Partnership firms and LLPs pay a flat 30% income tax, plus surcharge and cess

Unlike an individual, a partnership firm or a limited liability partnership (LLP) gets no basic exemption limit and no graduated slabs for assessment year (AY) 2026-27. Every rupee of a firm's total income is taxed at a flat 30%, with a 12% surcharge once taxable income crosses Rs 1 crore and a 4% Health and Education cess on top, as set out on the Income Tax Department's firm and LLP help page (incometax.gov.in). That single design choice is why two businesses earning the same profit can pay very different tax depending on whether they operate as a proprietorship, a firm, or a company.

This guide walks through exactly what the statute says, a fully worked computation, the mistakes that most often trigger a scrutiny notice, and the questions firms ask most. Use the income tax calculator alongside it to test your own numbers.

What the Section Says

A firm assessed as a firm under the Income-tax Act, 1961 is a separate taxable person, distinct from its partners. The Act fixes its rate at a flat 30% of total income for AY 2026-27, with no zero-rate band of the kind individuals enjoy. There is no Rs 2.5 lakh, Rs 3 lakh, or Rs 4 lakh exemption for a firm; the very first rupee of taxable profit attracts 30% tax. The full statutory text sits in the Income-tax Act, 1961, published at indiacode.nic.in.

An LLP registered under the Limited Liability Partnership Act, 2008 is taxed on the same footing as a partnership firm. It faces the identical flat 30% rate, the same surcharge trigger at Rs 1 crore, and the same 4% cess. The corporate concessional rates of 22% or 25% do not extend to LLPs, which is a point many founders miss when they convert a company into an LLP expecting a lower headline rate.

Two additions sit above the base 30% rate. First, a surcharge of 12% applies where the firm's or LLP's taxable income exceeds Rs 1 crore in the financial year. Unlike individuals, who face a graduated surcharge ladder, a firm has just one surcharge slab: 0% up to Rs 1 crore, and a flat 12% above it. Second, a cess styled Health and Education cess is levied at 4% on the sum of income tax and surcharge, a figure confirmed against Oquilia's central rate configuration.

Because the surcharge sits on a cliff at Rs 1 crore, the law provides marginal relief so that the extra tax on income just above Rs 1 crore never exceeds the income earned above Rs 1 crore. Firms whose total income hovers around the Rs 1 crore mark should compute both the surcharge and the marginal relief before filing, because ignoring the relief can overstate the liability by lakhs. Marginal relief is a computation built into the Act, not a discretionary concession.

There is also a floor. Under the Alternate Minimum Tax provisions, a firm or LLP that claims certain deductions and would otherwise pay less than 18.5% of its adjusted total income must instead pay tax at 18.5% of that adjusted book profit, plus applicable surcharge and cess. AMT converts a low regular-tax outcome into a minimum contribution, and the credit for AMT paid can be carried forward and set off in later years when regular tax exceeds the minimum.

Worked Example

Consider Meridian Associates LLP, a consultancy, with a total income of Rs 80,00,000 for AY 2026-27 after all allowable business deductions. Because the income is below Rs 1 crore, no surcharge applies, and the firm pays only the base 30% plus 4% cess.

The effective rate here is 31.2%, that is 30% grossed up by the 4% cess. Now compare a larger firm, Aegis Partners, with a total income of Rs 1,50,00,000 in the same year. Crossing Rs 1 crore switches on the 12% surcharge, and the arithmetic changes materially.

For Aegis Partners the effective rate rises to 34.944%, calculated as 30% multiplied by 1.12 for surcharge and then by 1.04 for cess. The Rs 1 crore threshold therefore adds nearly 3.75 percentage points to the effective burden. A firm expecting income near Rs 1 crore should model the surcharge and marginal relief in the income tax calculator before finalising partner drawings for the year.

Note what neither example includes: partner salary or interest paid to partners. Those are deducted while arriving at the firm's total income under the remuneration and interest rules of the Act, and the deducted amounts are then taxed in the partners' own hands. The Rs 24,00,000 and Rs 45,00,000 tax figures above are the firm's liability only, computed after such deductions have already reduced the taxable profit.

Common Mistakes

The errors below recur in income-tax scrutiny and rectification files, and each is avoidable with a careful reading of the AY 2026-27 rules.

Assuming a slab benefit. Some firms apply individual slabs and treat the first Rs 4 lakh as tax-free, then wonder why the demand notice adds back Rs 1,20,000 (30% of Rs 4 lakh) plus cess. A firm has no exemption limit; 30% applies from the first rupee.

Expecting the 22% or 25% company rate. LLPs converting from private limited companies sometimes budget for the concessional corporate rates. Those rates are unavailable to firms and LLPs, which stay at 30%; the mismatch can leave a firm short on advance tax by the difference.

Ignoring the surcharge cliff at Rs 1 crore. A firm at Rs 1,01,00,000 total income faces a 12% surcharge that a firm at Rs 99,00,000 escapes entirely. Firms near the line must apply marginal relief so the extra tax does not exceed the Rs 1,00,000 of income above the threshold; skipping the relief overstates the liability.

Overlooking AMT. Firms that claim large deductions can drop their regular tax below 18.5% of adjusted total income and then forget the AMT floor. AMT at 18.5% (plus surcharge and cess) then applies, and the shortfall surfaces only at assessment.

Netting off cess or surcharge incorrectly. Cess at 4% is levied on income tax plus surcharge, not on income tax alone. Computing 4% on the base tax while omitting the surcharge understates the total income liability, a small slip that compounds on large profits.

Mismatching TDS credit. Firms that receive professional or contractual receipts net of tax deducted at source must reconcile the credit in the return; unclaimed or mismatched credit inflates the net payable. Cross-check deductions using the TDS calculator and Form 26AS before filing.

FAQ

What is the income tax rate for a partnership firm in AY 2026-27?

A partnership firm is taxed at a flat 30% of its total income, with a 12% surcharge if income exceeds Rs 1 crore and a 4% Health and Education cess on income tax plus surcharge. There is no basic exemption limit and no slab benefit, as stated on the Income Tax Department's firm and LLP help page.

Do LLPs pay the same tax rate as partnership firms?

Yes. An LLP registered under the Limited Liability Partnership Act, 2008 is taxed exactly like a partnership firm at a flat 30%, with the same 12% surcharge above Rs 1 crore and the same 4% cess. The concessional company rates of 22% or 25% do not apply to LLPs.

When does the 12% surcharge apply to a firm?

The 12% surcharge applies only where the firm's or LLP's total income exceeds Rs 1 crore in the financial year. Below Rs 1 crore, the surcharge is nil. Where income is just above Rs 1 crore, marginal relief caps the surcharge so the additional tax does not exceed the income above the threshold.

What is the effective tax rate for a firm above Rs 1 crore?

For a firm with income above Rs 1 crore, the effective rate is 34.944%, being 30% base tax increased by 12% surcharge and then 4% cess. Below Rs 1 crore, the effective rate is 31.2%, being 30% grossed up by cess alone.

Does the Alternate Minimum Tax apply to LLPs?

Yes. Where an LLP or firm claims specified deductions and its regular tax falls below 18.5% of adjusted total income, AMT applies at 18.5% of that adjusted book profit, plus surcharge and cess. AMT credit can be carried forward and used in later years when regular tax exceeds the minimum.

Is partner salary taxed in the firm or in the partner's hands?

Partner remuneration and interest, to the extent allowable under the Income-tax Act, 1961, are deducted while computing the firm's total income and are then taxed as business income in the partner's own return. The firm's 30% liability is computed after these deductions.

Can a firm choose the new tax regime slabs instead of 30%?

No. The concessional new-regime slabs are designed for individuals, Hindu Undivided Families, and certain other taxpayers, not for firms or LLPs. A firm remains on the flat 30% structure for AY 2026-27 regardless of any regime that individual partners choose for their personal returns.