Income tax · Business and professionals
How is a partnership firm taxed, and how much remuneration and interest can partners be paid?
Short answer
A partnership firm or LLP pays tax at 30%, plus surcharge above ₹1 crore and cess. It can deduct interest to partners up to 12% a year and remuneration to working partners within limits on book profit: on the first ₹6 lakh, the higher of ₹3 lakh or 90%, and 60% of the rest. Both must be authorised by the deed. Partners pay tax on what they receive, but their share of profit is exempt.
Tax on the firm
- Rate: 30% of total income.
- Surcharge: 12% if total income exceeds ₹1 crore.
- Health and education cess: 4%.
The same applies to an LLP. A registered and an unregistered firm are taxed the same way, as long as the partnership deed exists in writing.
Interest to partners
Deductible up to 12% a year, simple interest, on capital, if the deed authorises it and specifies the rate. Interest above 12% is disallowed.
Remuneration to working partners
Only working partners can be paid remuneration, and the deed must authorise it and fix the amount or the method. The deductible maximum, from tax year 2024-25, is:
| Book profit | Maximum remuneration |
|---|---|
| On the first ₹6 lakh, or a loss | ₹3 lakh, or 90% of book profit, whichever is higher |
| On the balance | 60% of book profit |
"Book profit" is the profit computed under the Act before deducting partners' remuneration.
Example: Book profit of ₹10 lakh. Limit = 90% × ₹6 lakh (₹5.4 lakh) + 60% × ₹4 lakh (₹2.4 lakh) = ₹7.8 lakh.
In the partners' hands
- Share of profit: exempt.
- Interest and remuneration: taxable as business income of the partner, to the extent the firm was allowed a deduction.
- TDS: from 1 April 2025 the firm deducts 10% on salary, remuneration, commission, bonus or interest paid to a partner if the total exceeds ₹20,000 in the year.
Presumptive firms
A firm under the presumptive scheme (section 58, formerly 44AD) gets no separate deduction for partners' interest or remuneration; the 8% or 6% is the final business income.
Get the deed right
Most disallowances come from deeds that do not authorise remuneration, name the working partners, or fix the method. Review the deed whenever partners or terms change.
Legal basis
- Section 40(b), Income-tax Act, 1961, now section 35, Income-tax Act, 2025
- Section 10(2A) (share of profit), now section 11 with Schedule III
- Section 194T (TDS on payments to partners), now section 393(1)
Official sources
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