Key Takeaways
- Partnership firms (including LLPs) are taxed at a flat rate of 30% on taxable income, regardless of the income amount.
- Surcharge: 12% if total income exceeds Rs 1 crore. Health and Education Cess: 4% on tax plus surcharge.
- Section 40(b) remuneration limits (doubled from AY 2025-26): on the first Rs 6 lakh of book profit, the firm can deduct the higher of Rs 3,00,000 or 90% of book profit. On the balance, 60% is deductible.
- Interest on partner capital: deductible at a maximum of 12% simple interest per annum. Excess is disallowed.
- Section 194T (new from FY 2025-26): firms must deduct TDS at 10% on salary, remuneration, commission, bonus, and interest paid to partners if the total exceeds Rs 20,000 in a financial year.
- Partner's share of profit is exempt in the partner's hands under Section 10(2A). Only remuneration and interest received from the firm are taxable for partners.
- Partnership firms file ITR-5. Tax audit under Section 44AB is mandatory if turnover exceeds Rs 1 crore (Rs 10 crore if cash receipts and payments are each below 5% of total).
How is a partnership firm taxed in India? A partnership firm computes its profit like any business, then deducts partner remuneration (within Section 40(b) limits) and interest on capital (within 12% cap). The remaining book profit is taxed at a flat 30% plus surcharge and cess. Partners receive their share of profit tax-free and pay individual tax only on remuneration and interest received from the firm. From FY 2025-26, the firm must also deduct TDS at 10% on all payments to partners exceeding Rs 20,000 per year.
Partnership firms remain one of the most common business structures in India for small and medium enterprises: professional practices (CA firms, law firms, medical clinics), trading businesses, real estate developers, and family businesses. Despite their popularity, the taxation rules for firms involve several interlinked provisions that are frequently misapplied.
This guide covers the complete tax framework for partnership firms (both traditional partnerships and LLPs) for AY 2026-27 (FY 2025-26): the flat tax rate, Section 40(b) deduction limits, the new Section 194T TDS obligation, tax audit thresholds, ITR-5 filing, and how individual partners are taxed on their receipts from the firm.
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Tax Rate for Partnership Firms: AY 2026-27
Partnership firms and LLPs are taxed at a flat rate of 30% on their total taxable income. There are no progressive slabs.
| Component | Rate |
|---|---|
| Income tax | 30% of total income |
| Surcharge | 12% of income tax (only if total income exceeds Rs 1 crore) |
| Health and Education Cess | 4% of (income tax + surcharge) |
Effective Tax Rates
| Total income of the firm | Effective tax rate |
|---|---|
| Up to Rs 1 crore | 31.20% (30% + 4% cess) |
| Above Rs 1 crore | 34.944% (30% + 12% surcharge + 4% cess) |
There is no concessional rate option for partnership firms (unlike Section 115BAA for companies at 22%). The 30% rate applies to all firms regardless of turnover, age, or nature of business.
Section 40(b): Partner Remuneration and Interest Deduction
Section 40(b) governs the maximum amount a firm can deduct for salary, bonus, commission, and remuneration paid to working partners, as well as interest on capital to all partners.
Conditions for Deduction
- The remuneration and interest must be authorised by the partnership deed.
- The deed must specify the amount or the method of computing the remuneration.
- The remuneration is payable only to working partners (partners who are actively involved in the conduct of the business).
- The partnership deed must be executed before the relevant period to which the remuneration relates.
If these conditions are not met, the firm is assessed under Section 185 and loses all deductions for partner remuneration and interest.
Remuneration Limits (Doubled from AY 2025-26)
The Finance (No. 2) Act, 2024 doubled the allowable remuneration limits from AY 2025-26. The current limits are:
| Book profit of the firm | Maximum deductible remuneration |
|---|---|
| Loss or first Rs 6,00,000 of book profit | Rs 3,00,000 or 90% of book profit, whichever is higher |
| Balance exceeding Rs 6,00,000 | 60% of the remaining book profit |
Book profit = net profit of the firm as shown in the Profit and Loss account, computed before deducting any remuneration payable to partners under Section 40(b).
Worked Example: Remuneration Calculation
A firm has a net profit (before partner remuneration) of Rs 20,00,000 with two working partners.
| Step | Calculation | Amount |
|---|---|---|
| Book profit | Net profit before remuneration | Rs 20,00,000 |
| First Rs 6,00,000 slab | Higher of Rs 3,00,000 or 90% of Rs 6,00,000 = Rs 5,40,000 | Rs 5,40,000 |
| Balance book profit | Rs 20,00,000 minus Rs 6,00,000 | Rs 14,00,000 |
| Allowable on balance | 60% of Rs 14,00,000 | Rs 8,40,000 |
| Total maximum remuneration | Rs 5,40,000 + Rs 8,40,000 | Rs 13,80,000 |
This Rs 13,80,000 is the maximum total remuneration the firm can deduct for all working partners combined. The actual remuneration paid, as specified in the deed, is deductible up to this limit.
Loss Scenario
If the firm has a book profit of Rs 0 (loss or nil profit):
- Maximum deductible remuneration = Rs 3,00,000 (the higher of Rs 3,00,000 or 90% of Rs 0)
- The firm can still deduct Rs 3,00,000 as partner remuneration, which increases the business loss carried forward
Interest on Partner Capital: 12% Cap
Interest paid on capital contributed by partners is deductible, subject to:
- Maximum rate: 12% simple interest per annum
- Any interest paid above 12% is disallowed as a deduction for the firm
- Interest on loans given by partners (as distinct from capital) is also subject to the 12% cap under Section 40(b)
Section 194T: TDS on Payments to Partners (New from FY 2025-26)
The Finance (No. 2) Act, 2024 introduced Section 194T, effective from 1 April 2025. This is a significant compliance addition for all partnership firms and LLPs.
What Is Covered
TDS at 10% must be deducted on the following payments to partners:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on capital
- Interest on loan
Threshold
TDS is applicable only if the total payment to a partner during the financial year exceeds Rs 20,000. Once the threshold is crossed, TDS applies on the entire amount, not merely the excess above Rs 20,000.
Compliance Requirements
| Obligation | Deadline |
|---|---|
| TDS deduction | At the time of credit or payment, whichever is earlier |
| TDS deposit (government payment) | 7th of the following month (April payment: by 30 April) |
| Quarterly TDS return | Form 26Q within 31 days of quarter-end |
| TDS certificate to partner | Form 16A within 15 days of filing Form 26Q |
Key Practical Points
- Section 194T applies to all firms and LLPs regardless of size or turnover. There is no MSME exemption.
- Partners can submit Form 15G/15H if their total income is below the taxable threshold.
- Under the Income Tax Act 2025, Section 194T maps to Section 393(3).
For a detailed operational guide, see the Section 194T TDS on partner payments guide.
Section 184: Conditions for Assessment as a Firm
For the Income Tax Department to assess an entity as a "firm" (and allow the firm-level deductions), Section 184 requires:
- A valid partnership deed must exist, specifying each partner's share of income and the terms of remuneration and interest.
- The deed must be in writing (oral partnerships do not qualify for Section 184 assessment).
- Certified copies of the deed must be filed with the return of income.
If Section 184 conditions are not satisfied:
- The entity is assessed under Section 185: the firm still pays 30% tax, but loses all deductions for partner remuneration and interest.
- The disallowed remuneration and interest are not separately taxed in the partners' hands.
Tax Audit for Partnership Firms: Section 44AB
| Threshold | Tax audit required? |
|---|---|
| Business turnover above Rs 1 crore | Yes |
| Business turnover above Rs 10 crore (if cash receipts and cash payments are each below 5% of total) | Yes (the Rs 10 crore threshold applies) |
| Turnover below the applicable threshold but claiming profit below Section 44AD presumptive rate | Yes |
| Professional gross receipts above Rs 75 lakh | Yes |
| Professional gross receipts above Rs 75 lakh (if cash receipts below 5%) | Rs 75 lakh still applies; no enhanced threshold for professionals |
The tax audit must be completed and the report filed by 30 September of the assessment year (30 September 2026 for AY 2026-27).
Presumptive Taxation: Can a Firm Use Section 44AD?
Yes. Partnership firms (but not LLPs) can opt for presumptive taxation under Section 44AD if:
- Total turnover does not exceed Rs 3 crore (if cash receipts are below 5% of total receipts, otherwise Rs 2 crore)
- The firm declares profit at 8% of gross turnover (6% for digital receipts) or higher
- Under presumptive taxation, no books of accounts are required and no tax audit is needed
LLPs cannot use Section 44AD. They must maintain books and get audited if turnover exceeds Rs 1 crore.
Professional firms (CA, law, medical, engineering, etc.) can use Section 44ADA if gross receipts do not exceed Rs 75 lakh (50% deemed profit rate).
Alternate Minimum Tax (AMT): Section 115JC
Partnership firms (unlike companies, which are subject to MAT under Section 115JB) are subject to AMT under Section 115JC.
- AMT rate: 18.5% of adjusted total income + surcharge and cess
- AMT is applicable only if the firm claims certain deductions (under Sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 10AA, etc.)
- If AMT exceeds the regular tax, the difference is payable as AMT and can be carried forward as AMT credit for up to 15 assessment years
For most small and medium partnership firms that do not claim location-based or industry-based deductions, AMT does not apply.
How Partners Are Taxed Individually
Share of Profit: Exempt
A partner's share of profit from a firm in which they are a partner is exempt under Section 10(2A) of the Income Tax Act. This is because the firm has already paid 30% tax on its income.
Remuneration and Interest: Taxable
- Remuneration received by a partner is taxable as Profits and Gains of Business or Profession in the partner's ITR.
- Interest on capital received from the firm is also taxable as business income.
- Both are already subject to Section 194T TDS from FY 2025-26.
Partner's ITR Filing
| Partner type | ITR form |
|---|---|
| Individual partner (no other business income) | ITR-3 |
| Individual partner with only firm income | ITR-3 |
| Partner who is also a company | ITR-6 |
Partners must report the firm's PAN, name, and their share percentage in the ITR.
ITR-5 Filing for Partnership Firms
Partnership firms and LLPs file ITR-5. The key schedules in ITR-5 include:
- Schedule BP: Business or Profession income computation
- Schedule P&L: Profit and Loss account
- Schedule BS: Balance Sheet
- Schedule Partners: details of each partner (PAN, name, capital balance, remuneration paid, interest paid, share of profit)
- Schedule 40(b): computation of allowable remuneration and interest
Due Dates for AY 2026-27
| Category | ITR due date |
|---|---|
| Firm not subject to audit | 31 July 2026 |
| Firm subject to tax audit (Section 44AB) | 31 October 2026 |
| Firm with transfer pricing report | 30 November 2026 |
For a complete ITR-5 filing walkthrough, see the ITR-5 filing guide for partnership firms and LLPs.
Common Mistakes in Partnership Firm Taxation
- Paying remuneration to sleeping partners: Section 40(b) deduction is available only for working partners. Remuneration to sleeping (non-working) partners is fully disallowed.
- Interest above 12%: Any interest paid above 12% per annum on partner capital or loans is disallowed. Many firms inadvertently pay 15-18% and face disallowance during assessment.
- No partnership deed or outdated deed: If the deed does not specify the remuneration terms, or if a supplementary deed was not executed before the start of the year, the entire remuneration deduction is lost under Section 185.
- Ignoring Section 194T: From FY 2025-26, failure to deduct TDS on partner payments attracts interest under Section 201 and a penalty. Many firms are unaware of this new provision.
- Confusing firm profit with partner profit: The firm pays 30% on its taxable income. The partner's share of the residual profit is exempt. Remuneration and interest are separately taxable in the partner's hands.
Summary: Partnership Firm Tax Structure
| Aspect | Detail |
|---|---|
| Tax rate | 30% flat |
| Surcharge | 12% (income above Rs 1 crore) |
| Health and Education Cess | 4% |
| Remuneration limit (first Rs 6L of book profit) | Rs 3,00,000 or 90%, whichever is higher |
| Remuneration limit (balance profit) | 60% |
| Interest cap | 12% simple interest per annum |
| Section 194T TDS | 10% on partner payments above Rs 20,000/year |
| ITR form | ITR-5 |
| Tax audit threshold | Rs 1 crore (Rs 10 crore if cash below 5%) |
| Partner's share of profit | Exempt under Section 10(2A) |
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Looking for expert help with partnership firm income tax rate Section 40(b) remuneration interest ITR-5 India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Frequently Asked Questions
What is the income tax rate for a partnership firm in India?
Partnership firms and LLPs are taxed at a flat rate of 30% on their total taxable income. A surcharge of 12% applies if total income exceeds Rs 1 crore. Health and Education Cess of 4% is charged on tax plus surcharge. The effective rate is 31.20% (below Rs 1 crore) or 34.944% (above Rs 1 crore).
What is the maximum remuneration a firm can pay to partners under Section 40(b)?
On the first Rs 6,00,000 of book profit, the firm can deduct the higher of Rs 3,00,000 or 90% of book profit. On book profit exceeding Rs 6,00,000, the deduction is 60% of the excess. These limits were doubled by the Finance (No. 2) Act, 2024, effective from AY 2025-26. Remuneration must be authorised by the partnership deed and is payable only to working partners.
Is a partner's share of profit from the firm taxable?
No. A partner's share of profit from a firm is exempt under Section 10(2A) of the Income Tax Act because the firm has already paid tax at 30% on its income. Only remuneration and interest received from the firm are taxable in the partner's individual ITR.
What is Section 194T and how does it affect partnership firms?
Section 194T, introduced from FY 2025-26, requires firms and LLPs to deduct TDS at 10% on salary, remuneration, commission, bonus, and interest paid to partners if the total payment to a partner exceeds Rs 20,000 in a financial year. All firms must comply regardless of size.
What happens if the partnership deed does not specify partner remuneration?
If the partnership deed does not authorise remuneration or does not specify the amount or method of computation, the firm is assessed under Section 185 and loses the entire deduction for remuneration and interest paid to partners. The firm still pays 30% tax but on a higher taxable income.
Can a partnership firm opt for presumptive taxation under Section 44AD?
Traditional partnership firms (registered under the Indian Partnership Act, 1932) can use Section 44AD if turnover does not exceed Rs 3 crore (Rs 2 crore if cash receipts exceed 5%). LLPs cannot use Section 44AD and must maintain books of accounts.
When is tax audit mandatory for a partnership firm?
Tax audit under Section 44AB is mandatory if the firm's business turnover exceeds Rs 1 crore (or Rs 10 crore if both cash receipts and cash payments are below 5% of total). For professionals, the threshold is Rs 75 lakh of gross receipts. The audit report must be filed by 30 September of the assessment year.
Which ITR form does a partnership firm file?
Partnership firms and LLPs file ITR-5. The due date is 31 July if not subject to audit, or 31 October if subject to tax audit under Section 44AB. Partners individually file ITR-3 for their remuneration and interest income from the firm.
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Sources
This guide is verified against incometax.gov.in/iec/foportal/ (partnership firm/LLP tax rate for AY 2026-27, Section 40(b) remuneration limits, Section 184/185 assessment conditions), Finance (No. 2) Act 2024 (doubling of Section 40(b) limits from AY 2025-26, introduction of Section 194T), the Income Tax Act 2025 (Section 393(3) TDS mapping for partner payments), CBDT guidelines on tax audit thresholds under Section 44AB, Section 44AD presumptive taxation eligibility for firms, Section 115JC AMT provisions for non-corporate assessees, and confirmatory coverage from ClearTax (partner remuneration taxation), TaxScan (partnership firm income tax rules 2026), Bajaj Finserv (income tax slab for partnership firms FY 2025-26), and CAClubIndia (Section 194T TDS on partner payments). All rates, thresholds, and limits reflect the provisions applicable for FY 2025-26 (AY 2026-27).
