ITR-5 Filing for Partnership Firms: Partner Remuneration, Interest Deduction, and Tax Rates

A partnership firm is taxed as a distinct entity from its partners — a structural point that surprises founders coming from a sole proprietorship background, where the individual and the business are the same taxpayer.

Partnership Firm Tax Rate — Flat 30%, No Slabs

Unlike individuals, a partnership firm (registered or unregistered, as long as it has a valid partnership deed) is taxed at a flat 30% on its total income, plus applicable surcharge (12% if total income exceeds ₹1 crore) and cess — there's no slab structure and no basic exemption limit the way there is for individual taxpayers. This flat rate applies regardless of how small the firm's profit is.

Partner Remuneration and Interest — Deductible Only Within Section 40(b) Limits

A partnership firm can deduct remuneration (salary/commission) paid to working partners and interest paid to partners on their capital, but both are capped under Section 40(b) — amounts paid beyond these limits are disallowed as a deduction for the firm (added back to its taxable income), even though the partner receiving it still includes it in their personal income.

Interest on Partners' Capital

Deductible up to 12% per annum — interest paid at a higher rate is disallowed for the excess portion, though the deed can specify any rate; only the 12% ceiling is what the firm can actually deduct.

Remuneration to Working Partners

Book profit	Maximum deductible remuneration
On first ₹3 lakh of book profit (or in case of a loss)	₹1,50,000, or 90% of book profit, whichever is higher
On the balance of book profit	60% of the balance

Remuneration is only deductible for working partners (those actively engaged in the business, as specified in the partnership deed) — a purely investing/sleeping partner cannot be paid deductible remuneration, only interest on capital within the 12% limit. The partnership deed must specifically authorise remuneration and interest payment (with the manner of computation, not just a blanket permission) for the deduction to be allowed at all — a deed silent on this, or one that only broadly says "partners may be remunerated," commonly fails this requirement on scrutiny.

Worked Example

Book profit (before remuneration)	₹10,00,000
Deduction on first ₹3,00,000 (90% or ₹1,50,000, higher)	₹2,70,000 (90% of ₹3,00,000)
Deduction on remaining ₹7,00,000 (60%)	₹4,20,000
Maximum deductible remuneration	₹6,90,000

If the firm actually pays working partners more than ₹6,90,000 in total against this book profit figure, the excess is disallowed for the firm — increasing the firm's taxable income — even as the partners have already received and will personally be taxed on the full amount paid to them.

How Partners Are Taxed on What They Receive

A partner's share of the firm's profit (after tax) is exempt in the partner's individual hands under Section 10(2A) — since the firm has already paid tax on it. However, remuneration and interest received from the firm (within the Section 40(b) limits that were deductible for the firm) are taxable in the partner's individual return as business income, at the partner's own applicable slab rate.

ITR Form and Filing

Partnership firms file ITR-5, regardless of turnover. Tax audit under Section 44AB is required if turnover exceeds ₹1 crore (₹10 crore if cash transactions are below 5% of total) for a business, or ₹75 lakh (₹1 crore with the same digital-receipts condition) for a professional partnership firm — firms below these thresholds can still opt for Section 44AD presumptive taxation if eligible, similar to a proprietorship, though remuneration/interest to partners is treated differently even under presumptive filing and needs separate attention.

Practical Checklist

• Ensure the partnership deed specifically authorises remuneration and interest with the computation method, not just a general permission
• Compute maximum deductible remuneration under Section 40(b) before finalising what's actually paid to working partners
• Cap interest on partner capital at 12% for deduction purposes, even if the deed permits a higher rate
• File ITR-5 and arrange a tax audit if turnover crosses the applicable threshold

Getting the partnership deed's remuneration clause and the Section 40(b) computation right avoids a disallowance that effectively taxes the same money twice — once for the firm (disallowed excess) and once for the partner (who still received and is taxed on it). Our ITR filing service handles partnership firm returns including this computation.