Income Tax for a Partnership Firm —
Flat 30%, No Exemption
How partnership firms and LLPs are taxed: the flat 30% rate, surcharge and cess, why partners' profit share is exempt, Section 40(b) remuneration limits, the new 194T TDS and ITR-5 filing.
A partnership firm and an LLP are taxed at a flat 30% on total income — no slab rates and no basic exemption limit. A surcharge of 12% applies where income exceeds ₹1 crore, and 4% Health & Education Cess is added on top. A partner's share of profit is fully exempt in their own hands; only remuneration and interest from the firm are taxable to the partner. Firms file ITR-5.
Partnership Firm & LLP Tax Rate — AY 2026-27
Unlike an individual proprietor, a firm has no slab benefit — every rupee of taxable income is taxed at the same flat rate, plus surcharge and cess.
| Component | Rate | Applies When |
|---|---|---|
| Base income tax | 30% | On total income — always |
| Surcharge | 12% | Net income exceeds ₹1 crore (marginal relief applies) |
| Health & Education Cess | 4% | On tax + surcharge — always |
| Effective rate (income ≤ ₹1Cr) | 31.2% | 30% × 1.04 |
| Effective rate (income > ₹1Cr) | 34.944% | 30% × 1.12 × 1.04 |
| Alternate Minimum Tax (AMT) | 18.5% | Of adjusted total income, if lower than normal tax |
Rates under the Income-tax Act, 2025 for AY 2026-27. The new-regime slabs and the ₹12 lakh Section 87A rebate apply to individuals/HUFs — not to firms, which pay a flat 30%.
The default new regime, its Nil-up-to-₹12-lakh Section 87A rebate and the ₹75,000 standard deduction apply to individuals and HUFs. A partnership firm or LLP is a separate person taxed at a flat 30% regardless of regime — there is nothing to opt into.
How a Firm's Tax Is Computed
Two illustrations — one below ₹1 crore (no surcharge) and one above ₹1 crore (12% surcharge, ignoring marginal relief).
Firm with ₹40,00,000 taxable income
Firm with ₹1,50,00,000 taxable income
Book profit for these purposes is arrived at after allowing deductible partner remuneration and interest on capital within the Section 40(b) limits — covered below. Model your own numbers on the income tax calculator.
Want your firm's tax and 40(b) deduction computed precisely?
Get Firm Tax Help →Taxation in the Partner's Hands
Because the firm already pays 30% on its profit, the partner's share of that profit is exempt — taxing it again would be double taxation. Only what the firm has deducted before arriving at its profit (remuneration and interest) is taxed to the partner.
| Income to Partner | Taxed at Firm? | Taxed in Partner's Hands? | Basis |
|---|---|---|---|
| Share of profit | Yes · 30% | Exempt | Exempt in partner's hands (avoids double tax) |
| Remuneration / salary | Deductible (within 40(b)) | Yes | Taxed as business income (PGBP) |
| Interest on capital | Deductible up to 12% p.a. | Yes | Taxed as business income; excess disallowed at firm |
Remuneration and interest are added back to a partner's income only to the extent the firm was allowed to deduct them.
Under the new Section 194T, a firm must deduct 10% TDS on remuneration, salary, bonus, commission or interest paid or credited to a partner once the yearly aggregate crosses ₹20,000. This is new for AY 2026-27 and applies even to small firms — the firm needs a TAN and must file TDS returns.
Are you a partner unsure what to declare in your own ITR?
Ask a Tax Expert →Section 40(b) — Remuneration & Interest Limits
A firm can deduct remuneration paid to working partners only up to the Section 40(b) ceiling. These limits were enhanced from AY 2025-26 (Finance Act 2024) — the first slab rose from ₹3 lakh to ₹6 lakh of book profit. Anything above is disallowed and added back to the firm's taxable income.
| Book Profit | Maximum Deductible Remuneration |
|---|---|
| On the first ₹6,00,000 of book profit (or in case of loss) | ₹3,00,000 or 90% of book profit — whichever is higher |
| On the balance book profit above ₹6,00,000 | 60% of the excess |
| Interest on partner's capital | Maximum 12% per annum on the capital balance |
Applicable AY 2025-26 onward. Remuneration must be authorised by, and quantified in, the partnership deed to be deductible.
Deduction is allowed when
- Partner is a working (active) partner
- Remuneration is authorised in the partnership deed
- It stays within the 40(b) ceiling
- Interest on capital does not exceed 12% p.a.
Deduction is disallowed when
- Paid to a sleeping / non-working partner
- Not provided for in the deed
- It exceeds the 40(b) limit (excess added back)
- Interest charged above 12% p.a.
Get your partnership deed and remuneration clause reviewed for maximum deduction.
Talk to a Tax Expert →Firm Compliance & ITR-5
Partnership firms (registered or not) and LLPs file ITR-5. A tax audit under the Income-tax Act applies where turnover crosses the prescribed limit, and audited firms must file with a digital signature.
- File ITR-5 (firm / LLP return)
- PAN & (if deducting TDS) TAN
- Advance tax in 4 instalments
- 194T TDS on partner payouts
- Tax audit if turnover over limit
- Books of account & deed on record
- LLP: MCA annual filing (Form 8 & 11)
- Interest 234B/234C if advance tax short
Advance Tax Due Dates
| Instalment | Due Date | Cumulative % Payable |
|---|---|---|
| 1st | 15 June | 15% |
| 2nd | 15 September | 45% |
| 3rd | 15 December | 75% |
| 4th | 15 March | 100% |
Shortfall or delay attracts interest under Sections 234B and 234C. See the full advance-tax schedule.
A firm pays a flat 30% with no exemption; a proprietor uses individual slabs (Nil up to ₹12 lakh taxable under the new regime); a private limited company can pay 22% under Section 115BAA. The best structure depends on profit level and how partners draw money — worth modelling before you decide.
Partnership Firm Income Tax — FAQs
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