What is the tax rate for a partnership firm (AOP)?

Question

Me and my two cousins are starting a small consultancy and we want to know if the tax is charged on the total profit of the firm or on our individual shares of the profit.

Answer 1

Income tax is generally charged on the total profit of the firm (AOP) rather than individual shares, but the mechanism differs:

• Association of Persons (AOP): If you and your cousins work as a partnership, the AOP is a separate entity for tax purposes.
  • Tax on Total Profit: The AOP pays tax on its entire divisible profit according to the rates for individuals/AOPs (slabs range up to 35%).
  • Partner's Share: Once the AOP pays tax, the share received by you and your cousins is exempt from further tax in your personal hands to avoid double taxation.
  • Further, in your personal Income Tax Return, you and your cousins will receive a Tax Credit on Income Received from AOP