Partnership Deed — Key Clauses, Format and Drafting Guide 2026

What Is a Partnership Deed?

A Partnership Deed is the foundational document that governs the relationship between partners in a partnership firm. Under Section 4 of the Indian Partnership Act, 1932: "Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." The Partnership Deed records this agreement in writing — specifying: each partner's capital contribution, profit-sharing ratio, duties and responsibilities, decision-making authority, admission/retirement/expulsion procedures, and dissolution terms. While a partnership can legally exist without a written deed (oral partnership is valid), a written and registered deed is strongly recommended to prevent disputes and establish clear rights and obligations.

Key Clauses in a Partnership Deed

1. Name and Nature of the Firm

The deed must specify: (a) the name of the firm (subject to the rules under the Indian Partnership Act — the firm name must not contain the word "Limited" or "LLP"), (b) the nature of business (trading, manufacturing, services, profession), (c) the principal place of business (address), and (d) the date of commencement of partnership.

2. Partners' Details

Full names, addresses, PAN numbers, and Aadhaar numbers of all partners. Specify the role of each partner: (a) active/working partner — who participates in day-to-day management, (b) sleeping/dormant partner — who contributes capital but does not participate in management, (c) managing partner — who has primary management responsibility.

3. Capital Contribution

Specify: (a) each partner's capital contribution (in cash, assets, or both), (b) whether capital is fixed or fluctuating, (c) interest on capital (typically 6-12% per annum — Section 13(d) allows interest only if agreed between partners), (d) interest on drawings (amount withdrawn by partners from the firm), (e) additional capital requirements — whether partners are obligated to contribute more and in what proportion.

4. Profit and Loss Sharing Ratio

The most critical clause — specify how profits and losses are shared. If the deed is silent on profit-sharing: profits and losses are shared EQUALLY regardless of capital contribution (Section 13(b)). Common arrangements: (a) equal sharing, (b) proportional to capital, (c) different ratios for profit and loss, (d) guaranteed minimum return to a partner. Note: under Section 40(b) of the Income Tax Act — salary and interest to partners are deductible from the firm's income only if specified in the deed. The deed must explicitly mention: (a) salary/remuneration to working partners, (b) interest on capital (maximum 12% for tax deductibility), (c) profit-sharing ratio.

5. Salary and Remuneration to Partners

Under Section 13(a) of the Partnership Act: a partner is NOT entitled to remuneration for taking part in the firm's business, UNLESS the deed provides for it. For income tax purposes: salary to partners is deductible under Section 40(b) only if: (a) it is authorized by the partnership deed, (b) it does not exceed the limits prescribed (Rs. 1.5 lakh or 60% of book profit for first Rs. 3 lakh of book profit, 40% of the remaining). The deed should clearly specify: which partners receive salary, the amount, and the payment frequency.

6. Management and Decision Making

Under Section 12 of the Partnership Act: every partner has the right to participate in the conduct of business, and differences on ordinary matters are decided by majority. However, no change in the nature of business can be made without the consent of ALL partners. The deed should specify: (a) which partners manage day-to-day operations, (b) which decisions require unanimous consent (major expenditure, new business lines, admission of new partners), (c) banking authority (who can operate the firm's bank account), (d) authority to sign contracts and execute documents on behalf of the firm.

7. Admission and Retirement of Partners

Section 31 — No person can be introduced as a partner without the consent of ALL existing partners (unless the deed provides otherwise). Section 32 — A partner may retire: (a) with the consent of all partners, (b) by giving written notice (if the partnership is at will). The deed should specify: (a) procedure for admitting new partners, (b) notice period for retirement, (c) valuation of goodwill on admission/retirement, (d) settlement of accounts with outgoing partner, (e) restriction on the retiring partner from competing (non-compete — though enforceability is limited under Section 36(2)).

8. Death and Insolvency

Under Section 42 — the firm is dissolved on the death or insolvency of a partner (unless the deed provides otherwise). Most deeds include a continuation clause: "In the event of death/insolvency of any partner, the remaining partners shall have the option to continue the business of the firm." The deed should specify: (a) valuation of the deceased/insolvent partner's share, (b) payment terms to legal heirs (lump sum or installments), (c) goodwill valuation methodology, (d) timeline for settlement.

9. Dissolution

The deed should specify: (a) grounds for dissolution (mutual consent, notice period, court order under Section 44), (b) procedure for winding up (appointment of a winding-up partner, sale of assets, payment of debts), (c) distribution of surplus among partners, (d) treatment of goodwill on dissolution.

Specimen Partnership Deed — Key Sections

[Illustrative format only]

PARTNERSHIP DEED

This Deed of Partnership is made on [Date] at [City]

BETWEEN:

1. Mr./Ms. [Partner 1 Name], PAN: [Number] (First Party)
2. Mr./Ms. [Partner 2 Name], PAN: [Number] (Second Party)
[Additional partners as needed]

The parties hereto have agreed to carry on business in partnership on the following terms:

Clause 1 — Firm Name: The partnership shall be carried on under the name and style of "[Firm Name]."

Clause 2 — Business: The business of the firm shall be [description of business activities].

Clause 3 — Place of Business: The principal place of business shall be [Address].

Clause 4 — Commencement: The partnership shall commence from [Date] and shall continue [at will / for a fixed period of ___ years].

Clause 5 — Capital: The capital of the firm shall be Rs. [Amount], contributed as follows: Partner 1: Rs. [Amount], Partner 2: Rs. [Amount]. Interest on capital: [X]% per annum.

Clause 6 — Profit Sharing: The net profits and losses shall be shared as follows: Partner 1: [X]%, Partner 2: [Y]%.

Clause 7 — Salary: Partner 1 shall receive salary of Rs. [Amount] per month for services rendered. [Partner 2 — as applicable].

Clause 8 — Drawings: Each partner may draw up to Rs. [Amount] per month. Interest on excess drawings: [X]% per annum.

Clause 9 — Banking: The firm's bank account shall be operated by [Partner 1/jointly by any two partners].

Clause 10 — Retirement: A partner may retire by giving [3/6] months' written notice to the other partners.

Clause 11 — Death: On the death of a partner, the surviving partners shall have the option to continue the business. The deceased partner's share shall be valued and paid to legal heirs within [6/12] months.

Clause 12 — Dissolution: The firm may be dissolved by mutual consent or by [6] months' written notice by any partner.

Clause 13 — Arbitration: Any dispute between partners shall be resolved by arbitration under the Arbitration and Conciliation Act, 1996.

Registration of Partnership Deed

Under Section 58 of the Indian Partnership Act: registration of the firm with the Registrar of Firms is OPTIONAL — but failure to register has significant consequences: (a) an unregistered firm cannot sue third parties for claims arising from contracts (Section 69), (b) partners of an unregistered firm cannot sue each other (Section 69), (c) the firm cannot set off (adjust) claims against third parties. Registration process: file Form 1 with the Registrar of Firms (state-specific office) with: partnership deed (original + copy), details of all partners, nature of business, and prescribed fee (typically Rs. 500-3,000 depending on the state).

Income Tax Implications

Partnership firms are taxed at 30% flat rate under Section 184 of the Income Tax Act. For the firm's income to be assessed as a firm (and not as an AOP): the partnership deed must be registered and must specify: (a) individual shares of partners, (b) salary/remuneration payable to each partner, (c) interest on capital (maximum 12% for deductibility). Section 40(b) limits: (a) interest on capital — maximum 12% per annum, (b) salary to working partners — prescribed limits based on book profit. Partners receiving salary, interest, and share of profit must include these in their individual ITR.