A partnership deed is the document that decides who gets what, who decides what, and what happens if things go wrong — before any of that actually becomes a problem. It's still one of the most common ways to start a business in India, especially among family businesses, professional practices, and small trading firms, precisely because it's simpler to set up than a company. But "simple to set up" isn't the same as "simple to get right" — and a partnership deed drafted without attention to the current tax rules on partner remuneration can end up costing partners real money at filing time. This guide covers what the deed needs to include, the registration question everyone asks, and two significant tax changes that took effect in the last financial year.
A partnership deed is a written agreement between two or more persons who agree to carry on a business together and share its profits (and, implicitly, its losses), as defined under Section 4 of the Indian Partnership Act, 1932. While Indian law technically allows a partnership to exist on the basis of an oral agreement, a written deed is what actually gives the partnership a documented, provable set of terms — capital contribution, profit-sharing ratio, roles, and what happens if a partner wants to exit.
In practice, almost no bank, tax authority, or court treats an undocumented partnership as seriously as one backed by a clear, signed deed — it's the single document that determines how a dispute between partners actually gets resolved.
No — and this is one of the most commonly misunderstood points about partnerships in India. Under the Indian Partnership Act, 1932, registering a firm with the Registrar of Firms is entirely optional. A partnership deed is valid and the firm can operate without ever being registered.
That said, Section 69 of the Act attaches real consequences to staying unregistered:
An unregistered firm can still be sued by others, and can still defend itself — the restriction only bites when the firm or a partner wants to be the one enforcing a right through court. In practice, this is exactly the situation a growing business is most likely to find itself in eventually, which is why most firms with real commercial activity register despite the option not to.
This is the update that matters most for anyone drafting or reviewing a partnership deed today, and it's one that a lot of older, template-based deeds haven't caught up with.
Section 40(b) of the Income Tax Act, 1961 governs how much a firm can deduct as remuneration paid to its working partners — partners actively involved in running the business, as opposed to purely capital-contributing partners. Remuneration paid beyond this limit isn't a deductible business expense for the firm, even if the partnership deed authorises a higher figure.
The Finance Act, 2024 raised these limits meaningfully, effective April 1, 2025 (applicable from Assessment Year 2025-26 onward):
In effect, both the first-slab threshold and its minimum guaranteed remuneration floor were roughly doubled. For a firm with, say, ₹9 lakh in book profit, this changes the maximum deductible remuneration meaningfully compared to the pre-2025 formula — and a partnership deed still referencing the older ₹1.5 lakh/₹3 lakh figures, or silent on how remuneration is calculated altogether, risks either under-claiming a legitimate deduction or paying remuneration the firm can't actually deduct.
A few conditions remain unchanged and still apply strictly: remuneration is deductible only if the partner is a genuine working partner, only if it's authorised by the partnership deed itself (an oral understanding isn't enough), and only for the period after the deed authorising it takes effect — remuneration paid for an earlier period isn't deductible even if a later deed retroactively tries to cover it.
Interest on partner capital continues to be capped separately, at a maximum of 12% per annum, and is deductible only if the deed specifically authorises it.
This is a genuinely new compliance requirement, not just a revised limit, and it's easy for smaller firms to miss since it wasn't part of the partnership tax framework before.
Section 194T, introduced by the Finance Act, 2024 and effective from April 1, 2025, requires a partnership firm (and an LLP) to deduct TDS at 10% on salary, remuneration, commission, bonus, or interest paid or credited to a partner, once the aggregate of such payments to that partner exceeds ₹20,000 in a financial year. TDS must be deducted at the earlier of the amount being credited to the partner's account or actually paid — whichever happens first.
This applies in addition to, not instead of, the Section 40(b) deduction limits — a firm now needs to track both how much remuneration and interest it can deduct, and separately, whether it's deducted the correct TDS on what it's actually paid out. Firms that have been paying partners without any TDS deduction — common practice before this section existed — need to build this into their payroll and accounting process from FY 2025-26 onward.
Stamp duty on a partnership deed is governed by the relevant State Stamp Act, and the method of calculation varies — many states charge a fixed amount, while some calculate it based on the total capital contributed by the partners. Since this is a state subject with figures revised periodically, it's worth checking the current schedule for the state where the deed is executed rather than assuming a flat, universal figure. An insufficiently stamped deed risks admissibility problems if it's ever produced as evidence in a dispute between partners.
Yes. A partnership deed can be amended at any time with the mutual consent of all partners, typically through a supplementary deed that specifically records the change — a new partner's admission, a revised profit-sharing ratio, or updated remuneration terms, for instance. Any amendment should be properly documented, signed by all partners, and stamped where required, since an informal or undocumented change carries the same evidentiary risk as not having a deed at all. If the firm is registered with the Registrar of Firms, material changes (such as a change in partners) generally also need to be intimated to the Registrar.
A partnership deed template pulled off the internet rarely reflects the current Section 40(b) remuneration limits or the new Section 194T TDS obligation — both of which directly affect how much money actually stays with the firm and its partners after tax. Our team at LegalDev drafts partnership deeds with remuneration and interest clauses aligned to the current limits, handles registration with the Registrar of Firms where recommended, and helps set up the compliance processes — PAN, GST, and TDS under Section 194T — a partnership firm needs from day one.
Talk to our team about drafting your partnership deed, or get a free consultation to discuss what structure and terms fit your business.
A partnership deed is a written agreement between two or more people who agree to run a business together and share its profits, governed by the Indian Partnership Act, 1932. It defines each partner's rights, responsibilities, capital contribution, and profit-sharing ratio, and sets out the rules for the firm's operation and dissolution.
No, registration with the Registrar of Firms is optional under the Indian Partnership Act, 1932. However, an unregistered firm and its partners lose the ability to sue third parties or each other to enforce rights arising from a contract, under Section 69 of the Act — which is why most actively trading firms choose to register despite it not being mandatory.
Effective from Assessment Year 2025-26 (financial year starting April 1, 2025), under the Finance Act, 2024's revision to Section 40(b): on the first ₹6,00,000 of book profit (or in case of a loss), the deductible limit is ₹3,00,000 or 90% of book profit, whichever is higher; on book profit above that, the limit is 60% of the balance.
Yes. Under the new Section 194T, effective April 1, 2025, a partnership firm must deduct TDS at 10% on salary, remuneration, commission, bonus, or interest paid to a partner once the aggregate of such payments to that partner crosses ₹20,000 in a financial year.
Interest on partner capital is deductible up to a maximum of 12% per annum, and only where the partnership deed specifically authorises it.
Yes, with the mutual consent of all partners, typically through a supplementary deed that records the specific change and is signed by all partners. Changes should be properly documented and stamped, and, if the firm is registered, intimated to the Registrar of Firms where required.
A partnership deed can be drafted by the partners themselves, but professional drafting is strongly recommended — particularly to ensure the remuneration and interest clauses are aligned with the current Section 40(b) limits and that the deed anticipates the firm's actual operational needs, not just a generic template.
Generally, yes — all partners need to sign the deed in person, or be represented through a valid Power of Attorney, for both execution and registration with the Registrar of Firms.