Partnership firms are an essential part of India’s economy, ranging from small startups to well-established businesses. These firms are subject to specific income tax slabs and regulations that impact their overall tax liabilities. For any partnership firm, understanding these tax slabs is crucial for managing finances and ensuring compliance with the law.
In this article, we will break down the income tax slab for partnership firms in India, highlight key tax provisions, and provide helpful tips for managing taxes.
What is a partnership firm?
A partnership firm is a business structure where two or more individuals share ownership and profits of a business. Under the Indian Partnership Act of 1932, a partnership firm is a popular option due to its flexibility and lower setup costs.
While the firm is not taxed as an entity (like corporations), the individual partners must report and pay taxes on the firm’s income based on the income tax slab for partnership firms.
Partnership firm tax rate for FY 2024–25 (AY 2025–26)
Unlike individual taxpayers, the tax rate for partnership firms is relatively straightforward. The income tax for a partnership firm is calculated based on the total taxable income of the firm, without any exemptions or deductions that individuals typically benefit from.
1. Tax rates for partnership firms: For the financial year 2024-25, the tax rate for partnership firms is as follows:
- Total income up to Rs. 1 crore: Tax rate of 30% on the total income.
- Income above Rs. 1 crore: A surcharge of 12% is levied on the income exceeding Rs. 1 crore. The tax rate remains at 30%.
2. Surcharge, health, and education cess: A surcharge of 12% is applied on income above Rs. 1 crore, and a health and education cess of 4% is added to the total tax payable. This makes it crucial for partnership firms to maintain accurate records of income and expenditures to determine the correct taxable amount.
Returns and forms applicable for partnership firm/ LLP for AY 2025-26
When filing income tax returns, partnership firms and LLPs need to be aware of specific forms and documents that must be submitted. These forms vary depending on the nature of income, type of business activity, and compliance requirements under the Income Tax Act, 1961. Below is a detailed overview of the most relevant forms, their purpose, and who needs to file them.
ITR-4 (Sugam) – Presumptive Income Scheme (Firms other than LLPs)
This return is meant for small businesses operating as a partnership firm (excluding LLPs), with total income up to Rs. 50 lakh. It applies when income is computed on a presumptive basis under sections 44AD, 44ADA or 44AE. The form can also include income from one house property, other income sources like dividends or pension, and agricultural income up to Rs. 5,000. However, it cannot be used if the total income crosses Rs. 50 lakh, or if the firm has certain conditions like owning assets abroad or having directorship in a company.
ITR-5 – For firms, LLPs and other entities
ITR-5 is designed for a wide range of entities including firms, LLPs, associations of persons, bodies of individuals, cooperative societies, estates of deceased persons, and more. Essentially, most partnership firms and LLPs that do not fall under other specific ITR categories will be filing ITR-5. However, entities required to file under sections 139(4A), 139(4B) or 139(4D) cannot use this form.
Form 26AS – Annual tax statement
Form 26AS is a consolidated tax statement made available on the income tax portal. It reflects details of tax deducted at source (TDS), tax collected at source (TCS), advance tax payments, refunds, and high-value transactions reported under the Statement of Financial Transactions (SFT). This form is useful to verify whether the taxes deducted or paid on behalf of the firm are accurately recorded.
AIS (Annual Information Statement)
The AIS is a broader and more detailed version of Form 26AS. It shows income-related information received by the Income Tax Department from different sources including GST data, foreign government inputs, and pending proceedings. Firms can access it through the e-filing portal to ensure complete tax transparency and compliance.
Form 16A – TDS certificate for non-salary income
Form 16A is issued quarterly to firms when tax is deducted at source on income other than salaries. It contains details of the amount paid, the nature of such payments, and the TDS deducted. The deductor provides it to the deductee so that the same can be matched while filing income tax returns.
Form 3CA–3CD – Audit report for firms audited under other laws
This form applies when a partnership firm is already required to undergo an audit under another law, such as company or co-operative regulations, and also needs to comply with section 44AB of the Income Tax Act. It includes both the auditor’s report and a statement of particulars.
Form 3CB–3CD – Audit report for firms not covered under other laws
If a firm is required to get its accounts audited under section 44AB but is not covered under any other audit requirement, Form 3CB–3CD is filed. It also contains the auditor’s report and detailed particulars about income and expenses.
Form 3CEB – Transfer pricing report
Any firm entering into international transactions or specified domestic transactions must furnish Form 3CEB. This is a report by a chartered accountant that details such transactions and ensures compliance with transfer pricing regulations.
Form 3CE – Report for non-resident income
This form applies to non-resident firms or foreign companies earning income in India from royalties or technical services. It is certified by an accountant and is mandatory under section 44DA.
Form 67 – Foreign income and tax credit statement
Partnership firms that have earned income abroad or are eligible to claim foreign tax credits must file Form 67. It provides details of foreign income and the credit claimed against Indian tax liability.
Form 10CCB – Audit report for deductions
This form is necessary for firms that want to claim deductions under sections 80-IA, 80-IB, 80-IC, or 80-IE. The audit report, signed by an accountant, must be submitted before the due date of return filing.
Key income tax changes for a partnership firm effective from the 1st of April, 2025
The Finance (No. 2) Act, 2024, has introduced significant income tax changes for partnership firms, including Limited Liability Partnerships (LLPs). These changes are effective from April 1, 2025.
Primarily, these changes are focused on the:
- Increased limits for partner remuneration
and - Implementation of Section 194T (which mandates Tax Deducted at Source (TDS) on payments to partners).
Let’s understand these income tax changes in detail:
1. Increased limits for partner remuneration
Until the financial year 2024-25 (Assessment Year 2025-26), the remuneration paid to a working partner in a partnership firm was capped based on the book profit. The permissible remuneration limits were:
- On the first Rs. 3,00,000 of book profit (or in the case of a loss): Rs. 1,50,000 or 90% of the book profit, whichever is higher.
- On the remaining book profit: 60% of the book profit.
Now, these limits have been increased in the Finance (No. 2) Act, 2024.
2. Revised limits from April 1, 2025 (AY 2026-27 onwards)
From April 1, 2025, the remuneration limits have been doubled. The new structure is as follows:
- On the first Rs. 6,00,000 of book profit (or in the case of a loss): Rs. 3,00,000 or 90% of the book profit, whichever is higher.
- On the remaining book profit: 60% of the book profit.
This increase allows firms to compensate partners more generously. At the same time, they can keep these payments tax-deductible. However, firms must update their financial records to comply with the revised limits when calculating taxable income.
3. Introduction of Section 194T – TDS on payments to partners
Section 194T is a new provision under the Income Tax Act, 1961. It is applicable from April 1, 2025. This provision mandates the deduction of TDS on payments made to partners by partnership firms and LLPs.
Through this section, the Finance (No. 2) Act, 2024, brings uniformity in the tax treatment of payments to partners.
4. Applicability of Section 194T
Section 194T applies to all partnership firms and LLPs (irrespective of their turnover). The provision specifies that TDS must be deducted if the total payments to a partner exceed Rs. 20,000 in a financial year.
Once this threshold is crossed, a TDS of 10% will apply to the entire payment amount.
5. Payments covered under Section 194T
Under Section 194T, TDS applies to the following payments made to partners:
- Salary/ Remuneration
- Commission
- Bonus
- Interest on capital/ loan
Drawings or capital repayment are not subject to TDS under Section 194T.
6. Timing of TDS deduction
TDS under Section 194T must be deducted at the time of crediting the payment to the partner’s account or at the time of actual payment, whichever is earlier. This requirement ensures that the TDS deduction is not deferred or avoided.
7. What happens if firms fail to deduct TDS?
Failure to deduct TDS under Section 194T can lead to significant consequences, such as:
- Disallowance of 30% of the expenditure related to:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on Capital
- Interest penalty and late filing fees
8. Interest penalty
If TDS is not deducted or not paid after deduction, interest will be charged as follows:
- 1% per month for non-deduction of TDS
and - 1.5% per month for non-payment of deducted TDS.
9. No exemption or lower TDS rate certificates available
Under Section 194T, partners cannot claim exemption from TDS by submitting Form 15G or 15H. Additionally, there is no provision for applying for a lower TDS rate through Form 13 or Section 197.
10. How will Section 194T affect partners’ tax liability?
Since TDS will be deducted at source under Section 194T, the deducted amount will be credited against the partner’s final tax liability at the time of filing the Income Tax Return (ITR).
If the TDS amount exceeds the actual tax liability, the excess amount will be refunded after the ITR is processed.
11. Annual vs. monthly TDS deduction – How should firms deduct TDS?
The frequency of TDS deduction under Section 194T depends on the type of payment. Let’s see how:
- For monthly payments like salaries, TDS must be deducted each month when the payment is credited.
- For interest on capital, TDS must be deducted annually when the interest is calculated at the end of the financial year.
12. Steps firms need to take before April 1, 2025
To comply with the new provisions, partnership firms should undertake the following steps:
- Update remuneration agreements to align with the revised limits.
- Apply for a TAN (Tax Deduction and Collection Account Number) if not already obtained.
- Implement a system for TDS deduction and filing to remain compliant.
- Inform partners about the new TDS deduction requirement.
- Consult with a tax professional to address any uncertainties.
Key provisions for partnership firms
- Tax filing requirement: A partnership firm must file its Income Tax Return under ITR-5 on the Income Tax Department’s portal. The firm is required to maintain books of accounts and report its financial status regularly.
- No deductions for individual partners: Unlike individuals, partners cannot claim deductions such as those under Section 80C or 80D. However, they can reduce their taxable income by deducting business-related expenses.
- Business expense deductions: Partnership firms are allowed to deduct expenses directly related to business operations, including rent, salaries, interest on business loans, and other operational costs.
Tax planning for partnership firms
For a partnership firm, effective tax planning can significantly reduce the overall tax liability. By understanding the income tax slab for partnership firms, businesses can make informed decisions on:
- Claiming business-related expenses: Deductions like office rent, salaries, and utility bills can lower taxable income.
- Loan interests: Interest paid on business loans is also deductible, which helps reduce the taxable income of the firm.
Planning investments in ways that maximise tax savings is a key part of the firm’s long-term financial strategy.
Key deductions for partnership firms
While partnership firms are not eligible for personal deductions, they can claim certain business deductions that help reduce their tax liability. These include:
- Interest on loans: If the firm takes a loan for business purposes, interest paid on that loan is deductible under Section 37.
- Depreciation: The firm can claim depreciation on assets like buildings, machinery, and office equipment, reducing taxable income.
- Employee salaries and benefits: Salaries and benefits paid to employees are also deductible.
- Business expenses: All business-related expenses, such as rent and office supplies, are deductible.
These deductions help the firm lower its tax burden, enabling it to reinvest in its operations and growth.
Smart financial planning extends beyond business expenses to personal wealth building through property ownership. With Bajaj Finserv, you can secure funding up to Rs. 15 Crore* at attractive interest rates for your dream home. Check your loan eligibility and offers now. You may already be eligible, find out by entering your mobile number and OTP.
How to file income tax for partnership firms
Filing taxes for a partnership firm is simple but requires attention to detail. Here is how to do it:
- Obtain a PAN number: Ensure that the firm has a valid Permanent Account Number (PAN).
- Maintain books of accounts: Keep detailed financial records, including income, expenses, and balance sheets.
- File ITR-5 online: Log in to the Income Tax Department’s e-filing portal, select Form ITR-5, and provide the required details.
- Pay tax liability: Calculate the total tax payable and complete the payment process promptly.
- Verify the return: Use a Digital Signature Certificate (DSC) or Aadhaar OTP to verify the filed return.
Due date for partnership income tax return filing
The timeline for filing an income tax return for a partnership firm depends on whether the firm’s accounts are subject to audit. For firms that are not required to undergo an audit, the due date for submitting their return for AY 2025-26 is 15th September 2025 (for AY 2024-25 this applied as an exception).
In contrast, if the firm’s accounts are subject to mandatory tax audit under section 44AB, the filing deadline extends to 31st October 2025. Filing within these time limits is crucial, as delays can attract penalties, loss of certain exemptions, and interest on outstanding liabilities.
To stay compliant, partnership firms should plan their filings well in advance and ensure their financial records are finalised ahead of the deadlines. LLPs are also covered under the same timeline, provided they meet the respective audit requirements.
Tax planning tips for partnership firms
Effective tax planning is crucial to minimise liabilities and maximise profits. Here are some strategies:
- Maximise business expense deductions: Document and claim all eligible business-related expenses to reduce taxable income.
- Plan for depreciation: Invest in equipment or infrastructure to benefit from depreciation deductions over time.
- Review financial statements regularly: Analysing your firm’s finances helps in identifying potential tax-saving opportunities.
- Consider expert advice: Consult a tax professional for advanced planning and compliance guidance.
Understanding the income tax slab for partnership firms is essential for smooth financial management and legal compliance. By maintaining accurate records, utilising available deductions, and following proper filing procedures, partnership firms can effectively manage their tax obligations.
With thorough planning and attention to detail, partnership firms can optimise their financial strategies, reinvest in their operations, and focus on long-term growth.
Conclusion
If you are running or are a part of a partnership firm, you must be aware of the latest income tax regulations. The Finance (No. 2) Act, 2024 has introduced significant changes, such as:
- Increased limits for partner remuneration
- Mandatory TDS under Section 194T if payments to a partner exceed Rs. 20,000 in a financial year.
- Partners cannot submit Form 15G or 15H to claim TDS exemption under Section 194T.
- Interest penalty for TDS non-compliance of 1% per month for non-deduction and 1.5% per month for non-payment of TDS.
- Partnership firms must file ITR-5 and provide complete details related to income, expenses, and balance sheet data.
- Firms must obtain a TAN for TDS compliance.
All these changes are effective from April 1, 2025. Additionally, you must understand the applicable tax slabs, deductions, and filing procedures. This lets you minimise tax liability and avoid penalties.
Popular calculators for your financial calculations |
||
