Income Tax for Partnership Firms in India — Rates, Deductions and Compliance

Partnership firms — both registered and unregistered — are taxed as separate entities under the Income Tax Act. Unlike companies, firms are taxed at a flat rate, and the Act allows specific deductions for partner remuneration and interest. Here is the complete guide to income tax for partnership firms in India.

Tax Rate for Partnership Firms

• Flat tax rate: 30% on net income (same for registered and unregistered firms)
• Surcharge: 12% of tax if income exceeds ₹1 crore
• Health and Education Cess: 4% on tax + surcharge
• Effective rate for income up to ₹1 crore: 31.2%
• No basic exemption limit — all income above zero is taxed at 30%

Partner Remuneration — Section 40(b)

A firm can pay remuneration (salary, bonus, commission) to working partners and deduct it as a business expense — subject to limits under Section 40(b):

• On first ₹3 lakh of book profit (or in case of loss): ₹1.5 lakh or 90% of book profit, whichever is higher
• On balance book profit above ₹3 lakh: 60% of the balance book profit
• Remuneration must be paid to "working partners" only (as specified in the partnership deed)
• Remuneration must be authorised by the partnership deed — without partnership deed authorization, the deduction is disallowed

Interest on Capital — Section 40(b)

• Interest paid by the firm to partners on their capital is deductible up to a maximum of 12% per annum
• Interest beyond 12% is disallowed as a firm expense but is also not taxable in the hands of the receiving partner
• Must be authorised by the partnership deed

Taxation in Hands of Partners

• Share of profit received by a partner from a properly taxed partnership firm: fully exempt in the partner's hands under Section 10(2A)
• Partner remuneration received from the firm: Taxable as "Business Income" in the partner's ITR
• Interest on capital received from the firm: Taxable as "Business Income" in the partner's ITR

ITR Filing for Partnership Firms

Partnership firms must file ITR-5 annually. Tax audit under Section 44AB is compulsory if turnover exceeds ₹1 crore (or ₹10 crore if cash transactions are below 5%). Due date: July 31 without audit; October 31 with tax audit.

Conclusion

Partnership firm taxation offers the flexibility of pass-through profit exemption for partners combined with deductible remuneration and interest — but requires careful compliance with Section 40(b) limits. SPOTON provides complete income tax compliance for partnership firms including ITR-5 filing and tax audit. Contact us for expert firm tax advisory services.