Taxation of Partnership Firms

Partnership firms — whether traditional firms under the Indian Partnership Act, 1932 or LLPs under the LLP Act, 2008 — remain a popular vehicle for professionals, family businesses, and joint ventures in India. For FY 2026-27, the taxation framework continues to treat firms as a separate taxable entity, with specific rules on remuneration to partners, interest on capital, and pass-through of losses. Understanding the structure is essential for both founders and CFOs.

Tax Rate Applicable to Partnership Firms

Partnership firms (including LLPs) are taxed at a flat rate of 30% plus surcharge at 12% (where total income exceeds ₹1 crore) and 4% health-and-education cess. Unlike companies, firms are not eligible for the concessional 22% or 15% regimes under Sections 115BAA or 115BAB. AMT under Section 115JC applies if adjusted total income exceeds the basic threshold.

Deductibility of Remuneration to Partners

Section 40(b) permits firms to deduct remuneration paid to working partners subject to limits based on book profit. The traditional slabs — 90% of the first ₹3 lakh of book profit (or ₹1.5 lakh, whichever is higher), and 60% of the balance — were enhanced by Finance Act 2024 and continue to apply for FY 2026-27 at the revised levels notified by CBDT. Remuneration must be authorised by the deed and paid only to working partners.

Interest on Partners' Capital

Interest on partners' capital is allowed as a deduction up to 12% per annum, computed on the daily balance of capital, provided the partnership deed authorises payment of interest. Excess interest is disallowed in the firm's hands and is not chargeable to tax in the partner's hands. The deed must be in writing, signed by all partners, and filed with the assessing officer.

Taxation in the Hands of Partners

Partners are taxed only on:

• Remuneration received from the firm — taxable as business income in their hands under Section 28(v).
• Interest on capital — taxable as business income.
• Share of profit — fully exempt under Section 10(2A) in the partner's hands, since the firm has already paid tax.

This avoids double taxation on the share of profit but means partners cannot claim deductions in respect of the firm's expenses again in their personal returns.

Filing Requirements

Firms file ITR-5 by 31 July 2027 for AY 2027-28 if not subject to tax audit, or by 31 October 2027 if subject to audit under Section 44AB. The deed, audited accounts, partners' details, and TDS reconciliations must be retained. LLPs additionally file Form 8 and Form 11 with the MCA on the V3 portal.

Common Tax Planning Levers

Optimise partner remuneration within Section 40(b) limits to shift income from the firm's 30% bracket to the partner's individual slab, which may attract a lower marginal rate especially under the new tax regime where the basic exemption is ₹3 lakh and the Section 87A rebate applies up to ₹7 lakh. Maintain accurate daily capital balances to justify 12% interest. Avoid retrospective remuneration entries; CBDT routinely disallows these in scrutiny.

Conclusion

Taxation of partnership firms blends entity-level taxation with controlled deductions for partner compensation. A well-drafted deed, disciplined book-keeping, and optimised remuneration structures can meaningfully reduce the effective tax burden across the firm-partner combine. Review your deed annually to ensure it aligns with the prevailing Section 40(b) limits and the partner mix.