Sections 324-326 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.
Sections 324 to 326 contain the basic rules for taxing a partnership firm. Section 324 charges tax on the total income of a firm that is assessable as a firm. Section 325 sets out when a firm is assessed as a firm: a partnership evidenced by an instrument that specifies the partners' shares, with a certified copy filed with the return. Section 326 spells out what happens when a firm does not comply: no deduction for payments to partners, and no tax on those payments in the partners' hands. This article reads the three sections as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
A firm is assessed as a firm only if (a) the partnership is evidenced by an instrument and (b) the individual shares of the partners are specified in it. A certified copy goes with the return of the first year assessment as a firm is sought. If the firm does not comply, no deduction is allowed for interest, salary, bonus, commission or remuneration paid to a partner, and those payments are not chargeable in the partners' hands under section 26(2)(g).
Section 324: charge of tax on a firm
In the case of a firm which is assessable as a firm, tax is charged on its total income at the rate as specified in any Central Act for the relevant tax year. The Act prints no rate here. The rate for a given tax year is the one fixed by the Central Act for that year; check the current Act for it.
Section 325: assessment as a firm
Sub-section (1): the two conditions
A firm is assessed as a firm for the purposes of the Act if:
| Condition | Text |
|---|---|
| (a) | The partnership is evidenced by an instrument; and |
| (b) | The individual shares of the partners are specified in that instrument |
Both must be met. A partnership resting on an oral understanding, or an instrument that does not specify the individual shares, does not meet the test.
Sub-sections (2) and (3): certified copy with the return
- (2) A certified copy of the instrument of partnership accompanies the return of income of the firm of the tax year in respect of which assessment as a firm is first sought.
- (3) The copy is certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners immediately before dissolution and by the legal representative of any such partner who is deceased.
Sub-sections (4) and (5): later years and changes
- (4) Where a firm is assessed as such for any tax year, it is assessed in the same capacity for every subsequent year, if there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument on the basis of which assessment as a firm was first sought.
- (5) Where any such change has taken place in the tax year, the firm furnishes a certified copy of the revised instrument along with the return of income for that tax year, and the section applies accordingly.
So the certificate is not a one-time exercise. A change in partners or in shares needs a revised instrument filed with the return of the year of change. For how the Act treats a change in the constitution of a firm at assessment, see our article on sections 327 to 330.
Sub-section (6): failure mentioned in section 271
Irrespective of anything in any other provision of the Act, where for any tax year there is on the part of a firm any such failure as is mentioned in section 271:
- (a) the firm is assessed so that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by the firm to any partner is allowed in computing income under the head "Profits and gains of business or profession"; and
- (b) such payment is not chargeable to income-tax under section 26(2)(g) (in the partner's hands).
Section 271 provides for assessment to the extent of the Assessing Officer's judgment (the Act uses a different heading for it); sub-section (6) refers to the failures mentioned in it. To prepare a firm's return and the supporting instrument, our income tax return filing team can help.
Section 326: where section 325 is not complied with
Irrespective of anything in any other provision of the Act, where a firm does not comply with section 325 for any tax year:
| Clause | Result |
|---|---|
| (a) | No deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by the firm to any partner is allowed in computing its income chargeable under the head "Profits and gains of business or profession" |
| (b) | Such interest, salary, bonus, commission or remuneration is not chargeable to income-tax under section 26(2)(g) in the hands of the partners |
Sections 325(6) and 326 produce the same two consequences, one for the failures in section 271 and the other for non-compliance with section 325.
Consequences at a glance
| Situation | Firm's deduction for partner payments | Partner's receipt |
|---|---|---|
| Firm assessable as a firm (section 325 complied with) | Not removed by sections 325(6) or 326 | Not removed from charge by sections 325(6) or 326 |
| Firm does not comply with section 325 | Not allowed (section 326(a)) | Not chargeable under section 26(2)(g) (section 326(b)) |
| Failure mentioned in section 271 | Not allowed (section 325(6)(a)) | Not chargeable under section 26(2)(g) (section 325(6)(b)) |
The table states only what these sections say; whether a deduction is allowed in the first row is governed by the other provisions of the Act on business deductions, which are not explained here.
A worked example
Names and amounts are assumed. No rate of tax is printed in these sections, so the example shows the effect on income, not on tax.
Bharat & Sons is a partnership of Mr. Bharat and his two sons. The firm's business profit before partner payments is Rs. 20,00,000, and it pays Rs. 3,00,000 as salary and Rs. 60,000 as interest to the partners during the tax year.
Case 1: compliance. The partnership is evidenced by a deed that specifies each partner's share. A certified copy, signed by all three partners (none a minor), accompanies the return for the first year in which assessment as a firm is sought. The firm is assessed as a firm and tax is charged on its total income at the rate specified in the Central Act for that tax year (section 324). In later years the firm is assessed in the same capacity as long as the constitution and shares do not change (section 325(4)).
Case 2: non-compliance. The partnership is oral; no instrument exists. Under section 326:
- No deduction is allowed for the Rs. 3,00,000 salary and Rs. 60,000 interest. The firm's income for the head is therefore computed without deducting Rs. 3,60,000, that is, Rs. 20,00,000 stays at Rs. 20,00,000 and does not fall to Rs. 16,40,000.
- The Rs. 3,60,000 received by the partners is not chargeable in their hands under section 26(2)(g).
Case 3: change in shares. One year later, one son leaves and a new partner is admitted. The firm furnishes a certified copy of the revised instrument with that year's return (section 325(5)).
Need help with a firm's return?
Whether a firm is assessed as a firm turns on documents: the instrument, the shares it specifies and the certified copy that goes with the return. A gap in any of these costs the firm its deduction for partner payments. Our team can help you check the deed and prepare the return. See our income tax return filing service.
Key takeaways
- A firm assessable as a firm is charged tax on its total income at the rate specified in any Central Act for the relevant tax year.
- Assessment as a firm needs a partnership instrument that specifies each partner's individual share.
- A certified copy, certified by all partners who are not minors, goes with the return of the first year assessment as a firm is sought.
- The firm is assessed in the same capacity in later years unless the constitution or shares change; a revised instrument goes with the return of the year of change.
- If the firm does not comply with section 325, or has a failure mentioned in section 271, partner payments are not deducted and are not chargeable in the partners' hands under section 26(2)(g).
Read next
- Sections 327 to 330: change in constitution, succession and dissolution of firms
- Sections 323 and 331: liability of directors and of LLP partners
- Sections 309 to 311: members' shares in an association of persons
- Chapter XVII: special provisions relating to certain persons
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.