm’s total income (after all deductions) is ₹10,00,000.
• The firm pays:
  • Interest to Mr. A: ₹1,00,000 (within Section 40(b) limits).
  • Salary to Mr. B: ₹2,00,000 (within Section 40(b) limits).
• The firm’s taxable income and tax are calculated, and the remaining profit is shared between the partners.

Step-by-Step Calculation:

1. Firm’s Total Income:
   • Total income before partner payments: ₹10,00,000.
   • Less: Interest to Mr. A (₹1,00,000) + Salary to Mr. B (₹2,00,000) = ₹3,00,000.
   • Firm’s taxable income = ₹10,00,000 – ₹3,00,000 = ₹7,00,000.
2. Tax on Firm:
   • Tax at 30% on ₹7,00,000 = ₹2,10,000.
   • Add: Health and Education Cess (4%) = ₹2,10,000 × 4% = ₹8,400.
   • Total tax = ₹2,10,000 + ₹8,400 = ₹2,18,400.
   • Profit after tax = ₹7,00,000 – ₹2,18,400 = ₹4,81,600.
3. Profit Distribution:
   • Mr. A’s share (60%) = ₹4,81,600 × 60% = ₹2,88,960.
   • Mr. B’s share (40%) = ₹4,81,600 × 40% = ₹1,92,640.
4. Tax Treatment in Partners’ Hands:
   • Mr. A:
     • Share of profit (₹2,88,960): Exempt under Section 10(2A).
     • Interest received (₹1,00,000): Taxable as “Income from Business or Profession.”
   • Mr. B:
     • Share of profit (₹1,92,640): Exempt under Section 10(2A).
     • Salary received (₹2,00,000): Taxable as “Income from Business or Profession.”

Taxable Income for Partners:

• Mr. A: ₹1,00,000 (interest) – taxed as per his applicable slab rates.
• Mr. B: ₹2,00,000 (salary) – taxed as per his applicable slab rates.

Important Notes

• Other Payments to Partners: Any salary, interest, or commission paid to partners is not exempt under Section 10(2A). These are included in the partner’s taxable income, subject to the limits specified in Section 40(b).
• Losses: If the firm incurs a loss, the partner’s share of loss is not taxable or deductible in the partner’s hands, as the firm itself adjusts losses.
• Documentation: The partnership deed must clearly specify the profit-sharing ratio, and the firm’s tax return must reflect the income and tax paid for the exemption to apply.
• AOP/BOI: If the entity is an Association of Persons (AOP) or Body of Individuals (BOI) and not a partnership firm, Section 10(2A) does not apply, and different tax rules govern the members’ share.