How a Partnership Firm Is Taxed in India

Short answer: A partnership firm, including a Limited Liability Partnership (LLP), is taxed at a flat rate of 30% on its net taxable profit. A 12% surcharge applies if profits exceed ₹1 crore, and a 4% health and education cess is levied on the total tax. Remuneration and interest paid to partners are deductible expenses for the firm within prescribed limits. The firm must file its income tax return using ITR-5.

What is the income tax rate for a partnership firm?

A partnership firm is taxed at a flat rate of 30% on its total income. Unlike individuals, firms do not get the benefit of a basic exemption limit or slab rates. The final tax liability is calculated by adding a surcharge (if applicable) and a health and education cess to the base tax.

Here is the tax structure for a partnership firm for Assessment Year 2026-27 (Financial Year 2025-26):

Component	Rate	Condition
Income Tax	30%	On total taxable income
Surcharge	12% of Income Tax	If total income exceeds ₹1 crore
Health & Education Cess	4%	On (Income Tax + Surcharge)

How are partner remuneration and interest treated for tax?

Remuneration (like salary, bonus, commission) and interest on capital paid to partners are allowed as a deductible expense for the firm, provided they meet the conditions under Section 40(b) of the Income-tax Act, 1961. These conditions are:

1. Authorised by Deed: The payment must be authorised by a clear clause in the partnership deed.
2. Working Partners Only: Remuneration can only be paid to working partners.
3. No Retrospective Effect: The deed cannot authorise payments retrospectively for a period prior to the date of the deed.
4. Within Limits: The payment must be within the following prescribed limits:

Book Profit Bracket	Maximum Allowable Remuneration
On the first ₹3,00,000 of book profit (or in case of loss)	₹1,50,000 or 90% of book profit, whichever is higher
On the balance of book profit	60% of the balance book profit

For interest on capital, the maximum deductible rate is 12% per annum. Any interest paid above this rate is disallowed as an expense for the firm.

These amounts (remuneration and interest) are taxable in the hands of the receiving partners under the head "Profits and Gains of Business or Profession".

Is the profit share from a firm taxable for partners?

No, the share of profit received by a partner from the firm is fully exempt from tax in their hands. This is covered under Section 10(2A) of the Income-tax Act. This exemption prevents double taxation, as the firm has already paid tax on its profits. It is crucial to distinguish between remuneration/interest (taxable for partners) and share of profit (exempt for partners).

Which ITR form should a partnership firm file?

A partnership firm must file its income tax return using Form ITR-5. This form is applicable to firms, LLPs, Associations of Persons (AOPs), and Bodies of Individuals (BOIs). The due date for filing ITR-5 is 31st July of the assessment year. However, if the firm's accounts are required to be audited under any law (including a tax audit under the Income-tax Act), the due date is extended to 31st October.

Is a tax audit mandatory for a partnership firm?

Yes, a tax audit under Section 44AB is mandatory if the firm's turnover or receipts exceed specified thresholds. For the financial year 2025-26, a tax audit is required if:

• Business: Total sales, turnover, or gross receipts exceed ₹1 crore.
• Business with Digital Transactions: The ₹1 crore limit is increased to ₹10 crore if at least 95% of all receipts and payments are made through digital modes.
• Profession: Gross receipts exceed ₹50 lakh.
• Presumptive Taxation: The firm opts out of the presumptive taxation scheme after having claimed it in a prior year and its income exceeds the basic exemption limit.

Failing to get the accounts audited can lead to a penalty. You can read more in our detailed guide on tax audits under Section 44AB.

Can a partnership firm opt for presumptive taxation?

Yes, an eligible partnership firm can opt for the presumptive taxation scheme to simplify compliance. Under this scheme, income is calculated as a percentage of turnover, and the firm is not required to maintain detailed books of account or get them audited.

• Section 44AD: For businesses with a turnover up to ₹2 crore. Income is presumed to be 8% of turnover (or 6% for digital receipts).
• Section 44ADA: For specified professions with gross receipts up to ₹50 lakh. Income is presumed to be 50% of gross receipts.

However, a firm opting for Section 44AD or 44ADA cannot claim deductions for partner remuneration or interest, as these are deemed to be included in the presumptive income calculation. Read our guide on presumptive taxation for more details.

Worked example

Let's consider "Bengaluru Design Studio", a partnership firm in Bengaluru with two working partners, Priya and Rohan. For the Financial Year 2025-26, their financials are:

• Gross Receipts (Turnover): ₹80,00,000
• Other Business Expenses: ₹45,00,000
• Net Profit (before partner payments): ₹35,00,000
• Actual Remuneration paid to Priya & Rohan: ₹12,00,000 each (Total ₹24,00,000)
• Interest on Capital paid @ 12% p.a.: ₹3,00,000

The partnership deed authorises these payments.

Step 1: Calculate Book Profit Book Profit = Net Profit as per P&L Account Book Profit = ₹35,00,000

Step 2: Calculate Maximum Allowable Remuneration u/s 40(b)

• On the first ₹3,00,000 of book profit: 90% of ₹3,00,000 = ₹2,70,000
• On the balance book profit (₹35,00,000 - ₹3,00,000 = ₹32,00,000): 60% of ₹32,00,000 = ₹19,20,000
• Total Allowable Remuneration = ₹2,70,000 + ₹19,20,000 = ₹21,90,000

Step 3: Calculate the Firm's Taxable Income

• Net Profit before partner payments: ₹35,00,000
• Less: Allowable Interest on Capital (@12%): ₹3,00,000
• Less: Allowable Partner Remuneration (lower of actual paid or limit): Lower of ₹24,00,000 or ₹21,90,000 = ₹21,90,000
• Taxable Income of the Firm: ₹35,00,000 - ₹3,00,000 - ₹21,90,000 = ₹10,10,000

The difference between actual remuneration paid (₹24L) and allowed (₹21.9L), which is ₹2,10,000, is disallowed and added back to the firm's profit.

Step 4: Calculate the Firm's Tax Liability

• Income Tax @ 30% on ₹10,10,000 = ₹3,03,000
• Surcharge: Not applicable (income is below ₹1 crore)
• Health & Education Cess @ 4% on ₹3,03,000 = ₹12,120
• Total Tax Payable by Firm: ₹3,03,000 + ₹12,120 = ₹3,15,120

Step 5: Tax in the Hands of Partners

• Priya and Rohan will each show ₹12,00,000 as business income in their personal ITRs and pay tax as per their individual slab rates.
• The firm's remaining profit after tax, when distributed to them, will be exempt from tax.

Common mistakes

1. Missing Remuneration Clause: Paying remuneration to partners without it being explicitly authorised by a written, signed partnership deed. This will lead to the entire amount being disallowed.
2. Incorrect Remuneration Calculation: Failing to correctly apply the limits specified in Section 40(b), leading to excess claims being disallowed.
3. Paying Interest Above 12%: Claiming a deduction for interest on partner's capital at a rate higher than 12% per annum. The excess is always disallowed.
4. Taxing Profit Share: Partners mistakenly showing their exempt share of profit from the firm as taxable income in their personal returns.
5. Not Filing ITR-5 on Time: Missing the due date (31st July or 31st October) can attract late filing fees under Section 234F and interest on the tax due.
6. Ignoring Audit Requirements: Not getting a tax audit done when turnover exceeds the Section 44AB limits, resulting in penalties.

How SP & SC helps

Navigating partnership taxation requires careful planning and precise calculations to ensure compliance and tax efficiency. At SP & SC, our team of Chartered Accountants provides end-to-end tax services for partnership firms and LLPs. We assist with bookkeeping review, calculation of allowable deductions, preparation and filing of ITR-5, tax audit assistance, and responding to any notices from the Income Tax Department. For more details on how we can assist your firm, please review our Income Tax Filing services.

Frequently asked questions

Is salary to partners subject to TDS?

No. Remuneration, salary, or bonus paid to partners is considered an appropriation of profits, not a 'salary' in the sense of an employer-employee relationship. Therefore, it is not subject to TDS under Section 192. Partners are liable to pay advance tax on this income.

What is the surcharge on partnership firm tax?

A surcharge of 12% is levied on the amount of income tax if the firm's total income for the financial year exceeds ₹1 crore. This surcharge is calculated on the tax amount, not the income.

Can a firm claim deductions under Chapter VI-A (like 80C, 80D)?

A partnership firm can claim certain business-related deductions under Chapter VI-A, such as deductions for donations under Section 80G. However, it cannot claim personal deductions applicable to individuals, such as Section 80C (for investments), Section 80D (for health insurance), or Section 80E (for education loans).

What if a partnership deed does not mention remuneration?

If the partnership deed does not contain a clause specifically authorising the payment of remuneration to partners, any amount paid under this head will be disallowed as a business expense for the firm under Section 40(b). The entire amount will be added back to the firm's profit and taxed accordingly.

How is a loss in a partnership firm treated?

If a firm incurs a business loss, it can be carried forward for up to eight subsequent assessment years and set off only against future business profits of the firm. The loss cannot be distributed to the partners to set off against their other personal income.

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Ensure your partnership firm's tax compliance is handled accurately and efficiently. Share your firm's financial documents with us, and we will provide a written, fixed-fee quote for our comprehensive tax filing and advisory services. SP & SC handles all aspects of business compliance, from accounting and filing to responding to departmental queries, end to end. Contact SP & SC today or WhatsApp us at +91 90356 74566.