Partnership Firm & LLP Taxation — Complete Guide

Partnership firms and LLPs occupy a distinct place in Indian tax law — taxed as a separate entity at a flat rate, but with specific rules governing what the firm can deduct for paying its own partners.

The Flat Tax Rate

Both partnership firms and LLPs are taxed at a flat 30% on their total income, plus applicable surcharge and 4% cess — there’s no slab structure and no basic exemption limit, unlike individual taxpayers.

Partner Remuneration and Interest — What the Firm Can Deduct

A firm can deduct remuneration (salary, bonus, commission) paid to working partners, and interest paid on partners’ capital, but both are capped:

Item

Deduction Limit

Interest on partners’ capital

Capped at 12% per annum

Remuneration to working partners

Tiered limits based on the firm’s book profit (a higher percentage on the first slab of book profit, a lower percentage on the remainder)

Remuneration must be authorised by the partnership deed and paid only to working partners (those actively engaged in the business) — remuneration to a purely passive/sleeping partner isn’t deductible for the firm.

Taxation in the Partners’ Hands

Since the firm itself is taxed at 30% on its profits, amounts received by partners as their share of profit are exempt in the partners’ individual hands (to avoid double taxation of the same income). However, remuneration and interest received by partners (which the firm already deducted) are taxable in the partners’ individual hands as business income.

Section 194T — TDS on Partner Payments (A Recent, Significant Change)

Effective from 1st April 2025, firms must deduct 10% TDS on salary, remuneration, commission, bonus, or interest paid to partners, once the aggregate exceeds ₹20,000 in a tax year. This closed a long-standing gap — for decades, payments from a firm to its own partners were entirely outside the TDS net.

•             Capital withdrawals and repayment of capital by partners are not covered by this TDS.

•             The threshold is tested on the aggregate of all these payment categories combined, per partner, per year.

LLP-Specific Notes

•             LLPs are taxed identically to partnership firms for income tax purposes (30% flat rate, same partner remuneration/interest rules).

•             LLPs cannot opt for presumptive taxation under Section 44AD or 44ADA — these schemes are available only to individuals, HUFs, and partnership firms (not LLPs).

•             No Dividend Distribution Tax equivalent applies to LLP profit distributions to partners, since LLP profit share is already exempt in the partners’ hands (similar to a regular firm).

Worked Example

A partnership firm has ₹40,00,000 book profit for the year. It pays its two working partners a combined ₹18,00,000 in remuneration (within the permissible tiered limits) and ₹2,40,000 in interest on capital (calculated at 12% on their combined capital contribution). The firm deducts both amounts in computing its own taxable income (₹40,00,000 minus ₹20,40,000 = ₹19,60,000 taxed at 30% for the firm). Since the aggregate payment to each partner exceeds ₹20,000, the firm must also deduct 10% TDS on the remuneration and interest paid to each partner under Section 194T.

Frequently Asked Questions

Q1. Is a partner’s share of profit from the firm taxed again in their individual return? No — since the firm has already paid tax at 30% on its total profit, the partner’s share of that profit is exempt in their hands, preventing double taxation of the same income.

Q2. Can a firm deduct unlimited remuneration to its partners if the partnership deed allows it? No — regardless of what the partnership deed specifies, the deduction is capped by the statutory tiered-limit formula based on book profit; any amount authorised beyond this statutory cap simply isn’t deductible for the firm.

Q3. Does Section 194T apply to sleeping (non-working) partners too? Yes — the TDS applies to payments in the nature of salary, remuneration, commission, bonus, or interest to any partner, not just working partners, once the aggregate threshold is crossed.

Reflects the partnership/LLP taxation framework applicable for Tax Year 2026-27, carried forward under the Income Tax Act, 2025 with renumbered sections.


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