When it comes to taxing business income, partnership firms & their partners often raise one common question: “Is the share of profit received by a partner taxable?” Well, Section 10(2A) of the Income Tax Act has the answer. Let’s decode this underrated but crucial exemption clause.
What Is Section 10(2A) of the Income Tax Act?
Section 10(2A) of the Income Tax Act exempts any share of profit received by a partner from the total income of the partnership firm or LLP. This means that the amount distributed as profit (not remuneration or interest) to a partner is not taxable in their hands, as long as the firm has paid tax on the same.”
So, yes—the share of profit from a partnership firm is tax-free for the partner.
How It Works: The Logic Behind the Exemption
To avoid double taxation, Section 10(2A) ensures that any share of profit received by a partner from a firm is exempt from tax. Why? Because the firm itself already pays tax on its total income, including the profits. So taxing it again in the partner’s hands would amount to taxing the same income twice. “
Example to Understand Section 10(2A)
Let’s say a partnership firm earns ₹10 lakh as net profit. This is taxed at the firm level. Later, it distributes ₹3 lakh as a share of profit to Partner A.
- The ₹3 lakh will be completely exempt for Partner A under Section 10(2A).
- However, interest on capital & remuneration (if any) received by Partner A will be taxable.
Difference Between Remuneration and Share of Profit
It’s important to differentiate between the two:
|
Particulars |
Taxable in Partner’s Hands? |
Covered under 10(2A)? |
|
Share of Profit |
No |
Yes |
|
Remuneration/Salaries |
Yes |
No |
|
Interest on Capital |
Yes |
No |
Key Points to Remember
- Section 10(2A) of the Income Tax Act exempts the share of profit received by a partner in a firm or LLP.
- Only profits are exempt—not salary, bonus, commission, or interest received by the partner.
- The firm should be assessed as a partnership firm under Section 184 of the Income Tax Act.
- This provision applies to both registered partnership firms and LLPs.
Recent Updates or Clarifications
There have been no major amendments recently in Section 10(2A), but it’s always advisable for firms & partners to maintain a clear distinction between profit distribution & payments for services rendered.
Who Benefits the Most?
- Partners in CA/Consulting firms
- Partners in law firms, real estate LLPs
- Businesses where multiple owners operate via partnership models
Final Words
If you’re a partner in a firm or LLP, your share of profit is safe from taxes, thanks to Section 10(2A) of the Income Tax Act. But remember—any other income like interest or remuneration is taxable.
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