How a Partnership Firm Is Taxed
The firm is taxed as its own entity, and what partners take out is treated differently depending on what it is called.
Two levels, and the label matters
A partnership firm files its own return and pays tax on its income at the rate applicable to firms. What partners receive is then treated according to what it is — and the three categories are taxed quite differently.
- Share of profit is generally exempt in the partner's hands, because the firm has already paid tax on it
- Remuneration to working partners is deductible for the firm within prescribed limits, and taxable for the partner
- Interest on capital is deductible within a prescribed rate, and taxable for the partner
This is why the deed matters for tax and not only for disputes. Remuneration and interest are only deductible if the deed authorises them, and the limits are on the deed as much as on the amounts.
What goes wrong
- The deed does not provide for remuneration, so the firm cannot deduct it. This is common and entirely avoidable.
- Remuneration paid above the prescribed limit, so the excess is disallowed.
- Interest paid above the prescribed rate, same result.
- Paid to a non-working partner, where remuneration is not allowable.
- Return not filed, which risks the deductions themselves.
Written 5 September 2026. Government requirements and portal behaviour change — message us to confirm before you rely on any date or figure here.
Common questions
Send us your case
Tell us the firm's turnover and whether the deed provides for remuneration and interest.
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