"My share of firm profits is tax-free in India": what ITA 2025 actually says for NRI partners

An NRI partner's share of an Indian firm's total income is exempt from Indian income-tax — but only the profit share. Remuneration, interest on capital, and bonus remain taxable business income in the partner's hands.

Legal basis: Section 11 read with Schedule III, Table Sl. No. 2, Income-tax Act, 2025 (ITA 2025); Section 26(2)(g) (partner remuneration taxable only to the s.35(e) allowance); Section 35(e) (working-partner remuneration limits); Section 325 (assessment of firms); Section 393(3), Table Sl. No. 7 (TDS on partner payments) — ITA 2025.

The profit-share exemption

Section 11(1) of ITA 2025 provides that incomes enumerated in the Schedules, subject to the conditions stated there, "shall not be included" in total income (ITA 2025, s.11). Schedule III, Table Sl. No. 2 covers "any sum received by a partner towards his share in the total income of the firm" where the partner is "a partner of a firm separately assessed as such," with the share as per the profit-sharing ratio in the partnership deed (ITA 2025, Sch. III, Table Sl. No. 2).

For a firm to be "separately assessed as such," Section 325(1) requires that "the partnership is evidenced by an instrument; and" the individual shares of the partners are specified in that instrument (ITA 2025, s.325). A certified copy of the instrument must accompany the firm's return for the first year assessment as a firm is sought.

The exemption draws no distinction between resident and non-resident partners on its face. An NRI partner in a firm assessed under Section 325 may claim the exemption on the profit share even though the income accrued in India.

What is NOT covered

The exemption covers only the partner's share in the total income of the firm. Amounts the firm pays a partner in any other capacity stand outside it:

Whether interest on money a partner lends to the firm otherwise than as capital falls under business income or another head depends on the facts; no blanket characterisation is offered here.

How much remuneration the firm may deduct

A firm computing its own income may deduct working-partner remuneration only within Section 35(e), ITA 2025. Amounts outside it are disallowed in the firm's hands — and stay outside the partner's business income too: interest, salary, bonus, commission or remuneration from the firm is business income only "to the extent allowed under section 35(e) as a deduction in computing the income of the firm" (ITA 2025, s.26(2)(g)). The statutory limits on aggregate remuneration to all working partners are: on the first Rs. 6 lakh of book profit (or in case of loss), Rs. 3 lakh or at the rate of 90% of book profit, whichever is higher; on the balance of book profit, at 60% (ITA 2025, s.35(e)). Interest to a partner is capped at 12% simple interest per annum (ITA 2025, s.35(e): "exceeding 12% simple interest per annum,").

Only a working partner — "an individual who is actively" engaged in conducting the firm's business or profession (ITA 2025, s.35(e)) — counts. Remuneration to a non-working partner is not deductible, and the remuneration must be authorised by the partnership deed applicable to the period of payment.

TDS on partner payments

Section 393, Table Sl. No. 7 covers "any sum in the nature" of salary, remuneration, commission, bonus or interest paid to a partner or credited to the partner's account, by a payer "being a firm," at "Rate: 10%" with a "Threshold limit:" of Rs. 20,000 for the tax year (ITA 2025, s.393). Profit share itself is not a sum of that nature and attracts no TDS under this entry.

For NRI partners, the interaction of this entry with the non-resident TDS provisions is not settled on the material verified for this article. Firms with NRI partners should take written advice and document the position adopted, rather than assuming either rate.

Advance tax

An NRI partner who receives taxable remuneration or interest from the firm has income largely outside TDS coverage and must consider advance tax: where the tax payable for the year exceeds the prescribed threshold after TDS, advance tax is payable by the prescribed instalment dates, with interest consequences for shortfall. Verify the current instalment schedule and interest provisions from the statute before each year's compliance.

Which ITR form

A partner whose only receipt from the firm is the exempt profit share reports it under the exempt-income schedule. A working partner receiving remuneration or interest has business income and must file the return applicable to business income (ITR-3 under the current notified ITR scheme). Filing a non-business return while carrying business income from the firm is an incorrect return and a scrutiny trigger. Confirm the applicable form from the CBDT's ITR notification for the assessment year before filing.

FAQ

Q1. I am a sleeping partner — only profit share, no remuneration or interest. Is my entire income from the firm exempt?

Yes, on the verified text: if the firm is assessed under Section 325 and you receive only your profit share per the deed ratio, the receipt falls within Schedule III, Sl. No. 2. Report it in the exempt-income schedule with the firm's name, PAN and your ratio. Section 393 TDS does not apply to profit share.

Q2. The firm sold property and earned capital gains. Is my share of those gains also exempt?

The exemption applies to the partner's share in the total income of the firm as computed, which includes gains the firm itself is taxed on. The precise treatment where the firm pays tax at special capital-gains rates involves interpretive nuance not settled on the material verified here — take advice before filing.

Q3. My firm paid me Rs. 15,000 as interest on capital this year and deducted no TDS. Must I still report it?

Yes. Below-threshold means no TDS was required under Section 393, Table Sl. No. 7 — it does not make the receipt exempt. Report it as business income and pay tax at your applicable rate.

Q4. For an NRI partner's remuneration, should the firm deduct under Section 393 or the non-resident provisions?

Not settled on the material verified for this article. Document the position with written advice; do not assume 10% is sufficient for a non-resident payee.

For advice on your specific facts, contact a Chartered Accountant.

Need help with this?

Our team handles the paperwork. You focus on your business.