Partnership firm tax in India explained: 30% flat rate, Section 40(b) limits, ITR-5 deadlines, GST rules and real ₹ worked examples.
A partnership firm in India pays income tax as a separate taxpayer, at a flat 30% rate, before any profit even reaches the partners. That single fact trips up more business owners than anything else in this topic. No slabs, no basic exemption, and the firm's PAN — not the partners' PAN — carries the tax liability.
Under Section 2(23)(i) of the Income-tax Act, "firm" borrows its meaning straight from Section 4 of the Indian Partnership Act, 1932 — two or more people who've agreed to share the profits of a business run by all, or any of them acting for all. [Source: incometaxindia.gov.in/firm]
For income tax purposes, an LLP registered under the LLP Act, 2008 is treated exactly like a partnership firm. Same flat rate, same remuneration rules. The only real difference is that LLP partners get limited liability under company-style law, while ordinary partners don't.
Most 2026 articles quietly get this wrong. India is mid-transition: the Income-tax Act, 1961 was repealed from 1 April 2026, replaced by the Income-tax Act, 2025.
Your current filing isn't affected yet. Returns for FY 2025-26 (income up to 31 March 2026, assessed as AY 2026-27) — the return due this filing season — still run on 1961 Act numbering. Only income from 1 April 2026 onward (Tax Year 2026-27) falls under the 2025 Act's renumbered sections.
This article uses confirmed 1961 Act numbers for your current filing. For the 2025 Act, we've noted equivalents only where the official incometax.gov.in FAQ or multiple independent sources agreed — Section 44AB becomes Section 63, and Section 194T becomes Section 393(3) (Table Serial No. 7 of the consolidated TDS section) — and tagged the rest [VERIFY] rather than guessing. See our Income Tax Act 2025 vs 1961 explainer for the transition itself.
Applies to | Does NOT apply to |
|---|---|
General partnership firms (registered or unregistered) under the Indian Partnership Act, 1932 | Sole proprietorships — taxed as the individual's own income, no separate firm-level tax |
LLPs registered under the LLP Act, 2008 | Private/public limited companies — taxed under separate corporate rate slabs |
Professional firms (CA, legal, architecture, consulting) structured as a partnership or LLP | HUFs and standalone AOPs/BOIs not run as a partnership deed firm |
Firms with a written partnership deed specifying shares | One Person Companies (OPCs) |
One partial case worth flagging: a firm that exists but has no valid deed, or a deed that doesn't specify partner shares, is still taxed as a firm at 30% — it just loses the deduction for partner remuneration and interest for that year. More on that below.
Real numbers, not vague descriptions — here's what actually applies.
Tax rate for AY 2026-27: flat 30% on total income, no basic exemption. [Source: incometax.gov.in/iec/foportal/help/partnership-firm-llp] Surcharge: 12% if total income exceeds ₹1 crore, with marginal relief. Cess: 4% on tax plus surcharge.
AMT: if the firm claims certain deductions (Chapter VI-A other than 80P, Section 10AA, or 35AD) and normal tax works out below 18.5% of adjusted total income, it pays 18.5% instead, certified in Form 29C. Note for firms specifically: the commonly quoted ₹20 lakh adjusted-total-income exemption from AMT applies only to individuals, HUFs, AOPs and BOIs — it does not apply to partnership firms or LLPs, which fall under AMT at any income level the moment they claim a covered deduction.
Partner remuneration limit — Section 40(b): deductible only for working partners, only if the deed authorises it in writing.
Book profit slab | Maximum deductible remuneration (all partners combined) |
|---|---|
First ₹6,00,000 (or loss) | ₹3,00,000, or 90% of book profit — whichever is higher |
Balance above ₹6,00,000 | 60% of that balance |
Want to check your own number instead of doing this by hand? Toolisky's Section 40(b) Partner Remuneration Calculator does the slab maths for you.
Interest on partner capital: deductible up to 12% simple interest a year, only if the deed authorises it. Above 12%, the excess is disallowed outright — no partial relief.
TDS on partner payments — Section 194T: since 1 April 2025, firms and LLPs deduct 10% TDS once total payments to a partner cross ₹20,000 a year. No Form 15G/15H exemption route. Check your numbers with the Section 194T TDS Threshold Calculator.
GST registration: mandatory past ₹40 lakh turnover for goods or ₹20 lakh for services in normal category states; ₹20 lakh for goods and ₹10 lakh for services in special category states (most of the North-East and the hill states — Assam and Jammu & Kashmir have opted up to the ₹40 lakh goods threshold). Runs independently of your income tax status.
Tax audit — Section 44AB: mandatory past ₹1 crore business turnover (₹10 crore if cash receipts and payments each stay within 5%), or ₹50 lakh professional receipts. Check yours with the Section 44AB Tax Audit Checker.
Three payments flow from firm to partner, and each is taxed differently. Mixing them up is the most common mistake we see.
Remuneration and interest (the Section 40(b) deductions) are taxable to the partner as "Profits and Gains of Business or Profession," in their personal ITR-3. Share of profit, though, is fully exempt under Section 10(2A) — because the firm already paid 30% tax on it. Taxing it twice would make no sense.
Worth killing a genuine misconception here: several well-ranked finance sites describe partnership firms as "pass-through" entities where only partners get taxed, on their share — language borrowed from foreign tax systems. That's wrong for India. Your firm files its own ITR-5 and pays 30% first; only the already-taxed profit share passes through tax-free after.
Example 1 — the common case. Ramesh and Priya run "R&P Traders," a trading partnership, with FY 2025-26 book profit (before remuneration) of ₹12,00,000. Capital: Ramesh ₹9,00,000, Priya ₹6,00,000, interest paid at 10% p.a.
Maximum remuneration: 90% of first ₹6,00,000 = ₹5,40,000, plus 60% of the remaining ₹6,00,000 = ₹3,60,000. Total cap = ₹9,00,000. The firm actually pays ₹8,00,000 — within limit, fully deductible.
Interest: ₹15,00,000 combined capital × 10% = ₹1,50,000, well under the 12% cap, so fully allowed.
Firm's taxable income = ₹12,00,000 − ₹8,00,000 − ₹1,50,000 = ₹2,50,000. Tax at 30% = ₹75,000, plus 4% cess (₹3,000) = ₹78,000 total. No surcharge, since income stays under ₹1 crore.
Example 2 — the edge case competitors skip. Farida runs a chartered accountancy partnership with gross professional receipts of ₹45,00,000 for FY 2025-26. She opts for presumptive taxation under Section 44ADA (available since receipts sit under the ₹50 lakh limit for partnership firms other than LLPs — note that the 44ADA ceiling itself rises to ₹75 lakh where cash receipts stay within 5% of the total, so a firm closer to that range should re-check eligibility against actual cash mix before assuming it's excluded).
Presumptive income = 50% of ₹45,00,000 = ₹22,50,000, declared as final taxable income. Tax at 30% = ₹6,75,000, plus 4% cess (₹27,000) = ₹7,02,000 total.
Here's the trap: Farida's firm cannot additionally deduct partner remuneration or interest under Section 40(b) on top of this. That deduction was removed by the Finance Act, 2016. The ₹22,50,000 presumptive figure is already treated as final — no further subtraction allowed, even if the deed promises partners a salary.
Compute book profit — net profit per your P&L, adjusted per the Explanation to Section 40(b).
Work out maximum allowable remuneration using the slab table above.
Work out maximum allowable interest (12% cap on partner capital).
Subtract both from book profit to get taxable income of the firm.
Apply 30% tax, add 12% surcharge if income exceeds ₹1 crore, then add 4% cess.
Check whether AMT (18.5% of adjusted total income) applies instead, if you've claimed specified deductions.
File ITR-5 by the due date and pay the balance — 31 August 2026 for AY 2026-27 if no tax audit applies, or 31 October 2026 if Section 44AB applies (see the FAQ below on why this date moved). Remember: this is separate from what partners owe on their own remuneration and interest in their individual ITR-3.
No valid partnership deed, or Section 184 conditions not met. Your firm is still taxed at 30% — you just lose the remuneration and interest deduction that year, under Section 185. Fix: draft or update a deed stating each partner's share and remuneration clause, file a certified copy with your return. A revised deed only helps from the date it takes effect, not retroactively.
Missed the tax audit deadline. No audit report filed on time under Section 44AB? You're exposed to a Section 271B fee — 0.5% of turnover, capped at ₹1,50,000 — and the return becomes belated, blocking loss carry-forward. (Budget 2026 reclassified this from a "penalty" to a "fee" to reduce litigation, but the exposure is the same.) Fix: file the audit report and belated return before 31 December of the assessment year, pay accrued Section 234A interest, and request a reasonable-cause waiver if the delay had a genuine cause (auditor's illness, system failure).
TDS mismatch under Section 194T. Forgot to deduct TDS on remuneration, or deducted it late? Under Section 40(a)(ia), 30% of that expenditure gets disallowed until the TDS is actually deposited. Fix: deposit it now with 1% monthly interest for non-deduction (1.5% if deducted-but-unpaid), then claim the disallowed 30% back in the year you pay it.
Firm's PAN (fourth character is always "F")
Partnership deed — original plus a certified copy for your first return
PAN and Aadhaar of every partner
Books of accounts: cash book, ledger, sales and purchase registers
Audit report (Form 3CA-3CD or 3CB-3CD), if Section 44AB applies — digital copy accepted
GST registration certificate and returns, if registered
Form 26AS / AIS, to reconcile TDS credited against the firm and its partners
Bank statements showing partner capital contributions and drawings
Default | Penalty/Interest |
|---|---|
Late ITR filing (Section 234F) | ₹5,000; ₹1,000 if total income ≤ ₹5 lakh |
Failure to get accounts audited (Section 271B) | 0.5% of turnover/receipts, max ₹1,50,000 (fee, not penalty, from Budget 2026) |
Not maintaining books of accounts (Section 271A) | ₹25,000 |
Late filing interest (Section 234A) | 1% per month on unpaid tax |
TDS default under Section 194T | 30% expense disallowance (Sec 40(a)(ia)) + 1%/1.5% monthly interest |
Want the exact rupee figure for your own delay instead of the general rule? Use the Section 234A/B/C Interest Calculator.
Partnership Firm | LLP | Private Limited Company | |
|---|---|---|---|
Governing law | Indian Partnership Act, 1932 | LLP Act, 2008 | Companies Act, 2013 |
Registration | Optional | Mandatory (MCA) | Mandatory (MCA) |
Partner/shareholder liability | Unlimited | Limited to contribution | Limited to shares held |
Income tax rate | 30% flat | 30% flat | 15%/22%/25%/30% depending on turnover and regime chosen |
Partner/director pay deduction | Capped under Section 40(b) | Capped under Section 40(b) | No Section 40(b) cap; governed by Companies Act managerial-remuneration rules |
Annual compliance | ITR-5 only (plus Registrar of Firms filings, if registered) | ITR-5 + MCA Form 8 and Form 11 | ITR-6 + full ROC/MCA compliance, statutory audit regardless of turnover |
The firm itself is a separate taxpayer. It computes total income, deducts allowable partner remuneration and interest under Section 40(b), then pays a flat 30% tax (plus surcharge above ₹1 crore, plus 4% cess) on what's left. It files its own ITR-5 using its own PAN.
No, and this is where most articles go wrong. The firm pays 30% tax on its full income first. What's left over as "share of profit" is exempt in partners' hands under Section 10(2A). Only remuneration and interest are separately taxed to partners, and those were already deducted at firm level.
For FY 2025-26 (AY 2026-27), ITR-5 is due 31 August 2026 if no tax audit applies, or 31 October 2026 if Section 44AB tax audit applies (30 November 2026 if the firm has international or specified domestic transactions requiring Form 3CEB). The non-audit date used to be 31 July, but Finance Act 2026 pushed it out to 31 August specifically for ITR-3, ITR-4 and ITR-5 filers — ITR-1 and ITR-2 filers stayed at 31 July. Always cross-check the e-filing portal or a CBDT extension notification closer to the date.
Up to ₹3,00,000 or 90% of the first ₹6,00,000 of book profit (whichever is higher), plus 60% of book profit above that. This is a combined cap for all working partners together, not a per-partner limit, and only applies if the deed specifically authorises it.
No. This deduction was removed by the Finance Act, 2016. Presumptive income (6-8% of turnover under 44AD, or 50% of receipts under 44ADA) is treated as final — you cannot subtract Section 40(b) remuneration on top of it, no matter what the deed says.
No. Remuneration and interest are deductible only from the date the authorising deed takes effect — not retroactively. Sign in December but pay remuneration from April, and only the December-onward portion qualifies under Section 40(b), even though the firm itself is taxed as a firm for the whole year.
Yes, for income tax. Same 30% flat rate, same Section 40(b) caps, same Section 10(2A) exemption. The difference sits outside tax law: LLP partners get limited liability, and LLPs carry extra MCA filings (Form 8, Form 11) that ordinary firms don't.
File a belated return by 31 December of the assessment year. You'll owe a Section 234F fee (up to ₹5,000), Section 234A interest at 1% a month on unpaid tax, and lose the right to carry forward business losses to future years.
Yes, if total tax liability for the year exceeds ₹10,000. It's paid in four instalments (15 June, 15 September, 15 December, 15 March); shortfalls attract interest under Sections 234B and 234C, same as for any other taxpayer.
Nothing for income earned before 1 April 2026 — you still use 1961 Act numbering. From Tax Year 2026-27, the rules carry over under renumbered sections. We've confirmed Section 44AB becomes Section 63 and Section 194T becomes Section 393(3) (Sl. No. 7 of the consolidated TDS table); the remuneration and firm-assessment sections stay [VERIFY], since sources disagree on the exact numbers.
Get your partnership deed right, respect the Section 40(b) and 12% interest caps, and file ITR-5 on time — that's 90% of partnership firm tax compliance sorted. [INTERNAL LINK: Professional Income Tax Calculator, for partners estimating their own remuneration-plus-slab tax] Cross-check anything specific to your firm against the official Income Tax Department portal before filing.
For educational purposes only. Verify all figures at official sources before acting. Toolisky is not affiliated with any government body. Consult a qualified CA or legal professional before making compliance decisions. See toolisky.com/accuracy-and-limitations.
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