Tax Laws and Practice · Computation of Total Income and Tax Liability of various Entities

Tax Liability of HUF and Firms: Computation Guide

Updated 11 October 2026 · Fact-checked

An HUF is taxed at individual slab rates after allowed deductions. A firm or LLP is taxed at a flat 30% plus surcharge and cess. For a firm, you compute book profit, then allow partner remuneration and interest only within the limits, and tax the resulting business income.

Understand Tax Liability of Hindu Undivided Family and Firms

An HUF is a separate taxable unit made up of family members. It computes income under the usual heads and is taxed at individual slab rates, under the rate regime that applies to the assessee. It gets the basic exemption limit. It does not get the rebate meant for resident individuals.

A firm is taxed as a separate entity on its own total income. Its partners are not taxed again on their share of profit. But the remuneration and interest the firm pays to partners are taxable in the partners' hands as business income. So the firm's deduction for these payments is controlled by law.

The firm starts with its net profit as per the profit and loss account. You then recompute it as the business head requires. You add back disallowed items, for example excess depreciation, or cash payments above the limit. The result is book profit. Partner remuneration is allowed only up to a cap linked to book profit. Interest to partners is allowed only up to a rate cap.

The disallowance rules for business expenses apply to a firm like any other assessee. Under section 36, a payment to a specified person is disallowed to the extent it is excessive or unreasonable, judged against fair market value, legitimate business needs and benefit derived. For a firm, the specified persons include a partner or his relative. They also include persons or entities with a substantial interest in the business, and their directors, partners, members or relatives, as set out in section 36(3). A person has a substantial interest if, at any time during the tax year, they are the beneficial owner of shares carrying at least 20% of the voting power (where a company carries on the business), or are beneficially entitled to at least 20% of the profits (in any other case). Payments in a day above ₹10,000 to one person, not made through specified banking or online mode, are also not deductible. The limit is ₹35,000 for hiring goods carriages.

An LLP is taxed in the same way as a firm for this chapter. It is a separate entity and pays tax at the firm rate. The partner's share of profit is not taxed again in the partner's hands. Apply the firm method for partner remuneration and interest, as taught in the ICSI study material. A firm is a partnership under the Partnership Act. An LLP is a body corporate with limited liability. That legal difference does not change the tax method.

Key rules to remember

Tax on a firm or LLP: Tax = 30% × Total income; then add surcharge (if any) and 4% cess; Flat rate, no slab and no basic exemption. Surcharge applies only when total income exceeds ₹1 crore.
Tax on an HUF: Tax = slab rates for individuals on Total income + cess; Basic exemption applies under the rate regime in the question. Use the slabs given in the question. No rebate for HUF.
Book profit: Book profit = Net profit as per P&L + partners' remuneration debited (+ other business-head adjustments); Compute it as the business head requires, before deducting remuneration.
Maximum remuneration to working partners: On first ₹3,00,000 of book profit (or loss): higher of ₹1,50,000 or 90% of book profit. On balance: 60%; Only to working partners, and only if the partnership deed authorises it. Allowed amount is the lower of actual and maximum.
Interest to partners: Allowed interest = lower of actual interest and 12% simple per annum on capital or loan; Must be authorised by the deed. Excess is added back.
Business income of firm: Business income = Book profit − Allowed remuneration; Allowed interest is already deducted in arriving at book profit.
Interest deduction for an HUF: Deduction = lower of savings account interest and ₹10,000; Applies to savings deposits with a bank, co-operative bank or Post Office. Time deposits are excluded for an HUF.
Cash payment rule: Payment above ₹10,000 in a day to one person, not through specified banking or online mode: not deductible; ₹35,000 for plying, hiring or leasing of goods carriages.

How to solve Tax Liability of Hindu Undivided Family and Firms questions

Use this order for any firm or HUF computation question.

1Identify the assessee: HUF, firm or LLP. This fixes the tax rate and the special limits.
2Start with the net profit or income given. Compute each head separately for an HUF.
3For a firm, adjust net profit for items not allowed under the business head: excess interest, cash payments above the limit, excessive payments to specified persons, and any other disallowed items.
4Compute book profit by adding back partners' remuneration that was debited.
5Find the maximum remuneration using the 90% and 60% method. Allow the lower of actual and maximum. Check that the partners are working partners and the deed authorises the payment.
6Find the business income: book profit minus allowed remuneration. Add other heads and deduct allowed deductions to reach total income.
7For an HUF, claim the interest deduction only on savings deposits, up to ₹10,000. Then apply slab rates.
8Apply the tax rate, then surcharge if the threshold is crossed, then 4% cess. Round as the question asks.

Quickest way: Adjust, cap, tax

When to use it: Use this for a firm computation question with a given net profit and a list of partner payments.

Write net profit. Add back excess interest and other disallowed items, such as cash payments above the limit and excessive payments to specified persons.
Add back the full remuneration debited. This gives book profit.
Compute the cap on book profit. On the first ₹3,00,000, take the higher of ₹1,50,000 or 90% of book profit. On the balance, take 60%. If book profit exceeds ₹3,00,000, the first part is ₹2,70,000.
Compare the cap with actual remuneration. Deduct the lower figure from book profit to get business income.
Multiply the result by 30%, then add 4% cess. Check the surcharge threshold last.

Common mistakes in Tax Liability of Hindu Undivided Family and Firms

Allowing interest to partners at the rate in the deed without checking the 12% cap
Students copy the rate in the question and forget the cap.
Fix: Always compute 12% simple on the capital or loan. Add back the excess to profit.
Allowing remuneration to non-working partners
Students apply the formula to every partner.
Fix: Allow remuneration only to working partners, and only if the deed authorises it.
Deducting actual remuneration even when it exceeds the cap
Students compute the cap but forget to compare it.
Fix: Allow the lower of actual and cap. State this comparison in your answer.
Giving the HUF the interest deduction on fixed deposits
Students confuse the HUF rule with the senior citizen rule.
Fix: For an HUF, the deduction is on savings deposits only, up to ₹10,000. Time deposits are excluded.
Applying slab rates or a basic exemption to a firm
Students treat all entities like individuals.
Fix: A firm or LLP pays a flat 30% plus surcharge and cess.
Taxing the partner's share of profit again
Students forget the firm has already paid tax.
Fix: The partner's share of firm profit is exempt. Only remuneration and interest are taxable in the partner's hands.

Worked examples

Example 1

A partnership firm has net profit of ₹9,00,000 after debiting: remuneration of ₹6,00,000 to two working partners (authorised by deed); interest of ₹2,40,000 on partners' capital of ₹16,00,000 at 15% (authorised by deed); and a cash payment of ₹25,000 to one supplier in a single day. Compute the firm's total income and tax, assuming no other income. Ignore surcharge.

Show the solution

Interest allowed: 12% of ₹16,00,000 = ₹1,92,000. Excess interest = ₹2,40,000 − ₹1,92,000 = ₹48,000. Add back.
Cash payment of ₹25,000 in a day to one person exceeds ₹10,000 and was not made through specified banking or online mode. It is not deductible. Add back ₹25,000.
Book profit = ₹9,00,000 + ₹6,00,000 + ₹48,000 + ₹25,000 = ₹15,73,000.
Maximum remuneration: on first ₹3,00,000, the higher of ₹1,50,000 and 90% × ₹3,00,000 = ₹2,70,000, so ₹2,70,000. On balance ₹12,73,000 × 60% = ₹7,63,800. Maximum = ₹10,33,800.
Actual remuneration ₹6,00,000 is lower, so it is allowed in full.
Business income = ₹15,73,000 − ₹6,00,000 = ₹9,73,000. This is the total income.
Tax at 30% = ₹2,91,900. Cess 4% = ₹11,676. Total = ₹3,03,576.

Answer: Total income is ₹9,73,000. Tax liability is ₹3,03,576, including cess.

Example 2

An HUF has business income of ₹3,50,000, interest of ₹14,000 on a savings bank account and interest of ₹30,000 on a bank fixed deposit. Compute its total income.

Show the solution

Gross total income = ₹3,50,000 + ₹14,000 + ₹30,000 = ₹3,94,000.
For an HUF, the deduction is allowed only on interest on savings deposits, up to ₹10,000. Time deposits are excluded.
Savings interest is ₹14,000. The deduction is the lower of ₹14,000 and ₹10,000, which is ₹10,000.
The fixed deposit interest of ₹30,000 gets no deduction, since it is a time deposit.
Total income = ₹3,94,000 − ₹10,000 = ₹3,84,000.
Tax is then found by applying the individual slab rates to this income, as given in the question.

Answer: Total income of the HUF is ₹3,84,000. The deduction is ₹10,000.

Exam tips

Show the book profit computation as a clear working note. Marks are given for each adjustment.
State the three conditions for partner payments: working partner, deed authorisation, and the rate or amount cap.
Write the conclusion in ICSI style: provision, application with figures, then the final amount.
If the question asks about LLP, state that it is taxed like a firm and that the partner's share of profit is exempt.
Check surcharge only when total income is above ₹1 crore. Do not apply it by habit.

Practice questions from Computation of Total Income and Tax Liability of various Entities

Tax Liability of Hindu Undivided Family and Firms: frequently asked questions

How is a firm taxed under the Income-tax Act, 2025?

A firm is taxed as a separate entity at a flat rate of 30% on total income. Surcharge applies if income exceeds ₹1 crore, and 4% cess is added. There is no basic exemption.

What is the limit on partner remuneration and interest?

Remuneration is allowed only to working partners, if authorised by the deed. It is capped at the higher of ₹1,50,000 or 90% of book profit on the first ₹3,00,000, and 60% of the balance. Interest is capped at 12% simple per annum.

What is the difference between taxation of a firm and an LLP?

For this chapter, both are taxed at the same rate, and you apply the same method for partner remuneration and interest, as taught in the study material. The partner's share of profit is not taxed again in either case. They differ in legal status, since an LLP is a body corporate.

Can an HUF claim the deduction for interest on deposits?

Yes, on savings deposits with a bank, co-operative bank or Post Office, up to ₹10,000 a year. Interest on time deposits such as fixed deposits does not qualify for an HUF.