Partnership Firm Income Tax in 2026: Tax Rate, Partner Remuneration Limits and Worked Examples

Partnership firms are still the most common form for family businesses, traders and small manufacturers in India, and their tax works very differently from a proprietor's. This guide explains how a partnership firm is taxed in 2026 under the new Income-tax Act, 2025: the flat rate, surcharge and cess, how much salary and interest the firm can pay its partners, how book profit is worked out, how partners themselves are taxed, and the returns, TDS and due dates. Worked examples in rupees show the numbers at each step.

Quick answer

A partnership firm pays a flat 30% income tax on its whole taxable income, with no exemption limit and no new-regime option, plus a 12% (income above ₹1 crore) surcharge and 4% cess. It can cut its taxable income by paying working partners remuneration and interest within the limits of section 35(e) of the Income-tax Act, 2025.

• Effective rate: 31.2% up to ₹1 crore of income, about 34.94% above it

• Remuneration limit: on the first ₹6 lakh of book profit (or a loss): ₹3 lakh or 90% of book profit, whichever is higher; 60% of the balance of the balance

• Interest to partners: up to 12% simple interest a year, if the deed allows it

• Partner's share of profit is exempt; remuneration and interest are taxed in the partner's hands

• Return: ITR-5, due 31 August (no audit) or 31 October (audited)

How a partnership firm is taxed in 2026

For income tax, a partnership firm is a separate taxpayer from its partners. It has its own PAN, files its own return and pays tax on its own profit. The Income-tax Act, 2025 borrows the definitions of "partnership", "partner" and "firm" from the Indian Partnership Act, 1932, and stretches them to include limited liability partnerships. That is why firms and LLPs share the same rate and the same partner-remuneration rules, although LLPs have some extra features covered in our guide on LLP income tax.

The firm's profit is computed like any business: income minus allowable expenses, depreciation and so on. Two items then get special treatment. Payments to partners, such as salary and interest on capital, are deductible only within limits. And whatever profit remains after tax belongs to the partners, who do not pay tax on it again. The system is designed so that each rupee of profit is taxed once, either in the firm at the flat rate or in the partner's hands at their personal rate.

The new Act took effect on 1 April 2026 and applies to income earned from that date, which it calls tax year 2026-27. For profit earned up to 31 March 2026, which is assessed as assessment year 2026-27, firms still use the Income-tax Act, 1961. The rules for firms carried over with new section numbers: old section 40(b) is now section 35(e), old section 10(2A) is now serial 2 of the Schedule III table, and old sections 184 and 185 are now sections 325 and 326.

Tax rate, surcharge and cess for partnership firms

The rate for firms is set every year in the Finance Act. For tax year 2026-27, Paragraph C of Part I-B of the First Schedule to the Finance Act, 2026 fixes it at 30% on the whole of the total income. There is no basic exemption limit, so a firm with a taxable income of ₹50,000 pays tax on all of it. There are no slabs either: the first rupee and the last rupee are taxed at the same rate.

A surcharge of 12% (income above ₹1 crore) applies when the firm's total income exceeds ₹1 crore. Marginal relief ensures that a firm earning just over ₹1 crore does not pay more extra tax than the extra income itself. Health and education cess of 4% is then charged on the tax plus surcharge. The rates were the same in FY 2025-26, so firms see no change this year.

Partnership firm tax at a glance (2026)

30%

Income-tax rate

flat, from the first rupee

12% (income above ₹1 crore)

Surcharge

only if income > ₹1 crore

31.2%

Effective rate up to ₹1 crore

30% + 4% cess

34.94%

Effective rate above ₹1 crore

30% + 12% + 4% cess

Firms cannot use the new tax regime. Section 202 of the new Act, which sets the default slabs from nil to 30%, applies only to individuals, Hindu undivided families, associations of persons, bodies of individuals and artificial juridical persons. A firm is none of these. The ₹12 lakh rebate and the standard deduction are also only for individuals, so a firm with a small profit pays far more tax than a proprietor with the same profit. That is one reason firms usually pay their partners salary and interest.

Firms that claim certain profit-linked deductions face an alternate minimum tax under section 206(2): 18.5% of adjusted total income, payable if regular tax is lower. It applies only if the firm claims deductions under Chapter VIII-C (other than section 149) or the capital expenditure deduction in section 46, so most trading and service firms never meet it.

When a firm is assessed "as a firm"

To get the partner-remuneration deduction at all, the firm must qualify for assessment as a firm under section 325. Two conditions apply: the partnership must be evidenced by a written instrument, which in practice is the partnership deed, and the individual shares of the partners must be specified in it. A certified copy of the deed, signed by all adult partners, must accompany the return for the first year the firm seeks this status. After that, the status continues each year unless the constitution of the firm or the partners' shares change. When they do, a certified copy of the revised deed must be filed with that year's return.

If the firm fails these conditions, section 326 applies: no deduction is allowed for any interest, salary, bonus, commission or remuneration paid to partners, and those payments are not taxed in the partners' hands either. The same consequence follows under section 325(6) if the firm commits a failure of the kind described in section 271. Registration with the state Registrar of Firms is a separate matter under the Partnership Act; it helps the firm enforce contracts, but income tax looks only at the written deed. Our guide to partnership firm registration covers the state process.

Partner remuneration: who can be paid and how much

Section 35(e) sets three tests for salary, bonus, commission or any other remuneration paid to partners. Fail any one and the payment is added back to the firm's income.

First, it must be paid to a working partner. The Act defines a working partner as an individual who is actively engaged in conducting the affairs of the firm's business or profession. A sleeping partner who only contributes capital cannot be paid deductible remuneration, although he can be paid interest. A company or another firm that is a partner is not an individual, so it cannot be a working partner either.

Second, the deed must authorise it. The deed should state the amount, or a clear method to calculate it, such as "remuneration to each working partner equal to the maximum allowable under the Income-tax Act, in the ratio 60:40". The deed cannot cover a period before its own date. If you sign a deed on 1 October authorising remuneration from 1 April, the payment for April to September is not deductible.

Third, the total must stay within the limit based on book profit:

These are the limits that applied under section 40(b) of the old Act from FY 2024-25, carried into section 35(e) word for word. The limit is for all working partners together; the deed decides how it is split. Note that even in a loss year, the firm can deduct up to ₹3,00,000 of remuneration, which increases the loss it carries forward.

How to calculate book profit

Book profit is the base for the remuneration limit, and getting it wrong is the most common reason a firm's claim is cut down. Section 35(e)(v) defines it as the net profit shown in the profit and loss account for the year, computed as per the business-income chapter of the Act, increased by the remuneration to all partners if it has been deducted in arriving at that net profit.

In practice, take the firm's net profit after interest to partners, adjust it for all tax disallowances and allowances (book depreciation replaced with tax depreciation, disallowed expenses added back, and so on), and add back partner remuneration. Interest to partners is not added back, provided it is within the 12% limit. Any interest above 12% is added back as a disallowance first.

Worked example — a two-partner trading firm, tax year 2026-27

1. 1

   Start with the profit and loss account

   Profit before partner remuneration and interest: ₹14,40,000. Interest on capital of ₹10 lakh each at 12% = ₹2,40,000. Net profit after interest, before remuneration: ₹12,00,000 (all tax adjustments already made).

2. 2

   Book profit

   Book profit = ₹12,00,000 (interest within 12% is not added back).

3. 3

   Remuneration limit

   First ₹6,00,000: higher of ₹3,00,000 or 90% (₹5,40,000) = ₹5,40,000. Balance ₹6,00,000 × 60% = ₹3,60,000. Total limit = ₹9,00,000.

4. 4

   Compare with the deed

   The deed pays each working partner ₹5,00,000 (₹10,00,000 in all). ₹1,00,000 above the limit is added back.

5. 5

   Firm's taxable income and tax

   ₹12,00,000 − ₹9,00,000 = ₹3,00,000. Tax at 30% = ₹90,000, plus 4% cess = ₹93,600.

6. 6

   Partners' side

   Each partner reports ₹4,50,000 remuneration and ₹1,20,000 interest as business income. Their share of the firm's after-tax profit is exempt.

Compare the same firm with no partner remuneration. Its taxable income would be ₹12,00,000 and its tax ₹3,74,400. By paying ₹9,00,000 of deductible remuneration, the firm's tax drops by ₹2,80,800. Whether the family saves money overall depends on the partners' personal rates. Under the default new regime, an individual whose only income is ₹5,70,000 of remuneration and interest pays no tax after the section 156 rebate, so in this example the saving is close to the full ₹2,80,800.

Interest on partners' capital

Interest paid to partners on their capital or loans is deductible only if the deed authorises it, and only up to 12% simple interest a year. Unlike remuneration, interest can be paid to any partner, working or sleeping. The deed must state the rate. A deed that says "interest at such rate as the partners may agree" gives the firm no authority, and the interest may be disallowed in full.

Section 35(e)(iv) has special rules for partners who hold their share on behalf of someone else, typically a karta representing a Hindu undivided family. Interest paid to that individual in his own right is ignored when testing the limit; interest paid to him in his representative capacity, and to the person he represents, is tested together. Most small firms do not need to worry about this, but family businesses with HUF partners should have the deed say clearly in which capacity each partner holds.

Twelve per cent is a ceiling, not a target. Paying the full 12% on large capital balances moves profit to partners at their slab rate, which saves tax when their personal rates are below the firm's 30%. For a partner already in the 30% slab with surcharge, the saving is small or even negative once you include the TDS cash-flow cost. Run the numbers for each partner before fixing the rate in the deed.

How partners are taxed

The partner's tax depends on what kind of payment he receives. Remuneration, salary, bonus, commission and interest from the firm are taxed in the partner's hands as business income under section 26(2)(g), but only to the extent the firm was allowed to deduct them under section 35(e). The excess that the firm could not deduct is not taxed again in the partner's hands. Because this is business income, not salary, the partner gets no standard deduction against it, and section 15(4) says expressly that a partner's remuneration is not "salary". He can, however, deduct genuine expenses incurred to earn it, such as interest on money he borrowed to invest as capital in the firm.

The partner's share of the firm's profit is exempt under Schedule III (Table: Sl. No. 2) of the new Act, as long as the firm is separately assessed and the share follows the profit-sharing ratio in the deed. This replaces section 10(2A) of the old Act. The exemption covers the share whether it is withdrawn in cash or left in the capital account.

Since partners' remuneration and interest are business income, a partner files ITR-3, not ITR-1 or ITR-2. The due date for partners of a firm that does not need an audit has moved to 31 August from tax year 2026-27, and for partners of an audited firm it is 31 October, the same date as the firm. Partners usually need to pay advance tax on their remuneration, since TDS at 10% rarely covers their full liability.

TDS on payments to partners

From 1 April 2025, a firm must deduct TDS on salary, remuneration, commission, bonus or interest paid or credited to a partner's account: 10% once payments to a partner exceed ₹20,000 in a year. This started as section 194T of the 1961 Act and continues as section 393(3) of the 2025 Act. The TDS is due when the amount is credited to the partner's account, including the capital account, or paid, whichever is earlier. Many firms credit annual remuneration on 31 March, which means TDS must be deducted that day and deposited by 30 April.

Share of profit is not covered by this TDS, and neither are drawings, which are simply withdrawals of the partner's own capital. The firm needs a TAN to deduct and deposit TDS and must file quarterly TDS returns. Missing the deduction can cost the firm 30% of the remuneration as a disallowance under section 35(b), in addition to interest. Use our TDS calculator to check the deduction on each partner's credit.

Presumptive taxation, audit and returns

A resident partnership firm, but not an LLP, can opt for presumptive taxation under section 58 of the new Act if its turnover is within ₹2 crore, or within the higher digital limit. The firm then declares 8% of turnover (6% of digital receipts) as profit, or 50% of receipts for a specified profession. One important catch: section 58(5) lets a firm deduct partner salary and interest from presumptive income only for the goods-carriage scheme. A trading firm on the 8% scheme cannot reduce that figure by paying partners, so the whole presumptive profit is taxed at the firm's 30% rate. Read our guide on presumptive taxation before choosing this route.

Outside the presumptive scheme, a firm whose turnover exceeds ₹1 crore needs a tax audit under section 63, rising to ₹10 crore if cash receipts and cash payments are each within 5% of the total. A firm carrying on a profession needs an audit if gross receipts exceed ₹50 lakh.

A firm's income-tax calendar for tax year 2026-27

15 Jun, 15 Sep, 15 Dec 2026 and 15 Mar 2027

Advance tax instalments (if tax due is ₹10,000 or more)

31 Mar 2027

Year-end credit of partner remuneration and interest — deduct TDS

30 Apr 2027

Deposit TDS deducted in March

31 August 2027

ITR-5 due for firms not needing an audit, and their partners

30 September 2027

Tax audit report due for audited firms

31 October 2027

ITR-5 due for audited firms, and their partners

Changes in the firm: new partners, retirement and dissolution

When partners join, retire or the firm dissolves, assets moving between the firm and partners can trigger tax in the firm's hands. Section 8 of the new Act treats a firm that hands over a capital asset or stock-in-trade to a partner on its dissolution or reconstitution as having sold it at fair market value on that date. The profit is taxed in the firm as business income or capital gains. A companion rule in section 67(10) taxes the firm when money or assets paid to a partner on reconstitution exceed his capital balance. Both continue the regime introduced by the Finance Act, 2021 under the old sections 9B and 45(4).

Reconstitution under the Act includes a partner leaving, a new partner joining while at least one old partner continues, and a change in the partners' shares. Any of these also requires a revised deed to be filed with the return under section 325(5). If a firm is dissolved or its business discontinued, the Assessing Officer can still assess the firm's income for past years, and every person who was a partner at the time is jointly and severally liable for the tax, penalty and interest.

Common mistakes partnership firms make

The same handful of errors come up in assessments year after year. Paying remuneration to a partner who is not actively working, often a spouse or parent added for capital reasons, leads to a full disallowance. Signing the deed late in the year and applying it retrospectively loses the deduction for the earlier months. Using the accounting profit instead of book profit as computed under the tax chapter overstates the limit. Fixing remuneration as a flat figure that later exceeds the limit wastes the excess, so most advisers draft the deed to pay "the maximum allowable under section 35(e)" with a stated ratio.

The second group of errors is procedural. Firms forget to deduct TDS on the year-end credit, forget to file the revised deed after a partner retires, or file the return late and lose the right to carry forward a loss. Losses of a business can be carried forward only if the return is filed by the due date.

Official links

• Income Tax e-filing portalFile ITR-5, pay advance tax, view Form 26AS
• New Income-tax Act FAQsHow the 2025 Act replaces the 1961 Act
• Finance Act, 2026 (Gazette)Firm tax rate and surcharge for tax year 2026-27
• Section 326, Income-tax Act 2025Effect of not meeting the section 325 conditions
• Indian Partnership Act, 1932Law governing partnership firms

What to do next

Read your partnership deed against this guide: does it name the working partners, authorise remuneration with a clear formula, state the interest rate and carry a date before the period it covers? If not, sign a supplementary deed now so it applies to the rest of tax year 2026-27. Then estimate this year's book profit, work out the remuneration limit and set up TDS for the March credit. If you are choosing between a firm and an LLP for a new venture, compare this guide with our pages on LLP income tax and company tax rates, and see how depreciation on your machinery reduces book profit in our depreciation rate chart.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is the income tax rate for a partnership firm in 2026?

A partnership firm pays a flat 30% on its whole taxable income, with no basic exemption limit and no slabs. A surcharge of 12% (income above ₹1 crore) applies, and health and education cess of 4% is added on top. That makes the effective rate 31.2% for income up to ₹1 crore and about 34.94% above it, with marginal relief just above ₹1 crore.

Can a partnership firm choose the new tax regime?

No. The new-regime slabs in section 202 of the Income-tax Act, 2025 apply to individuals, HUFs, associations of persons, bodies of individuals and artificial juridical persons. A firm is none of these, so it always pays the flat rate. Firms also cannot claim the ₹12 lakh rebate or the standard deduction, which are for individuals.

How much salary can a partnership firm pay its partners?

The firm can deduct remuneration only to working partners, only as authorised by the deed, and only up to a limit based on book profit: on the first ₹6 lakh of book profit (or a loss): ₹3 lakh or 90% of book profit, whichever is higher, plus 60% of the balance of the balance of book profit. Anything above that is added back to the firm's income.

Is a partner's share of profit taxable?

No. A partner's share of the firm's profit, received as per the profit-sharing ratio in the deed, is exempt in the partner's hands under Schedule III (Table: Sl. No. 2) of the Income-tax Act, 2025, because the firm has already paid tax on it. Remuneration and interest received from the firm are taxable in the partner's hands as business income, to the extent the firm was allowed to deduct them.

What is the maximum interest a firm can pay partners on capital?

The firm can deduct interest to partners only if the deed authorises it, and only up to 12% simple interest a year. If the deed provides 15%, the extra 3% is disallowed in the firm's hands and is not taxed as business income in the partner's hands. Interest can be paid to all partners, including sleeping partners.

Which ITR form does a partnership firm file?

ITR-5 in most cases. A resident firm other than an LLP that declares presumptive income under section 58 and has total income within ₹50 lakh may file ITR-4 instead. The due date is 31 October if the firm's accounts are audited, and 31 August if they are not, from tax year 2026-27.

Is TDS deducted on partner remuneration?

Yes. Since 1 April 2025 a firm must deduct TDS on salary, remuneration, commission, bonus or interest paid or credited to a partner: 10% once payments to a partner exceed ₹20,000 in a year. The rule began as section 194T of the 1961 Act and continues under section 393(3) of the Income-tax Act, 2025. Share of profit is not subject to this TDS.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Finance Act, 2026 (No. 4 of 2026), First Schedule Part I-B Paragraphs C and F — Ministry of Law and Justice (Legislative Department) · accessed 9 October 2026
2. 2.Income-tax Act, 2025 (Act 30 of 2025) — sections 8, 15(4), 26(2)(g), 35(e), 58(5), 202, 206(2), 324–326 and Schedule III — Ministry of Law and Justice (Gazette of India, reproduced by TaxHeal) · accessed 9 October 2026
3. 3.Section 326 — Income-tax Act, 2025 — Income Tax Department · accessed 9 October 2026
4. 4.Finance Bill 2026 — Memorandum explaining provisions (direct taxes) — Ministry of Finance (India Budget) · accessed 9 October 2026
5. 5.Objective and scope of the new Act (Income-tax Act, 2025) — FAQs — Income Tax Department (e-filing portal) · accessed 9 October 2026
6. 6.Section 325 — Assessment as a firm (Income-tax Act, 2025) — EZTax · accessed 9 October 2026
7. 7.Partner remuneration and interest under section 35(e) of the Income-tax Act, 2025 — TaxGuru · accessed 9 October 2026
8. 8.Indian Partnership Act, 1932 — India Code (Legislative Department) · accessed 9 October 2026