Partnership Firm Taxation and Compliance in India: Rates, Audit and Due Dates
A partnership firm pays income tax at a flat 30%, plus a 12% surcharge above ₹1 crore and 4% cess, as of September 2026. It files ITR-5, may deduct partner remuneration and interest only within set limits, and needs a tax audit above prescribed turnover. Shunya registers the firm for ₹1,999.
How is a partnership firm taxed in India?
A partnership firm is taxed as a separate entity on its profits at a flat 30%, with a 12% surcharge if total income exceeds ₹1 crore and 4% Health and Education Cess on the tax and surcharge. This is for assessment year 2026-27 (financial year 2025-26), filed under the Income-tax Act, 1961, as of September 2026.
Say Divya and Rohan run a two-partner design studio as a firm, with book profit of ₹18 lakh before partner payments. The firm pays tax at 30% on its taxable income, and the cess takes the effective rate to 31.2% (30% multiplied by 1.04). Above ₹1 crore of income, with the 12% surcharge, the effective rate works out to about 34.944% (30% x 1.12 x 1.04), with marginal relief available near the threshold.
There is also alternate minimum tax at 18.5% of book profit where normal tax comes out lower; your CA checks whether it applies to you. A partner's share of profit received from the firm is generally not taxed again in the partner's hands, since the firm has already paid tax on it. Talk to your CA about your structure.
For FY 2026-27 onward, the Income-tax Act, 2025 applies. We found no change to the firm's headline rate, but confirm the current figure with your CA at filing time. If you are still deciding on a structure, our partnership firm vs LLP vs Private Limited comparison puts these figures side by side.
How much remuneration and interest can a firm pay its partners?
A firm can deduct remuneration to working partners and interest on capital only within statutory limits, and only if the partnership deed authorises them. Interest is capped at 12% simple per annum; remuneration is capped by a formula on the firm's book profit.
These limits sit in section 40(b) of the Income-tax Act, 1961 and, from FY 2026-27, in section 35(e) of the Income-tax Act, 2025 (the earlier section 40(b)). As of September 2026, the limits are the same in both.
| Item | Deductible limit | Conditions |
|---|---|---|
| Remuneration to working partners | The higher of ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, plus 60% of the balance book profit (₹3,00,000 applies in a loss) | Authorised by the deed; working partners only; not for any period before the deed |
| Interest on partners' capital | Up to 12% simple per annum | Authorised by the deed; not for any period before the deed |
For example, with a book profit of ₹10 lakh, the cap is 90% of ₹6 lakh (₹5.4 lakh) plus 60% of the remaining ₹4 lakh (₹2.4 lakh), so ₹7.8 lakh. The exact book-profit computation has its own adjustments, so let your CA work it out. Before the amendment from assessment year 2025-26, the fixed amount was ₹1.5 lakh.
The practical lesson: write remuneration and interest into the deed from day one. Our partnership deed format and clauses guide shows where those clauses go.
Does a partnership firm deduct TDS on payments to partners?
Yes, since 1 April 2025 a firm has to deduct TDS at 10% on salary, remuneration, commission, bonus and interest paid to partners when the total in a financial year exceeds ₹20,000. This is section 194T of the Income-tax Act, 1961, and its mirror is section 393(3) of the Income-tax Act, 2025.
New firms often miss this because partner payments feel internal. They are not. If you pay a partner monthly remuneration, plan to deduct and deposit the TDS, and to file the related returns. Ask your CA on the callback how this fits your payment schedule. It is one reason to have a professional keep the books, not just register the firm.
Remuneration and interest only count if your deed authorises them; a CA drafts it and files with the Registrar.
Start partnership registration →When does a partnership firm need a tax audit?
A partnership firm needs a tax audit under section 44AB when its business turnover exceeds ₹1 crore, or its professional gross receipts exceed ₹50 lakh, with a higher business limit of ₹10 crore if cash receipts and cash payments are each no more than 5% of the total. These are the assessment year 2026-27 thresholds, as of September 2026.
| Type of income | Audit threshold (AY 2026-27) |
|---|---|
| Business turnover or gross receipts | Above ₹1 crore |
| Business, with cash receipts and cash payments each at most 5% of total | Above ₹10 crore |
| Profession (gross receipts) | Above ₹50 lakh |
Audit can also apply in some presumptive-tax cases where the firm declares a profit lower than the presumptive rate. From FY 2026-27, tax audit provisions move to section 63 of the Income-tax Act, 2025. We could not verify the exact conditions for that year, so check the thresholds with your CA before the year closes.
Even below these limits, a firm must maintain proper books; the audit is an extra step, not the only compliance.
Which forms and due dates apply to a partnership firm?
A partnership firm files its income-tax return in Form ITR-5; the due date depends on whether a tax audit applies. For assessment year 2026-27, as of 26 September 2026, the dates below apply unless the CBDT (Central Board of Direct Taxes) notifies an extension.
| Filing | Due date (AY 2026-27) |
|---|---|
| Tax audit report | 30 September 2026 |
| ITR-5 where audit applies | 31 October 2026 |
| ITR-5 where transfer-pricing report (Form 3CEB) applies | 30 November 2026 |
| Belated or revised return | 31 December 2026 |
| ITR-5 where no audit applies | Check the current section 139(1) date; sources conflict, so confirm with your CA |
The audit report date is close, so check the latest CBDT notification. Late-filing fee amounts are not covered here; ask your CA. A firm with presumptive income up to ₹50 lakh may be able to use ITR-4 instead, per the income tax portal; your CA confirms this.
What other compliance does a partnership firm carry?
Beyond tax returns, a partnership firm needs its own PAN, may need GST registration, and has no yearly return with the Registrar of Companies. Partner changes and other updates are recorded with the state Registrar of Firms, and the procedure varies by state.
- PAN: the firm gets its own PAN, which is needed to file ITR-5 and open a bank account.
- GST: as of September 2026, the turnover thresholds are ₹40 lakh for goods and ₹20 lakh for services in most states, lower in special-category states. Registration is mandatory from day one for inter-state supply of goods, e-commerce operators and reverse-charge cases. See the GST registration page.
- Udyam: optional and free; useful for MSME benefits and loans. Ask your CA.
- Books and records: required regardless of size.
Registration with the Registrar of Firms also matters legally: see what happens if you do not register.
How does Shunya help with a partnership firm?
Shunya's professional fee of ₹1,999 covers the registration work described on the partnership firm registration page: a CA-drafted deed, the application to the Registrar of Firms, and the PAN application, with a practising Chartered Accountant reviewing every filing.
Ongoing tax returns, audits and GST are not part of that registration fee. Stamp duty, the Registrar's fee and other government and third-party costs are billed separately; your CA walks you through them on your callback. If you want help with returns or audit later, ask about it on the free callback.
What is the income tax rate for a partnership firm in India?
As of September 2026, a partnership firm pays a flat 30% on taxable income, plus a 12% surcharge if income exceeds ₹1 crore, plus 4% Health and Education Cess. That is about 31.2% up to ₹1 crore and about 34.944% above it, with marginal relief. Confirm current rates with your CA.
How much remuneration can a partnership firm pay its partners?
Deductible remuneration to working partners is the higher of ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, plus 60% of the balance, and only if the deed authorises it. Interest on capital is capped at 12% simple per annum. Your CA computes book profit.
When is a tax audit required for a partnership firm?
For assessment year 2026-27, a tax audit applies when business turnover exceeds ₹1 crore, or ₹10 crore if cash receipts and payments are each within 5%, or when professional gross receipts exceed ₹50 lakh. From FY 2026-27 the provision moves to section 63 of the Income-tax Act, 2025; check conditions.
Which ITR form does a partnership firm file?
A partnership firm generally files ITR-5. The income tax portal lists ITR-4 only for firms with total income up to ₹50 lakh under the presumptive scheme. The due date depends on whether a tax audit applies, so confirm the current date with your CA before filing.
Is TDS required on remuneration paid to partners?
Yes. Since 1 April 2025, section 194T requires a firm to deduct 10% TDS on salary, remuneration, commission, bonus and interest paid to partners when the total in a financial year exceeds ₹20,000. Under the Income-tax Act, 2025 the mirror provision is section 393(3).
Does Shunya file a partnership firm's income tax returns?
Shunya's professional fee of ₹1,999 covers the registration work listed on the partnership firm page, not ongoing returns or audit. Government fees, stamp duty and other third-party costs are billed separately. Ask on the free callback if you want help with returns later.
This article is for general information only. For your specific situation, consult a practicing CA.
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