Retirement explained: this guide covers what it 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.
When a partner retires, the firm owes him his capital, his share of reserves and revaluation gains, and his share of goodwill. The continuing partners gain his share of future profit and so compensate him through goodwill. The amount due can be paid at once or converted into a loan repaid over time. This guide works through the steps with one invented firm, to a balance sheet that agrees. Our partnership deed drafting team writes the settlement terms into the retirement deed.
Gaining ratio = new share - old share of each continuing partner. Revaluation and reserves are shared by all partners in the old ratio, including the retiring partner. His share of goodwill is borne by the gaining partners in the gaining ratio. The total due is paid in cash or transferred to a retiring partner's loan account. Section 37 protects an outgoing partner where the business continues without any final settlement.
The law, by link
Retirement itself is in our post on section 32. On what an outgoing partner may claim where the firm carries on without settling with him, section 37 says, as printed, that in the absence of a contract to the contrary, the outgoing partner or his estate is entitled, at his option, to the share of profits attributable to the use of his share of the firm's property, or to interest at six per cent a year on his share. Our post on sections 37 and 38 explains it. The proviso says that where an option to purchase the outgoing partner's interest is duly exercised, he gets no further share. A settlement by agreement, as in the example, is a contract that governs. Accounting follows below.
The steps
| Step | What to do |
|---|---|
| 1. Gaining ratio | New share - old share for each continuing partner |
| 2. Revaluation | Revalue assets and liabilities; share the result among all partners in the old ratio |
| 3. Reserves | Transfer reserves and undistributed profits to all partners' capitals in the old ratio |
| 4. Goodwill | Retiring partner's share of goodwill is credited to him and debited to the gaining partners in the gaining ratio |
| 5. Amount due | Total of the retiring partner's capital, reserve, revaluation and goodwill, less drawings |
| 6. Settlement | Pay in cash, or transfer to his loan account, with interest as agreed |
A joint life policy, if the firm holds one, is dealt with before the final amount is fixed: its surrender value or claim is shared among all partners in the old ratio, and the detail depends on the policy and the deed. Our guide to goodwill in partnership accounts explains why no goodwill account is raised.
Worked example: Dinesh and Esha buy out Farhan
The entity and all figures in this example are invented for illustration.
Dinesh, Esha and Farhan share profits 4:3:3. Farhan retires on 1 April 2026. Dinesh and Esha will continue in the ratio 4:3. The balance sheet before retirement is:
| Capital and liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Dinesh's capital | 5,00,000 | Building | 5,00,000 |
| Esha's capital | 4,00,000 | Machinery | 3,00,000 |
| Farhan's capital | 3,00,000 | Stock | 2,50,000 |
| General reserve | 1,50,000 | Debtors | 2,60,000 |
| Creditors | 2,00,000 | Bank | 2,40,000 |
| Total | 15,50,000 | Total | 15,50,000 |
Terms agreed. The building is revalued to 6,00,000 and machinery to 2,70,000; a provision of 10,000 is made for doubtful debts. Goodwill is agreed at 3,50,000. Farhan receives 68,000 in cash now, and the balance goes to his loan account, repayable in two equal annual instalments with interest at 10 per cent a year on the outstanding balance (an assumed rate, for arithmetic only).
Step 1 – gaining ratio. New: Dinesh 4/7, Esha 3/7. Old: Dinesh 4/10, Esha 3/10. Gain: Dinesh 4/7 - 4/10 = 40/70 - 28/70 = 12/70; Esha 3/7 - 3/10 = 30/70 - 21/70 = 9/70. Gaining ratio 12:9, which is 4:3.
Step 2 – revaluation. Profit = 1,00,000 - 30,000 - 10,000 = 60,000, shared 4:3:3: Dinesh 24,000; Esha 18,000; Farhan 18,000.
| Particulars | Debit | Particulars | Credit |
|---|---|---|---|
| To Machinery (reduction) | 30,000 | By Building (increase) | 1,00,000 |
| To Provision for doubtful debts | 10,000 | ||
| To Profit: Dinesh | 24,000 | ||
| To Profit: Esha | 18,000 | ||
| To Profit: Farhan | 18,000 | ||
| Total | 1,00,000 | Total | 1,00,000 |
Step 3 – general reserve 1,50,000 in 4:3:3: Dinesh 60,000; Esha 45,000; Farhan 45,000.
Step 4 – goodwill. Farhan's share = 3,50,000 x 3/10 = 1,05,000. Borne by Dinesh 1,05,000 x 4/7 = 60,000 and Esha 1,05,000 x 3/7 = 45,000.
Step 5 – amount due to Farhan. Capital 3,00,000 + revaluation 18,000 + reserve 45,000 + goodwill 1,05,000 = 4,68,000.
Journal entries
| Particulars | Debit | Credit |
|---|---|---|
| Building A/c Dr | 1,00,000 | |
| To Revaluation A/c | 1,00,000 | |
| Revaluation A/c Dr | 40,000 | |
| To Machinery A/c | 30,000 | |
| To Provision for Doubtful Debts A/c | 10,000 | |
| Revaluation A/c Dr | 60,000 | |
| To Dinesh's capital A/c | 24,000 | |
| To Esha's capital A/c | 18,000 | |
| To Farhan's capital A/c | 18,000 | |
| General Reserve A/c Dr | 1,50,000 | |
| To Dinesh's capital A/c | 60,000 | |
| To Esha's capital A/c | 45,000 | |
| To Farhan's capital A/c | 45,000 | |
| Dinesh's capital A/c Dr | 60,000 | |
| Esha's capital A/c Dr | 45,000 | |
| To Farhan's capital A/c (goodwill) | 1,05,000 | |
| Farhan's capital A/c Dr | 4,68,000 | |
| To Bank A/c | 68,000 | |
| To Farhan's Loan A/c | 4,00,000 | |
| Total | 9,23,000 | 9,23,000 |
Check on the journal: debits 1,00,000 + 40,000 + 60,000 + 1,50,000 + 1,05,000 + 4,68,000 = 9,23,000; credits 1,00,000 + 40,000 + 60,000 + 1,50,000 + 1,05,000 + 4,68,000 = 9,23,000.
Capital accounts
| Particulars | Dinesh | Esha | Farhan |
|---|---|---|---|
| Balance b/d | 5,00,000 | 4,00,000 | 3,00,000 |
| Revaluation profit | 24,000 | 18,000 | 18,000 |
| General reserve | 60,000 | 45,000 | 45,000 |
| Goodwill | (60,000) | (45,000) | 1,05,000 |
| Total | 5,24,000 | 4,18,000 | 4,68,000 |
| Less: paid in cash | (68,000) | ||
| Less: transferred to loan account | (4,00,000) | ||
| Closing | 5,24,000 | 4,18,000 | nil |
Balance sheet after retirement
| Capital and liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Dinesh's capital | 5,24,000 | Building | 6,00,000 |
| Esha's capital | 4,18,000 | Machinery | 2,70,000 |
| Farhan's loan | 4,00,000 | Stock | 2,50,000 |
| Creditors | 2,00,000 | Debtors (2,60,000 - 10,000) | 2,50,000 |
| Bank (2,40,000 - 68,000) | 1,72,000 | ||
| Total | 15,42,000 | Total | 15,42,000 |
Check: capital and liabilities 5,24,000 + 4,18,000 + 4,00,000 + 2,00,000 = 15,42,000; assets 6,00,000 + 2,70,000 + 2,50,000 + 2,50,000 + 1,72,000 = 15,42,000.
Farhan's loan account for two years (instalments of 2,00,000 at each year-end, with interest on the opening balance of each year):
| Year | Opening balance | Interest at 10% | Total | Paid (instalment + interest) | Closing balance |
|---|---|---|---|---|---|
| 1 | 4,00,000 | 40,000 | 4,40,000 | 2,40,000 | 2,00,000 |
| 2 | 2,00,000 | 20,000 | 2,20,000 | 2,20,000 | nil |
The interest of 40,000 and 20,000 is charged to the profit and loss account of the firm in the years concerned. Total paid to Farhan across the two years is 2,40,000 + 2,20,000 = 4,60,000, of which 4,00,000 is the loan and 60,000 is interest.
Common mistakes
- Sharing the revaluation result without the retiring partner: he shares in the old ratio.
- Charging goodwill to the continuing partners in the old ratio instead of the gaining ratio.
- Treating the loan as capital: it is a liability of the firm and carries interest as agreed.
- Charging interest on the original balance for every year instead of the reducing balance.
- Ignoring section 37 when no settlement is made: the retiring partner or his estate may claim a share of profits or interest.
Need help with a retirement settlement?
If a partner is leaving and the dues, goodwill and instalments are not yet fixed, we can work out the amounts and write the retirement deed. Our partnership deed drafting team handles the deed, the settlement schedule and the revised ratio.
Key takeaways
- Gaining ratio = new share less old share of each continuing partner.
- Revaluation and reserves are shared by all partners in the old ratio.
- The gaining partners compensate the retiring partner for goodwill in the gaining ratio.
- The amount due is paid in cash or moved to a loan account with agreed interest.
- Section 37 applies where the business continues without final settlement.
Read next
- Goodwill in partnership accounts
- Admission of a partner: accounting
- Death of a partner: accounting
- Section 32: retirement of a partner
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.