ITR Filing for Partners Drawing Salary or Interest from the Firm
- Nimisha Panda
- 3 days ago
- 8 min read
Partners receiving salary, remuneration, or interest from a firm must follow specific tax rules under the Income Tax Act, 1961. From April 2025, new TDS provisions and revised limits have reshaped how such income is taxed and reported. Whether a partner is earning active remuneration or interest on capital, the income is taxable under “Profits and Gains from Business or Profession.” Choosing the right ITR form, claiming deductions, and reporting exempt profit shares correctly are essential for compliance.
Table of Contents
Understanding ITR Filing for Partners Drawing Salary or Interest
Partners in a partnership firm are treated differently under the Income Tax Act when it comes to income from the firm. The salary, remuneration, and interest received by a partner from the firm are taxable in their individual hands, even though the firm has already claimed these amounts as expenses in its income computation. However, this income is not considered “salary” in the traditional sense—it is treated as business income under the head “Profits and Gains from Business or Profession.” Each partner must file their ITR accordingly, disclosing income received from the firm and claiming applicable deductions or adjustments as per law.
Tax Treatment of Partner’s Salary and Remuneration
A partner’s salary or remuneration received from a partnership firm is taxable under Section 28(v) of the Income Tax Act. This income is included under “Business or Profession” income and not as “Salaries.” The firm can deduct such payments as business expenses if they are authorised by the partnership deed and comply with Section 40(b). For the partner, the entire amount of remuneration is taxable, and they can claim expenses like interest on borrowed capital used for partnership contributions or related professional expenses. The firm and partner are taxed separately, ensuring no double taxation on the same income.
Tax Treatment of Interest on Partner’s Capital or Loans
Partners often receive interest on their capital or loans given to the firm. This interest is taxable in the partner’s hands under “Business or Profession” income. However, the rate of interest must not exceed 12% per annum as per Section 40(b)(iv); otherwise, the excess amount will be disallowed in the firm’s books and may still be taxable in the partner’s hands. The firm can claim the allowable portion as an expense. The partner must include the full interest received in their ITR and pay tax at applicable slab rates.
Is TDS Applicable on Partner’s Salary or Interest Under the New Rules?
No, the partnership firm is not required to deduct TDS on payments made to its partners in the form of salary, remuneration, or interest. This is because these amounts are not considered “salary” under Section 192 or “interest” under Section 194A for TDS purposes. However, the partner must declare this income in their ITR and pay self-assessment tax if any balance tax liability remains after advance tax payments. This exemption from TDS simplifies accounting and compliance between the firm and its partners.
Which ITR Form Should Partners Use for Filing?
Partners receiving salary, remuneration, or interest from a partnership firm must file their returns using ITR-3. This form applies to individuals or HUFs earning income from a proprietary business or partnership firm. Partners should report their share of profit (which is exempt under Section 10(2A)), along with taxable salary and interest received from the firm. If a partner only receives exempt profit and has no other taxable income, they are not required to file ITR unless they meet other filing conditions, such as high-value transactions.
Recent Regulatory Updates from Budget 2025
Budget 2025 has streamlined certain compliance requirements for partnership firms and partners. Partners can now avail faster credit for taxes paid by the firm and claim proportionate deductions automatically reflected in Form 26AS and AIS. Additionally, clarity has been provided regarding the reporting of interest and remuneration separately in ITR forms. The government has also emphasised digital record maintenance and verification for partnership income reporting, ensuring transparency and consistency between firm and partner returns.
Practical Example: ITR Calculation for Partner Receiving Salary and Interest
A partner receiving both salary and interest from a partnership firm must report this income carefully while filing their Income Tax Return. Let’s understand this with a detailed example.
Suppose a partner earns ₹5,00,000 as remuneration and ₹2,00,000 as interest on capital from the firm during the financial year 2024-25. The partnership firm has already treated these payments as deductible expenses while calculating its taxable profit, which means they are no longer taxable in the firm’s hands. Instead, this income becomes taxable in the hands of the partner.
When filing the ITR, both remuneration and interest received from the firm are reported under the head “Profits and Gains from Business or Profession.” This is because the income arises from a partnership-related business activity, not from employment. The total income from these two sources amounts to ₹7,00,000 (₹5,00,000 remuneration + ₹2,00,000 interest).
If the partner has incurred any business-related expenses, such as office rent, travel, or professional tools amounting to ₹50,000, these expenses can be deducted from the total income. After accounting for these deductions, the taxable income will be ₹6,50,000 (₹7,00,000 - ₹50,000).
Additionally, if the partner also receives a share of profit from the firm, that amount remains exempt under Section 10(2A) of the Income Tax Act. This exemption exists because the firm has already paid tax on its total profits at the entity level, ensuring there is no double taxation.
Finally, the partner’s taxable income of ₹6,50,000 will be subject to tax as per the applicable income tax slab rates for FY 2024-25. The partner can also claim the standard deduction, Section 87A rebate (if applicable), and other eligible deductions under the old tax regime. Once all applicable deductions and rebates are adjusted, the final tax liability can be computed, and the partner can pay any balance tax due or claim a refund if excess tax has been deducted.
This example highlights how partnership-related income is treated differently from employment or business income and how proper classification ensures accurate tax filing and compliance.
How TaxBuddy Simplifies ITR Filing for Partners
Filing ITR for partners can be complex due to multiple income sources and business head classification. TaxBuddy simplifies this process with AI-based categorisation that automatically distinguishes between remuneration, interest, and exempt profits. It pre-fills relevant data from Form 26AS and firm statements, ensuring accurate reporting under the correct ITR form. Expert-assisted plans help partners validate deductions, compute tax liabilities, and file securely—making the entire process smooth, error-free, and compliant with the Income Tax Act.
Common Mistakes Partners Should Avoid During ITR Filing
Partners often make errors such as using the wrong ITR form (ITR-2 instead of ITR-3), misclassifying salary as employment income, or failing to include exempt profit shares. Some also overlook advance tax payments, leading to interest under Sections 234B and 234C. Others neglect to claim expenses linked to their professional contributions to the firm. Avoiding these mistakes ensures compliance and prevents scrutiny notices. Filing through professional platforms like TaxBuddy helps detect and correct such errors automatically.
Conclusion
Understanding taxation for partnership income is vital for accurate and compliant filing. Partner remuneration, salary, and interest are taxed as business income, while profit shares remain exempt. With evolving tax rules and e-filing systems, staying updated is essential. Platforms like TaxBuddy make the process easier by offering self-filing and expert-assisted plans that help partners claim eligible deductions, ensure error-free filing, and receive timely acknowledgements.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. How is a partner’s salary taxed under the Income Tax Act? A partner’s salary or remuneration received from a partnership firm is taxable under the head “Profits and Gains from Business or Profession,” as per Section 28(v) of the Income Tax Act. It is not considered salary income because a partner is not treated as an employee of the firm. The firm deducts the remuneration as an allowable expense (within prescribed limits), while the partner declares it as business income in their ITR.
Q2. Is interest on a partner’s capital taxable? Yes, interest paid by a firm on a partner’s capital contribution or loan is taxable in the hands of the partner as business income. However, the interest rate must not exceed 12% per annum, as specified in Section 40(b)(iv). Any excess interest paid beyond this limit is disallowed as an expense for the firm but may still be taxed as income for the partner.
Q3. Can the firm deduct TDS on a partner’s salary? No, TDS is not applicable on a partner’s salary, remuneration, or interest on capital. These payments are internal transfers within the firm and are already accounted for in the firm’s profit distribution. Therefore, the firm does not deduct tax at source, and the partner must include these amounts directly in their income tax return.
Q4. What form should partners use to file ITR? Partners earning income from a partnership firm should file ITR-3. This form is specifically designed for individuals and Hindu Undivided Families (HUFs) who have income from business or profession, including partnership income such as remuneration, interest, and profit share.
Q5. Is a partner’s share of profit from the firm taxable? No, a partner’s share of profit from the firm is fully exempt under Section 10(2A) of the Income Tax Act. The firm already pays tax on its total income, so the same income is not taxed again in the partner’s hands. However, this exempt income should still be reported in the partner’s ITR for disclosure purposes.
Q6. Can a partner claim deductions for expenses incurred to earn partnership income? Yes, partners can claim deductions for expenses that are directly related to earning their share of partnership income. This includes expenses such as interest paid on personal loans used to invest in the firm, professional fees, or administrative costs. Proper documentation is necessary to substantiate these claims during tax assessment.
Q7. Are partners required to pay advance tax? Yes, if a partner’s total tax liability exceeds ₹10,000 in a financial year, they must pay advance tax in four installments as per Section 208 of the Income Tax Act. Failure to pay advance tax on time may attract interest under Sections 234B and 234C. Partners should estimate their annual income, including remuneration, interest, and profit share, to determine their advance tax obligation.
Q8. What happens if a firm pays excess remuneration to a partner? If a firm pays remuneration exceeding the limits prescribed under Section 40(b), the excess amount becomes non-deductible for the firm. However, it may still be taxable in the hands of the partner as business income. This creates a mismatch where the firm cannot claim the deduction, but the partner must still pay tax on the entire amount received.
Q9. How are capital contributions treated for tax purposes? A partner’s capital contribution to the firm is not taxable, as it represents an investment and not income. Only the returns generated from that capital—such as interest or remuneration—are taxable. When the firm repays the capital contribution, it is not treated as taxable income in the partner’s hands.
Q10. What are the penalties for incorrect ITR filing by partners? Incorrect or delayed ITR filing can lead to penalties under Sections 234F and 271F of the Income Tax Act. Filing errors like misreporting income heads or using the wrong ITR form can trigger notices or scrutiny from the Income Tax Department. Ensuring accurate categorization of partnership income and using professional filing assistance helps avoid these issues.
Q11. How does TaxBuddy help partners during ITR filing? TaxBuddy simplifies the ITR filing process for partners by automatically identifying income from partnership firms, computing deductions under Section 40(b), and categorizing income correctly under business or profession. Its experts review all entries for accuracy and compliance, ensuring a seamless and error-free filing experience with maximum tax efficiency.
Q12. Are these tax rules applicable to LLP partners as well? Yes, the taxation principles for partners in a Limited Liability Partnership (LLP) are similar to those in a traditional partnership firm. Remuneration, interest on capital, and profit shares are taxed in the same way—remuneration and interest are taxable as business income, while profit shares remain exempt under Section 10(2A). LLPs, however, are taxed as separate legal entities and must file their own ITR under Form ITR-5.
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