Partnership Firm Taxation: 30% Flat Rate, Section 40(b) & Partner Salary

साझेदारी फर्म (पार्टनरशिप) कर नियम

Comprehensive guide to Partnership Firm taxation in India under the Income Tax Act: flat 30% tax rate, claiming deduction for working partner remuneration under Section 40(b), interest on partner capital, and filing Form ITR-5.

Written by: Author Profile

Direct Tax & CA Review Panel

Chartered Accountancy Review Panel • Senior Direct Tax Review Desk

Reviewed & Fact-Checked by: Technical Review Panel

Tax Law & Dispute Review Desk

Tax Litigation & Legal Review Panel • Tax Appeal & Procedure Review Desk

Published: 1st April 2026•Last Updated: 15th August 2026•Last Reviewed: 15th August 2026

Key Statutory Highlights (FY 2026-27 (AY 2027-28))

Taxed at a flat base rate of 30% plus 12% surcharge (if total income > ₹1 Crore) and 4% Health & Education Cess (effective 31.2%).

Section 40(b) limits working partner remuneration: Up to ₹3 Lakh book profit or loss @ ₹1,50,000 or 90% of book profit; balance book profit @ 60%.

Interest on partner capital is deductible up to a maximum statutory rate of 12% per annum if specified in the Partnership Deed.

Share of profit received by a partner from the firm is 100% tax-exempt in the hands of the partner under Section 10(2A).

Who is Eligible & When Does it Apply?

Applicability #1

Registered and unregistered partnership firms formed under the Indian Partnership Act, 1932.

Step-by-Step Procedure & Compliance Roadmap

Compute Book Profit Before Partner Remuneration

Calculate net commercial profit before deducting partner salary and interest on capital.

Apply Section 40(b) Ceiling

Deduct partner remuneration up to the permissible statutory formula.

Compute Net Taxable Income @ Flat 30%

Apply 30% income tax plus 4% cess on remaining taxable profit.

File ITR-5 by 31st July / 31st October

Submit ITR-5 with digital signature on the income tax portal.

Mandatory Documents Checklist

Partnership Deed, PAN of the Firm, Audited Balance Sheet, Bank Statements, Form 26AS/AIS

Common Mistakes & Compliance Risks to Avoid

•Paying partner salary without explicit clause in the Partnership Deed (disallowed u/s 40(b)).

Frequently Asked Questions

Is partner salary taxable in the partner's personal ITR?

Yes, partner remuneration and interest on capital allowed as deduction to the firm are taxed as business income (PGBP) in the individual partner's ITR.

Interactive Tax Calculators

Business Tax Calculator

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🛡️ Educational Disclaimer: FinSetu India is an independent educational guidance and calculation platform. Content is published for general citizen awareness based on applicable laws as of FY 2026-27 (AY 2027-28). We do not provide personalized legal/tax advice or file returns directly. Verify current applicable rules on official portals or consult a qualified Chartered Accountant / Tax Lawyer.