Unlike individuals, a partnership firm (or LLP) doesn't get the benefit of tax slabs or basic exemption limits - profits are taxed at a flat 30% from the very first rupee. But the firm can reduce its taxable profit by paying remuneration and interest to working partners, within limits prescribed under Section 40(b). Get these limits wrong, and the excess gets added back and taxed again.
A partnership firm (registered or unregistered, governed by the Indian Partnership Act, 1932) and a Limited Liability Partnership (LLP, governed by the LLP Act, 2008) are both taxed as separate entities under the Income Tax Act, distinct from their partners. The key features of firm/LLP taxation are:
While the firm itself is taxed at 30% flat, payments made by the firm to its working partners - in the form of salary, bonus, commission, or remuneration, and interest on capital - are deductible from the firm's taxable profit, subject to limits under Section 40(b). These amounts are then taxed in the hands of the individual partners as their personal income (under "Profits and Gains of Business or Profession" for remuneration, and "Income from Other Sources" or business income for interest, depending on the partner's status).
Remuneration paid to working partners only (not to non-working/sleeping partners) is deductible by the firm only if it is (a) authorized by the partnership deed, and (b) within the following limits computed on "book profit":
| Book Profit Slab | Maximum Deductible Remuneration |
|---|---|
| On the first ₹3,00,000 of book profit (or in case of a loss) | ₹1,50,000 or 90% of book profit, whichever is more |
| On the balance of book profit (above ₹3,00,000) | 60% of the balance book profit |
"Book profit" here means the net profit as per the firm's profit & loss account, adjusted as per the computation prescribed under Section 40(b) (broadly, net profit before deducting partner remuneration itself, with certain other adjustments).
Interest paid by the firm to partners on their capital contributions is deductible only if:
Any interest paid in excess of 12% per annum is disallowed in the firm's hands (added back to taxable profit) - even if the partnership deed permits a higher rate.
After deducting allowable remuneration and interest, the firm's remaining profit is taxed at 30% in the firm's hands. The partners' share of this post-tax profit (i.e., their share in the firm's profits as per the partnership deed, after the firm has already paid tax on it) is exempt in the hands of the partners under Section 10(2A), since it has already suffered tax at the firm level. This avoids double taxation of the same profit.
| Item | Taxed In Whose Hands? |
|---|---|
| Remuneration/salary/commission to working partners (within Section 40(b) limits) | Partner's individual income (business income), at slab rates |
| Interest on capital to partners (up to 12% p.a.) | Partner's individual income, at slab rates |
| Firm's remaining profit after the above deductions | Firm, at flat 30% + surcharge + cess |
| Partner's share of post-tax profit (per profit-sharing ratio) | Exempt in partner's hands under Section 10(2A) - already taxed at firm level |
For income tax purposes, LLPs are taxed almost identically to partnership firms - flat 30% rate, same Section 40(b) limits on partner remuneration and interest, and the same exemption for partners' share of profit under Section 10(2A). The main differences between LLPs and traditional firms relate to limited liability protection and compliance requirements under the LLP Act/Companies Act framework, not the core income tax computation.