Tax treatment under retirement of the partner from firm

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

12 June 2013 on the retirement of partner of my father, we have revalued the land and building and passed the following entry in the books of account as follows.
L&B A\c 4500000
To revaluation account
(being L& B is revalued on account of the valuation at the retirement)

Revaluation a/c dr.
To existing partners;s capital account
to retiring capital account

what is the tax treatment will applicable to retiring and existing partners to
the share in profit on revaluation of partnership firm's assets ?

Querist : Anonymous

Querist : Anonymous (Querist)

15 August 2013 is it right?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Great question about the **tax treatment on retirement of a partner and revaluation of assets**! Here's a clear breakdown for you:

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## Tax Treatment on Revaluation Profit at Partner’s Retirement

### 1. **Background:**

* When a partner retires, assets like land and building may be **revalued** to reflect their current fair market value.
* The **increase (profit) or decrease (loss) on revaluation** is shared among partners (existing and retiring) according to their profit-sharing ratio.
* The firm passes entries to adjust partners' capital accounts accordingly.

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### 2. **Tax Treatment for the Firm**

* The **revaluation profit or loss** is considered as a **capital gain or loss in the hands of the firm**.
* The firm must compute **capital gain on revaluation** of assets (especially land/building).
* However, **tax is not payable immediately by the firm if the asset is not transferred outside the firm**. Instead, the capital gain is recognized on transfer or sale.

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### 3. **Tax Treatment for Partners (Existing & Retiring)**

* The **share of profit on revaluation credited to partners’ capital accounts is treated as capital receipt, not taxable as income** for the partners.
* It **does not attract income tax as 'income'** because this is adjustment of capital accounts, representing their share in the firm’s assets.
* However, the **retiring partner’s share in the revaluation profit increases his capital account balance**, which may become relevant if the retiring partner receives consideration on retirement.

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### 4. **On Retirement - Payment to Retiring Partner**

* The amount paid to the retiring partner (including his share of revaluation profit) is treated as **transfer of capital asset**.
* The **retiring partner is liable to pay capital gains tax** on the difference between the **retirement payout and his original cost of investment in the firm**.
* For the **existing partners**, no immediate tax consequences arise on revaluation profit; their capital account reflects the increased value.

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### 5. **Summary Table**

| Person | Tax Treatment |
| ----------------- | ----------------------------------------------------------------------------------------- |
| Partnership Firm | Revaluation profit/loss is capital gain/loss; tax on actual transfer or sale |
| Retiring Partner | Retirement payment (including revaluation share) taxed as capital gains based on his cost |
| Existing Partners | Share of revaluation profit credited to capital accounts; **not taxable income** |

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### 6. **Relevant Sections**

* **Section 45** — Capital gains on transfer (retirement considered transfer).
* **Section 50B** — Capital gains on slump sale of undertaking (if applicable).
* **Partnership taxation provisions** under Income Tax Act.

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### **Practical Note**

* Maintain proper records of **cost of investment, capital account balances, and retirement payout** for accurate capital gains computation.
* Consult with a tax professional to correctly compute gains and fill returns.

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If you want, I can help you draft the capital gains calculation for the retiring partner based on your numbers. Want me to do that?

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