Partnership Firm Taxation Under explained: this guide covers what Partnership Firm Taxation Under means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
1. How Firms Are Taxed
Partnership firms (both registered and unregistered) are taxed as separate entities under ITA 2025 at a flat rate of 30% (plus 4% cess = 31.2%). This is different from LLPs (also 30%) and companies (22-25%). The firm files ITR-5 separately from partners. Partners then receive their share of profit — which is exempt in their hands (to avoid double taxation).
2. Partner Salary: Deductible with Limits
A registered partnership firm can pay remuneration (salary, bonus, commission) to working partners — deductible from firm income subject to limits:
| Book Profit Slab | Maximum Deductible Partner Salary |
|---|---|
| First Rs 3,00,000 of book profit (or loss) | Rs 1,50,000 or 90% of book profit — whichever is higher |
| Balance book profit above Rs 3,00,000 | 60% of remaining book profit |
3. Partner Interest: Maximum 12% per Annum
Interest paid to partners on their capital contributions is deductible from firm income — but only up to 12% per annum. Any excess interest is disallowed and not deductible. Partners include the interest received in their individual income (as "income from firm").
4. Partners Taxation
- Share of firm profits: FULLY EXEMPT in partner hands under Section 86 — no double taxation
- Salary from firm: Taxable as salary in partner hands — but deductible for the firm
- Interest from firm: Taxable as business income in partner hands — but deductible (up to 12%) for firm
- Capital gains on sale of firm interest: Taxable as capital gains in partner hands
5. Registered vs Unregistered Firm
| Feature | Registered Firm | Unregistered Firm |
|---|---|---|
| Partner salary deduction | Allowed (within limits) | NOT allowed — full disallowance |
| Tax rate | 30% | 30% |
| Ability to sue partners/third parties | Yes | Limited |
6. LLP vs Partnership Firm
LLPs (Limited Liability Partnerships) are taxed similarly to partnership firms at 30%. However, LLP partners have limited liability — personal assets are not at risk for LLP debts. LLP partner remuneration limits are the same as for firms. LLPs are often preferred over traditional partnership firms for professional services due to the liability protection.
7. Why TaxClue
Partner salary within prescribed limits, firm ITR-5 filing, and partner individual ITR coordination require precision. TaxClue handles firm taxation and partner ITR filing together. Contact us under ITA 2025.
