Changed for Partnership Firms 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.
Under the Income-tax Act, 2025, partnership firms and LLPs continue to be taxed at a flat 30%. Deductible partner remuneration (old section 40(b)) continues with revised, higher entry thresholds; interest to partners stays capped at 12%; and LLPs remain within Alternate Minimum Tax at 18.5% with credit carry-forward.
Overview
Firms and LLPs are taxed as separate entities at a flat rate, with specific rules on what they can deduct for payments to partners. The Act 2025 keeps this framework and reflects the recent liberalisation of the remuneration limits.
What the Old Act Said
Under the 1961 Act, a firm/LLP paid tax at a flat 30%. Remuneration to working partners was deductible only within the section 40(b) limits — a slab based on book profit (a higher percentage on the first tranche of book profit, a lower percentage beyond). Interest to partners was deductible up to 12% per annum if authorised by the deed. The partner's share of profit was exempt in the partner's hands to avoid double taxation. LLPs claiming profit-linked deductions fell within Alternate Minimum Tax (AMT) at 18.5% of adjusted total income, with AMT credit carried forward.
What the New Act 2025 Changes
The Act 2025 retains the 30% flat rate, the 12% interest cap, the exemption of the partner's profit share and AMT for LLPs. The notable liberalisation is on working-partner remuneration: the section 40(b)-type slabs are carried forward with revised, higher thresholds, so firms can deduct more remuneration on a given book profit than under the older limits. A withholding obligation on remuneration and interest paid by firms to partners above a threshold — introduced in recent law — is part of the current framework, so firms must now deduct and deposit TDS on such payments where the limit is crossed.
Old → New Mapping
| Item | Under the 1961 Act | Under the Act 2025 |
|---|---|---|
| Tax rate | Flat 30% | Flat 30% (continued) |
| Working-partner remuneration | 40(b) slabs on book profit | Continued with higher thresholds |
| Interest to partners | Up to 12% p.a., deed-authorised | Continued (12%) |
| Partner's profit share | Exempt in partner's hands | Continued (exempt) |
| AMT on LLP | 18.5% of adjusted total income | Continued, with credit |
| TDS on partner payments | Newly introduced above threshold | Applies as prescribed |
Practical Impact / Examples
Consider a firm with book profit of ₹12,00,000. Under the revised, higher remuneration thresholds, a larger slice of that book profit can be paid to working partners as deductible remuneration than under the old limits, reducing the firm's 30% tax and shifting income to the (exempt-share plus salary) partners. Interest to partners of, say, ₹3,00,000 is deductible only if the deed authorises it and the rate does not exceed 12%. If the firm's remuneration or interest payments cross the withholding threshold, it must now deduct TDS and deposit it — a new compliance point many firms overlook.
Transition Tips
- Update the partnership/LLP deed to authorise remuneration and interest at the revised, higher limits — no deed clause means no deduction.
- Recompute deductible remuneration using the new thresholds to optimise the firm-vs-partner tax split.
- Set up TDS on partner payments where the threshold is crossed, and deposit on time to avoid disallowance and interest.
- LLPs must project AMT if they claim profit-linked deductions, and track AMT credit for future set-off.