Section 10(2A) – Exemption on Share of Profit from Partnership Firm or LLP
For partners in a partnership firm or a Limited Liability Partnership (LLP), understanding how income is taxed is crucial for effective tax planning. One of the most beneficial provisions under the Income Tax Act, 1961 is Section 10(2A), which grants an exemption on the share of profit received from a firm or LLP.
This provision plays a key role in preventing double taxation and simplifying partner-level taxation.
This article explains Section 10(2A) in detail, including its meaning, applicability, conditions, tax treatment, and practical implications.
What Is Section 10(2A) of the Income Tax Act?
Section 10(2A) provides that the share of profit received by a partner from a partnership firm or LLP is exempt from income tax in the hands of the partner.
In simple terms, once the firm or LLP pays income tax on its profits, the amount distributed to partners as their profit share is not taxed again at the individual partner level. This ensures that the same income is taxed only once.
Objective Behind Section 10(2A):
The key objectives of introducing Section 10(2A) are:
- To avoid double taxation of the same income
- To promote partnership and LLP business structures
- To simplify taxation for partners
- To ensure fair and equitable tax treatment
Since firms and LLPs are taxed as separate legal entities, taxing partners again on distributed profits would be unreasonable. Section 10(2A) addresses this concern effectively.
Applicability of Section 10(2A):
The exemption under Section 10(2A) applies when:
- A partner receives a share of profit from a partnership firm or LLP
- The firm or LLP is assessed as a taxable entity
- The profits are distributed in accordance with the partnership deed or LLP agreement
This exemption is available to:
- Individual partners
- Partner entities such as companies, LLPs, or firms
Income Covered Under Section 10(2A):
Exempt Income:
- Share of profit from a partnership firm
- Share of profit from a Limited Liability Partnership (LLP)
Income Not Covered (Taxable):
- Salary or remuneration paid to a partner
- Interest on capital
- Commission or bonus
These amounts are fully taxable in the hands of the partner under the applicable head of income.
Taxation of Partnership Firms and LLPs:
To fully understand Section 10(2A), it is important to know how firms and LLPs are taxed:
- Firms and LLPs are taxed at a flat rate of 30%, plus applicable surcharge and cess
- Profits are computed at the entity level
- After tax payment, profits may be distributed to partners
- Distributed profits are exempt in the hands of partners under Section 10(2A)
Thus, taxation is completed at the firm or LLP level for profit income.
Applicability of Section 10(2A) to LLPs:
Section 10(2A) applies equally to Limited Liability Partnerships. Although LLPs have features similar to companies, for income tax purposes they are treated like partnership firms.
Partners in an LLP can receive their share of profit tax-free, provided the LLP has paid income tax on its profits. This makes LLPs a tax-efficient structure for professionals and business owners.
Disclosure in Income Tax Return:
Even though the share of profit is exempt, it must still be:
- Disclosed in the income tax return
- Reported under the Schedule of Exempt Income
Failure to disclose exempt income may lead to notices or scrutiny, despite the income being tax-free.
Impact on Tax Slab and Deductions:
Exempt income under Section 10(2A):
- Is not included in total taxable income
- Does not affect tax slab rates
- Does not reduce eligibility for deductions
However, it may be considered for:
- Financial disclosures
- Loan eligibility or net worth calculations
Section 10(2A) vs Partner's Remuneration:
A common misconception is that all income received from a firm is exempt. This is incorrect.
Correct classification is essential for accurate tax compliance.
Conditions to Claim Exemption Under Section 10(2A):
To validly claim the exemption:
- The firm or LLP must be a taxable entity
- Profits must be computed under the Income Tax Act
- Distribution must follow the partnership or LLP agreement
- Exempt income must be reported in the ITR
Non-compliance with these conditions may result in denial of exemption.
Benefits of Section 10(2A):
Section 10(2A) offers multiple advantages:
- Eliminates double taxation
- Enhances post-tax income for partners
- Simplifies partner-level compliance
- Encourages LLP and partnership structures
It is especially beneficial for professionals, consultants, and SMEs.
Common Mistakes to Avoid:
- Treating partner salary as exempt
- Failing to disclose exempt profit in ITR
- Claiming exemption when firm has not paid tax
- Incorrect income classification
Avoiding these errors helps prevent litigation and penalties.
Practical Example:
An LLP earns a profit of ₹20 lakh and pays applicable income tax. A partner’s profit share is ₹5 lakh.
- LLP pays tax on ₹20 lakh
- Partner receives ₹5 lakh
- ₹5 lakh is fully exempt under Section 10(2A)
If the partner also receives ₹2 lakh as remuneration, that amount is taxable.
Conclusion:
Section 10(2A) provides a significant tax exemption on the share of profit received from a partnership firm or LLP, ensuring that income is taxed only once. While the exemption is straightforward, it applies strictly to profit share and does not extend to remuneration or interest.
For partners—especially those operating through LLPs—proper understanding, disclosure, and classification under Section 10(2A) are essential for effective tax planning and smooth compliance.
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, or professional advice; readers are advised to consult a qualified tax professional for guidance specific to their situation.
