Library / Income-tax Act, 2025: The Professional's Master Guide

22. Firms, LLPs, AOPs and BOIs

22.1 Firms and LLPs

A partnership firm (including an LLP) is taxed as a separate entity at 30% plus surcharge (12% if income exceeds Rs. 1 crore) and cess. It is assessed as a firm if the partnership deed is in writing, specifies individual shares, and is filed with the first return; a certified copy of any revised deed must be filed when the deed changes.

Aspect	Firm	Partner
Business income	Taxed at 30%	Share of profit exempt (Schedule II)
Remuneration to working partners	Deductible within section 35 limits	Taxed as business income to the extent allowed to the firm
Interest on capital	Deductible up to 12% simple	Taxed as business income to the extent allowed
TDS	Deducts 10% on remuneration and interest above Rs. 20,000 (section 393)	Claims credit
Presumptive scheme	Business scheme for firms (not LLPs); profession scheme for firms	Not separately
AMT	LLPs and firms claiming profit-linked deductions pay AMT under section 206(2)	Not applicable

22.2 Reconstitution of a firm

When a partner retires or the firm is reconstituted, and a partner receives money or assets from the firm, two provisions operate (carried forward from old sections 9B and 45(4)):

Section 8 (old 9B): where a partner receives a capital asset or stock-in-trade on dissolution or reconstitution, the firm is deemed to have transferred it at FMV, and the profit is taxed in the firm's hands as capital gains or business income.
Capital gains on excess payout (old 45(4)): where a partner receives money or assets in excess of the balance in his capital account, the excess is taxed as capital gains in the firm's hands. The formula is A = B + C less D, where A is the gain, B is the money received, C is the FMV of any capital asset received, and D is the balance in the partner's capital account at the time of reconstitution (ignoring increases due to revaluation, self generated goodwill or self generated assets). If the result is negative, it is taken as nil.
The firm can attribute such gains to its capital assets as per the Rules, which affects whether the gain is short or long-term and the rate.

Illustration 94: Retiring partner

Ankit retires from a firm and receives Rs. 80 lakh in cash. His capital account balance before revaluation is Rs. 30 lakh. No asset is given to him. The excess Rs. 50 lakh is taxable in the firm's hands as capital gains, attributed to the firm's capital assets (for example, goodwill and land) in the manner prescribed. The firm must provide for this tax when negotiating the retirement settlement.

Judicial view: Revaluation and payment to partners

CIT v. Mansukh Dyeing and Printing Mills (Supreme Court, 2022): where a firm revalued its assets, credited the gain to the partners' capital accounts and the partners withdrew the amounts, the firm was liable to capital gains tax on the transfer, applying the provision corresponding to old section 45(4).

22.3 Associations of persons and bodies of individuals

An AOP (a group of persons, including companies, joining for a common purpose to earn income, such as a consortium) or BOI (a group of individuals) is taxed as follows:

Situation	Tax on AOP or BOI	Member's share
Shares of members are determinate and known, no member has income above the exemption limit	Normal slab rates	Exempt
Shares determinate, any member has taxable income	Maximum marginal rate (30% plus surcharge) on total income of the AOP	Exempt
Shares indeterminate or unknown	Maximum marginal rate	Exempt
A member is taxable at a higher rate	That member's share at the higher rate	Exempt

Practice note

For consortiums bidding for contracts, structure the arrangement carefully. If each member does a defined scope of work, bills separately and bears its own risk, the consortium may not be an AOP. A joint control, joint risk arrangement is likely to be taxed as an AOP at the maximum marginal rate.

Chapter summary

• Firms and LLPs pay 30%; partner remuneration and interest are deductible within limits and taxed in partners' hands.

• Reconstitution can trigger tax in the firm under sections 8 and the provision corresponding to old 45(4).

• AOPs are taxed at slab or maximum marginal rates depending on determinacy of shares.