Income Tax Compliances for a Partnership Firm in India: Tax Rate, Audit, Partner TDS and Due Dates (2026–27)

Tax year 2026–2027 (1 April 2026 to 31 March 2027)

A partnership firm must file its own income-tax return every year, whatever its turnover, profit or activity. Filing the partners' personal returns does not replace the firm's return.

This guide to income tax for a partnership firm covers a traditional firm under the Indian Partnership Act, 1932, not an LLP. It helps you decide four things: how much tax the firm pays, whether to use presumptive taxation, whether a tax audit is needed, and how to handle partner remuneration and TDS. GST and filing steps are covered separately.

Is income tax return filing compulsory for a partnership firm?

Yes, every year. This applies even if the firm has not started business, has no income or has made a loss. Registration with the Registrar of Firms is not required for filing.

What should the partnership deed include, and which tax registrations are needed?

Arrange these when setting up the firm so that its tax records and partner payments are supported from the beginning.

• Include clear payment terms in the partnership deed. State each partner's exact profit-sharing ratio, the interest rate on capital and additional capital, and the remuneration payable to each working partner. For remuneration, specify an amount or a clear method of calculating it. If remuneration or interest is not authorised by the deed for the relevant period, the Income Tax Department will disallow that payment as a deduction. The deduction must also stay within the limits explained in the partner-payments section.
• Apply for the firm's PAN immediately after signing the deed. The firm needs its own PAN for its income-tax return; a partner's personal PAN cannot replace it.
• Apply for TAN along with PAN. This prepares the firm to deduct TDS when required. Obtaining TAN alone does not require a TDS return every quarter. Quarterly statements become necessary when there are deductions or other transactions that must be reported under the TDS rules. Besides partner payments, rent, contractor charges and professional fees may also require TDS; those rules are covered separately.

Example: A firm formed in November 2026 makes no sales up to 31 March 2027. It must still file its income-tax return for financial year 2026–27.

Income tax rate for a partnership firm

The firm normally pays income tax at 30% of taxable income. A further 4% cess is calculated on the tax, making the combined rate 31.2% before surcharge. Taxable income is the income remaining after the deductions allowed by income-tax law; it is not the firm's turnover or bank balance.

What else affects the firm’s tax?

• Surcharge: If taxable income exceeds ₹1 crore, a 12% surcharge applies to the tax. Marginal relief limits the extra tax and surcharge when income is only slightly above ₹1 crore.
• No tax-free starting slab: A firm has no basic exemption limit or personal income-tax rebate.
• Income taxed at special rates: Some income, such as certain capital gains, is taxed at separate rates.
• Partners’ income: A partner's share of the firm's taxed profit is exempt in the partner's hands. Remuneration and interest are taxable income for the partner, with the treatment adjusted for amounts disallowed to the firm under the applicable rules.

Presumptive taxation for a partnership firm: is it right for you?

Presumptive taxation (known under the earlier law as Section 44AD and 44ADA) is a simpler way to work out profit. The firm declares a set percentage of receipts as profit. These percentages calculate taxable profit, not the tax itself. The firm then applies its income-tax rate to that profit.

Who can use presumptive taxation, and what are the conditions?

• Residence and business type: These schemes are available to resident traditional partnership firms, not LLPs. Commission, brokerage and agency businesses cannot use the ordinary business scheme. The professional scheme applies only to professions specified in the law; it does not cover every service business.
• Receipts eligible for the 6% rate: The amount must be received through an eligible bank or electronic mode during the year or by the income-tax return due date. The remaining turnover is taken at 8%.
• Partner payments: Under these business and professional schemes, remuneration and interest cannot be deducted again from presumptive profit. A separate goods-carriage scheme allows partner salary and interest within its limits.
• Leaving the business scheme: If the firm uses this scheme and reports profit outside its rules in any of the next five tax years, it cannot use the scheme for five tax years after the year of departure.

Example: A trading firm has ₹80 lakh turnover, all received electronically. Its minimum profit is ₹80,00,000 × 6% = ₹4,80,000. Paying ₹1,80,000 remuneration to partners does not reduce it to ₹3,00,000.

Should your firm use presumptive taxation or regular accounts?

Tax audit for a partnership firm: when is it required?

A tax audit means a chartered accountant examines the accounts and gives a report. It is separate from filing the return.

Does your firm need a tax audit?

How do the audit and presumptive limits differ?

The ₹10 crore limit is an audit relaxation for businesses with low cash transactions. It does not increase the ordinary business presumptive limit of ₹2 crore, or ₹3 crore where the cash-receipt condition is met.

For tax year 2026–27, an eligible firm declaring profit below the presumptive amount needs an audit when it has positive total income. Low cash transactions do not remove this requirement. A firm reporting a loss must still consider the turnover-based audit rules and any applicable rule for leaving the presumptive scheme. The audit report is due before the income-tax return; both dates appear in the calendar below. Example: A trading firm has ₹2 crore turnover, all received electronically, and 4% cash payments. It declares ₹8 lakh profit instead of the prescribed ₹12 lakh. It still needs a tax audit.

Partner remuneration, interest and TDS rules for a partnership firm

What the firm can deduct

Payments to partners reduce taxable profit only within these rules.

• Deed authorisation: The deed must authorise the payment for the period concerned. A later amendment cannot authorise a deduction for an earlier period.
• Remuneration: Salary, commission, bonus or other remuneration is deductible only for working partners—partners actively involved in running the business.
• Interest: Interest paid to a working or non-working partner is deductible up to 12% simple interest a year, where the deed authorises it. Interest above that rate is not deductible.

Example: At ₹8 lakh book profit, the maximum remuneration deduction is ₹5.4 lakh + ₹1.2 lakh = ₹6.6 lakh, if the deed authorises the remuneration and the amount paid or payable supports the deduction.

Tax-planning point: Deductible remuneration reduces the firm’s taxable profit but becomes taxable income for the working partner. Compare the combined tax payable by the firm and its partners before deciding the remuneration. A lower personal tax rate can make this useful, but the deed and deduction limits still apply.

TDS on partner payments

For payments to resident partners, the firm must normally deduct 10% TDS on the covered partner payments (known under the earlier law as Section 194T). It covers salary, remuneration, commission, bonus and interest paid to a partner when the total for that partner exceeds ₹20,000 in the year.

• When to deduct: Deduct at payment or credit, whichever happens first. Crediting remuneration or interest to the partner's capital account also triggers the rule.
• How the threshold works: Add all covered payments for each partner. Once the annual total exceeds ₹20,000, TDS applies to the whole covered amount, not just the excess.
• What is excluded: Genuine profit-share distributions and withdrawals of existing capital are outside this rule. Describing remuneration or interest as a capital withdrawal does not remove TDS.
• Presumptive firms: Using presumptive taxation does not remove the duty to deduct TDS on covered partner payments.

Example: The firm credits ₹60,000 remuneration to a partner in September 2026. TDS is ₹6,000, and ₹54,000 is payable to the partner.

Advance tax for a partnership firm

Advance tax is income tax paid during the year, not at return time. It applies when the estimated tax for the year, after credits such as TDS, is ₹10,000 or more.

Advance-tax instalments are based on cumulative targets of 15%, 45%, 75% and 100%. For example, assume the firm's estimated income tax for 2026–27 is ₹3,12,000 and customers are expected to deduct ₹12,000 TDS from its income. The balance of ₹3,00,000 is payable as advance tax. If the estimate stays unchanged, the instalments are:

Revise the estimate if the firm's income or expected TDS changes. Firms using the business or professional presumptive scheme pay their full advance tax by 15 March 2027, instead of following the four-instalment schedule.

How are advance tax and customer TDS adjusted against the final tax?

TDS deducted by customers is tax already paid on the firm's behalf. Advance tax is paid directly by the firm during the year. Before filing its income-tax return, the firm pays the balance tax after deducting both these amounts from its final tax liability. Interest and other applicable charges are added separately.

Example: The firm's final income tax is ₹3,40,000, eligible customer TDS is ₹12,000 and advance tax paid is ₹3,00,000. The balance income tax is ₹3,40,000 − ₹12,000 − ₹3,00,000 = ₹28,000, before any applicable interest or other charges.

Income tax due dates for a partnership firm: tax year 2026–27

The calendar below shows the normal deadlines for TDS deposits, quarterly TDS statements, the tax-audit report and the firm's income-tax return. A notified extension replaces the normal deadline for the cases it covers. Depositing deducted tax and filing the quarterly statement are separate obligations; completing one does not replace the other.

Transfer pricing applies to specified dealings with related parties. An overseas customer alone does not trigger it.

Practical income tax points for partnership firms

• File on time when the firm makes a loss. A late return can attract a late fee and interest. Business and capital losses generally require an on-time return to carry them forward; unabsorbed depreciation and house-property losses follow different rules.
• Review partner payments before claiming deductions. Remuneration to a non-working partner is not deductible. Under the ordinary business and professional presumptive schemes, partner remuneration and interest cannot be deducted separately.
• Keep the deed effective for the payment period. Agree and document remuneration and interest terms before the period they cover. Backdating a deed is not an acceptable way to support an earlier deduction.
• Track TDS even when no money is withdrawn. Crediting covered remuneration or interest to a partner's account can require TDS. Paying the TDS and filing its quarterly statement are separate duties.
• Continue filing during inactivity and deal with closure properly. No business activity does not remove the firm's annual return requirement. On dissolution, pending returns, outstanding tax and any tax on assets distributed to partners still need attention. GST cancellation does not end income-tax obligations.

Frequently asked questions