Direct Tax Laws & International Taxation · Assessment of Various Entities

Assessment of Firms and LLPs under the Income-tax Act, 2025

Updated 5 October 2026 · Fact-checked

A firm or LLP is taxed as a separate person at a flat 30% plus surcharge and cess. To solve a question, compute business income, derive book profit, allow only authorised interest (up to 12% simple) and remuneration (to working partners, within the book-profit slabs), and treat the partners' share of profit as exempt in their hands.

Understand Assessment of Firms and LLPs

A partnership firm and an LLP are both taxed as a separate person from their partners. The firm pays tax on its total income. The partner then receives three things from the firm: a share of profit, interest on capital or loans, and remuneration.

The share of profit is already taxed in the firm, so it is exempt in the partner's hands. Interest and remuneration are different. The firm may deduct them, but only within limits. The partner then pays tax on the amount the firm was allowed to deduct, as business income.

The limits exist to stop a firm from stripping its profit out as salary and interest. Three conditions apply to both items: the payment must be authorised by the partnership deed, it must relate to a period after the deed's date, and it must not exceed the amount the deed provides. Remuneration is also allowed only to a working partner, one who is actively engaged in conducting the firm's business. Interest can go to any partner, but only as simple interest at up to 12% a year.

For the remuneration cap you need book profit. This is the business profit computed under the business income rules, before deducting partner remuneration. It is not the profit shown in the books. Depreciation, for example, must be at the tax rates.

For tax purposes an LLP is treated like a firm, so the same computation applies. The differences you may be asked about are legal: an LLP is a body corporate with its own LLP Act, and the partners' liability is limited. For the tax computation, think of the two as one category.

Key rules to remember

Tax rate on firm or LLP: Tax = 30% of total income + surcharge (12% if total income exceeds ₹1 crore) + 4% health and education cess; Flat rate, with no slab or basic exemption limit. Marginal relief applies on surcharge near the ₹1 crore limit.
Book profit: Book profit = Net profit as per P&L (adjusted to business income rules) + partner remuneration debited; Make all the business-income adjustments first, such as tax depreciation and disallowances. Then add back the full remuneration debited, whether or not it was authorised. Income not taxable as business income, such as capital gains, is not part of book profit.
Maximum remuneration: book profit positive: Book profit up to ₹6,00,000: cap = higher of ₹3,00,000 or 90% of book profit. Book profit above ₹6,00,000: cap = ₹5,40,000 + 60% of the excess over ₹6,00,000; The 90% applies only to book profit up to ₹6,00,000, so the first-slab cap never exceeds ₹5,40,000. Above ₹6,00,000, add 60% of the excess to ₹5,40,000. Allowed remuneration is the lower of this cap and the amount authorised by the deed and actually debited.
Maximum remuneration: book profit is a loss: Cap = ₹3,00,000 or 90% of book profit, whichever is higher; The cap is ₹3,00,000 when book profit is negative or below ₹3,33,333, and 90% of book profit when that is higher.
Interest to partners: Allowed interest = simple interest at up to 12% a year, as authorised by the deed, for the period after the deed; Any rate above 12% is disallowed. Compound interest is not covered by the allowance.
Business income of the firm: Business income = Book profit − allowed remuneration; This holds when interest has already been dealt with in arriving at book profit. Add other heads of income separately to get total income.
Partner's taxation: Partner's business income = allowed remuneration + allowed interest − expenses attributable to earning them; share of profit = exempt; Expenses are deductible only up to the amount of interest and remuneration received.

How to solve Assessment of Firms and LLPs questions

Use this order for any firm or LLP question. It keeps the numbers clean and shows the examiner each limit being applied.

1Read the partnership deed facts: who is a working partner, what remuneration and interest rate are authorised, and from which date the clause applies.
2Start with the net profit per P&L. Make the usual adjustments: add back disallowed expenses and book depreciation, and deduct tax depreciation and any items taxed under other heads.
3Handle interest to partners. Allow simple interest up to 12% (and not more than the deed rate). Add back the excess to the net profit.
4Add back the full partner remuneration that was debited. This gives book profit.
5Work out the remuneration cap on book profit. For book profit up to ₹6,00,000, the cap is the higher of ₹3,00,000 or 90% of book profit. For book profit above ₹6,00,000, the cap is ₹5,40,000 plus 60% of the excess. Compare it with the remuneration authorised by the deed, and with the amount paid to working partners only. Allow the lowest.
6Compute business income as book profit less allowed remuneration. Add income under other heads to get gross total income. Deduct any admissible deductions and loss set-off to reach total income.
7Apply the 30% rate with surcharge and cess. Then show the partners' position: interest and remuneration as business income, and share of profit as exempt.

Quickest way: Four-line book profit table

When to use it: Use this when a question gives a long P&L and you must find the allowed remuneration quickly.

Write four lines: Net profit; add remuneration and excess interest; add or deduct depreciation and other adjustments; Book profit.
Compute the cap in one line: ₹6,00,000 slab first, then 60% of the balance. Put the lower of cap, deed limit and amount debited next to it.
Business income is book profit minus that allowed remuneration. Check it by recomputing from net profit adding back only the disallowed items.
Apply 30% plus cess and move on. Use the check as a mental test: if the two answers differ, look for a missed add-back.

Common mistakes in Assessment of Firms and LLPs

Applying 60% to the whole book profit, or the 90% rule to the whole amount.
Students remember the percentages but forget the slab structure.
Fix: Use the ₹6,00,000 first slab. Take ₹3,00,000 or 90% of book profit, whichever is higher. Apply 60% only to the excess over ₹6,00,000.
Taking book profit as the P&L net profit without adjustments.
The word 'book' suggests the accounts figure is enough.
Fix: Adjust the P&L to the business income rules first: tax depreciation instead of book depreciation, and the disallowances. Then add back the full remuneration debited.
Allowing remuneration to a non-working partner.
The question names all partners and students assume all are eligible.
Fix: Only working partners get remuneration. A non-working partner's remuneration is wholly disallowed. A non-working partner can still get interest.
Ignoring the date of the deed or the authorisation.
Students focus on the numbers and skip the conditions.
Fix: Remuneration and interest must be authorised by the deed and relate to a period after the deed. Anything for an earlier period, or beyond the deed's amount or rate, is disallowed.
Taxing the partner's share of profit again.
Students treat it like any other income received from the firm.
Fix: The share of profit is exempt in the partner's hands. Only the allowed interest and remuneration are taxed, as business income.
Using slab rates or a basic exemption for the firm.
Students mix up the firm with individual assessees.
Fix: A firm or LLP pays a flat 30% on total income, plus surcharge if applicable and 4% cess, with no basic exemption.

Worked examples

Example 1

Sharma & Co., a partnership firm with two working partners, has a net profit of ₹2,00,000 for the tax year after debiting: partners' remuneration ₹14,00,000 (the deed authorises ₹14,00,000), interest on partners' capital ₹2,40,000 at 15% on capital of ₹16,00,000 (deed authorises 15%), and book depreciation ₹1,10,000. Depreciation as per tax rules is ₹1,60,000. The firm has no other income. Compute total income and tax.

Show the solution

Interest: allowed rate is 12%, so allowed interest = ₹16,00,000 × 12% = ₹1,92,000. Excess interest = ₹2,40,000 − ₹1,92,000 = ₹48,000, which is added back.
Book profit: net profit ₹2,00,000 + remuneration ₹14,00,000 + excess interest ₹48,000 + book depreciation ₹1,10,000 − tax depreciation ₹1,60,000 = ₹15,98,000.
Remuneration cap on the first ₹6,00,000: the higher of ₹3,00,000 or 90% of book profit. Here 90% of ₹6,00,000 is ₹5,40,000, which is higher than ₹3,00,000. So the cap on the first slab is ₹5,40,000.
Balance of book profit = ₹15,98,000 − ₹6,00,000 = ₹9,98,000. 60% of this = ₹5,98,800.
Maximum remuneration = ₹5,40,000 + ₹5,98,800 = ₹11,38,800. The deed authorises ₹14,00,000, so the allowed remuneration is ₹11,38,800. Disallowed remuneration = ₹14,00,000 − ₹11,38,800 = ₹2,61,200.
Business income = book profit ₹15,98,000 − allowed remuneration ₹11,38,800 = ₹4,59,200. Check: ₹2,00,000 + ₹48,000 + ₹2,61,200 + ₹1,10,000 − ₹1,60,000 = ₹4,59,200.
Tax at 30% = ₹1,37,760. Cess at 4% = ₹5,510 (rounded). Surcharge is nil as income is below ₹1 crore. Total tax = ₹1,43,270.

Answer: Total income = ₹4,59,200. Tax payable = ₹1,43,270 (tax ₹1,37,760 + cess ₹5,510).

Example 2

Mehta & Rao LLP has two working partners, Mehta and Rao, who share profit equally. The LLP agreement authorises remuneration of ₹5,00,000 to each, and simple interest at 12% on capital of ₹5,00,000 each (₹60,000 each). Both are authorised for the period after the agreement. The LLP's book profit, after deducting the interest but before deducting remuneration, is ₹20,00,000. The LLP has no other income. Mehta had borrowed money to contribute capital and paid ₹40,000 interest on that loan. Explain what is taxable in Mehta's hands from the LLP.

Show the solution

Interest: 12% of ₹5,00,000 = ₹60,000 for each partner, which is within the allowed limit. It is allowed in full and is already deducted in arriving at the book profit of ₹20,00,000.
Remuneration cap on book profit of ₹20,00,000: ₹5,40,000 on the first ₹6,00,000, plus 60% of the balance ₹14,00,000 = ₹8,40,000. Cap = ₹13,80,000. The total remuneration authorised is ₹10,00,000, which is lower, so it is allowed in full.
LLP total income = book profit ₹20,00,000 − allowed remuneration ₹10,00,000 = ₹10,00,000. Tax at 30% = ₹3,00,000. Cess at 4% = ₹12,000. Total tax = ₹3,12,000 (surcharge nil).
Mehta's remuneration of ₹5,00,000 and interest of ₹60,000 are business income in his hands. Total = ₹5,60,000.
The ₹40,000 interest on his loan was incurred to earn the interest from the LLP. It is within the ₹60,000 interest received, so it is deductible.
Mehta's share of profit: profit after tax = ₹10,00,000 − ₹3,12,000 = ₹6,88,000, shared equally, so his share is ₹3,44,000. This share is exempt in his hands, so no tax arises on it.
Mehta's business income from the LLP = ₹5,00,000 + ₹60,000 − ₹40,000 = ₹5,20,000.

Answer: Mehta's taxable business income from the LLP is ₹5,20,000. His share of the LLP's profit (₹3,44,000) is exempt and is not included.

Exam tips

Show the book profit working as a separate table. Marks are usually given for the adjustments and for the cap, even if the final figure is wrong.
Read the deed facts first. Questions often hide a trap, such as a non-working partner, a rate above 12%, or remuneration for a period before the deed.
State your conclusion in words after the numbers: 'Remuneration allowed is ₹X as it is lower of the cap and deed amount'. This supports your answer if a figure slips.
In MCQs on this topic, check the partner's side too. Share of profit is exempt, and interest and remuneration are business income.
For the firm versus LLP difference, say that the tax computation is the same and the differences lie in legal status and liability.

Practice questions from Assessment of Various Entities

Assessment of Firms and LLPs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Assessment of Firms and LLPs: frequently asked questions

Is an LLP taxed differently from a partnership firm?

For the tax computation, an LLP is treated like a firm. It pays a flat 30% plus surcharge and cess, and the same limits on partner remuneration and interest apply. The differences are legal: an LLP is a separate body corporate under its own Act, and the partners' liability is limited.

What is the maximum interest a firm can pay to partners?

The firm can claim simple interest of up to 12% a year, if the deed authorises it and it relates to the period after the deed. Any interest above that rate, or above the deed rate, is disallowed in the firm's hands.

Why do we add back partner remuneration to get book profit?

The remuneration cap is a share of the profit before remuneration, so you need the profit that existed before paying it. You add back the full remuneration debited, including any amount that was not authorised, and then apply the cap.

Is the partner's share of profit taxable?

No. The firm or LLP has already paid tax on its income, so the partner's share of profit is exempt in the partner's hands. Only the allowed remuneration and interest are taxed, as business income.