Income Tax Slab for Partnership Firm – Tax Rates, AMT, and Filing Guide FY 2025-26

Partnership firm taxation follows different rules from individual taxation — no slab system, no basic exemption, and partners' drawings are treated very specifically. Understanding the firm's tax structure is essential for any partner planning their personal and business finances together.

This page covers:

• Income tax rate for partnership firms
• How partnership firm income is calculated
• Deductions available to partnership firms — partner salary, interest
• AMT (Alternative Minimum Tax) — how it applies to firms
• ITR form for partnership firms — ITR-5
• Due dates for filing — with and without audit
• How partners are taxed on their share of profit
• How firm income connects to partners' home loan eligibility

A partnership firm is treated as a separate taxable entity under the Income Tax Act, 1961 — distinct from its partners. Unlike an individual (who pays tax on a progressive slab system with a basic exemption), a partnership firm pays tax at a flat rate on its entire net profit without any exemption threshold.

This flat-rate approach means that even a firm earning Rs. 1 lakh pays tax at 30%, unlike an individual for whom Rs. 1 lakh would be below the basic exemption limit.

Worked example:

• Partnership firm net income: Rs. 40 lakh
• Income tax at 30%: Rs. 12 lakh
• Surcharge: Nil (income below Rs. 1 crore)
• Cess at 4%: Rs. 48,000
• Total tax: Rs. 12,48,000

The firm's taxable income is calculated as:
Firm's Gross Income
(minus) Allowable deductions — business expenses, depreciation, etc.
(minus) Partner salary (deductible under Section 40(b))
(minus) Partner interest on capital (deductible under Section 40(b))
= Net taxable income of the firm

Partner salary (Section 40(b)): The firm can deduct salary paid to working partners, subject to limits:

Partner salary paid within these limits is deductible from firm income and taxable in the partner's hands as salary.

Interest on partner's capital (Section 40(b)): Interest paid to partners on their capital contribution is deductible, subject to a maximum rate of 12% per annum. Interest above 12% is not deductible.

Business expenses: All legitimate business expenses — rent, utilities, employee salaries, professional fees, marketing — are deductible as in any business entity.

Depreciation: Depreciation on firm assets at prescribed rates under Section 32.

AMT applies under Section 115JC when a firm has significantly reduced its tax liability through deductions and the regular tax (30%) falls below 18.5% of its adjusted total income.

If the tax calculated normally (30% of net income after all deductions) is less than 18.5% of adjusted total income, the firm must pay AMT at 18.5% (plus surcharge and cess). An AMT credit is available in future years when the firm's regular tax liability exceeds AMT.

This is a crucial distinction:

• Partners' share of profit from the firm is exempt from income tax in the partner's hands under Section 10(2A) — to avoid double taxation (since the firm has already paid tax at 30%)
• Partner salary received from the firm is taxable as salary income in the partner's hands at their applicable individual slab rate
• Partner interest on capital is taxable as income from other sources in the partner's hands

This means partners typically structure firm payments to balance between salary (which is taxed as personal income) and profit share (which is exempt) to optimise total tax.

Form: Partnership firms use ITR-5 for their annual income tax return.

Due dates for FY 2025-26:

Partnership firms with turnover above Rs. 1 crore (or Rs. 50 lakh for professionals) must have their accounts audited under Section 44AB. Partners who are also employees receiving salary from the firm must file their individual ITR (ITR-3) as well.

For home loan applications, partners in a firm are assessed as self-employed individuals. Key documentation:

• ITR-3 (individual) showing partner's salary and profit share components
• Firm's ITR-5 for the past 2-3 years confirming the firm's financial health
• Partnership deed — confirming profit-sharing ratio, partner salary terms
• Balance sheet and P&L — CA-certified

Lenders assess the partner's total documented income — salary from firm + share of profit (though typically only the salary component is counted since exempt profit share has no formal income certificate) + any other income. Consistent ITR filing across 3+ years, with stable or growing firm income, strengthens a partner's home loan application. Bajaj Finance offers home loans from 7.25% p.a.* with amounts up to Rs. 15 Crore* and tenures up to 32 years. Check your eligibility today.

Partnership firm taxation at 30% flat rate is straightforward in structure but requires careful planning around partner salary, interest, and profit distribution to optimise the overall tax position for both the firm and its partners.