Taxation for family businesses
Income tax returns, TDS, transactions between related entities, drawings, remuneration to working partners and assessments for family-owned businesses and for the people who own them.
Last reviewed 3 October 2026
In a family business the company, the firm and their owners are linked by rent, interest, salaries and guarantees. If their returns are prepared separately, an inconsistency in one can lead to a question, and later a demand, in another. From our Nashik office we prepare returns and handle assessments for family groups with all the entities in a single view. The current tax year falls under the Income-tax Act, 2025, while earlier years remain under the Income-tax Act, 1961.
Tax questions that family groups face
A family group often holds a company, a firm, an LLP and personal entities side by side, with rent, interest and job-work charges passing between them. When each return is prepared on its own, the treatments diverge, and the difference is usually noticed by the assessing officer, sometimes several years after the year concerned. We read the entities together before any return is filed. The notes below are general, reflect the law as at 1 October 2026 and are not advice on the facts of a particular family.
Transactions between family entities
Rent for a shed owned by an LLP, job-work charges between a company and a firm, and sales of material between them need the same treatment on both sides. GST valuation and Companies Act approvals may also apply. The income-tax computation should be consistent with those records.
Drawings and deemed dividend
A loan or advance from a closely held company to a substantial shareholder, or to a concern in which that shareholder has a substantial interest, can be taxed as a deemed dividend to the extent of accumulated profits (section 2(40)(e) of the Income-tax Act, 2025; section 2(22)(e) of the 1961 Act). Drawings from a current account are a frequent cause of notices on this point.
Partner remuneration and interest
Remuneration and interest paid to working partners are deductible only within the limits in section 35(e) of the 2025 Act (section 40(b) of the 1961 Act). Since 1 April 2025, firms have deducted tax at source on remuneration and interest paid to partners (section 393 of the 2025 Act; section 194T of the 1961 Act).
Salaries and rent to family members
Salary has to be supported by work actually performed, and rent by property actually used in the business. Reasonableness is examined in assessment. The paperwork and the TDS are therefore prepared during the year itself.
Succession and reorganisation
A gift, a will, a family settlement, the conversion of a firm into a company or LLP, or the division of a group carries income tax consequences, frequently with stamp duty and GST effects as well. Conditions that preserve continuity usually have to be met at the time of the step, since they cannot be satisfied afterwards.
Related reading
Full income tax scope: taxation. Sector context: family businesses. Where overseas associates exist, see transfer pricing. To request a meeting, contact the firm.
Common questions
Should personal and company returns be prepared together?
For owner-managed family groups, yes. Rent, interest, salaries, guarantees and drawings connect the two, and inconsistent treatments appear when each return is prepared in isolation.
We take money from the company current account for household costs. Is that a problem?
It can be. Depending on the shareholding and on accumulated profits, such drawings may be examined as deemed dividend. A salary, rent or dividend agreed in advance, with the required approvals and TDS, is the cleaner practice.
Does the Income-tax Act, 2025 change how we file this year?
Income from 1 April 2026 is returned under the 2025 Act. Earlier years, and proceedings relating to them, remain under the 1961 Act. Section numbers in workings should match the year to which they belong.
Can you help before a family settlement is signed?
Yes. The tax, stamp duty and GST effects of the proposed steps should be identified while the structure can still be changed. This work is often carried out alongside business advisory on the group map.
Family businesses, Taxation. See also: Taxation, Business advisory, GST and Indirect Tax
Contact the firm
About Taxation for family businesses, or any related matter. A phone number or an email address is enough for us to reply.
- Office
- Office at Plot 08, Eden Complex, Gangapur Road, Nashik 422222
- Hours
- 9:30 AM to 8:00 PM; other times by appointment