Published 7 May 2026
Meet Tanmay Bhatnagar, 36, a partner at Omega Associates, a chartered-accountancy firm in Hauz Khas, Delhi. He holds a 30% capital share. During FY 2025-26 the firm:
- Paid him partner remuneration ₹12,00,000 (under the Sec 40(b) ceiling specified in the Partnership Deed).
- Paid him interest on capital ₹3,00,000 (12% per annum on his ₹25 lakh capital balance, the statutory ceiling).
- Distributed his share of post-tax profit ₹18,00,000.
Tanmay is not on the firm’s payroll – he’s a partner. His income flows under ITR-3’s Schedule BP, not as salary. This article walks through how a working partner files ITR-3 with the right schedules, what is taxable in his hands, and what must be disclosed but exempt.
1. Why ITR-3 (and why neither ITR-1 nor ITR-4 work)
The form-selector eliminates everything else:
- ITR-1 (Sahaj) – excludes anyone with PGBP income. Partner remuneration is PGBP under Sec 28(v). Out.
- ITR-2 – allows Other Sources but excludes PGBP. Out.
- ITR-4 (Sugam) – allows presumptive PGBP under Sec 44AD/44ADA/44AE only. Partner income is not presumptive – it’s actual receipt under Sec 28(v), which ITR-4 has no place for. Out.
- ITR-3 – the residual form for individuals with non-presumptive business / professional income, including partner-in-firm. ✓
BharatTax’s questionnaire asks “Are you a partner in any firm?”. Selecting Yes locks the form to ITR-3 and unlocks the partner-only sub-schedule (a slim Schedule BP that captures only remuneration + interest, not the firm’s full books).
2. Tax treatment of partner income (Sec 28(v) + Sec 10(2A))
| Income type from firm | Section | Taxable in partner’s hands? |
|---|---|---|
| Partner remuneration (working partner only) | 28(v) | Yes – under PGBP |
| Interest on partner capital (rate per Deed, max 12%) | 28(v) | Yes – under PGBP |
| Share of profit (post-firm-tax) | 10(2A) | No – fully exempt |
(Section 28(v) taxes interest, salary, bonus, commission or remuneration received by a partner from the firm; its proviso adjusts that income to the extent the firm was denied a deduction under Section 40(b). Section 10(2A) exempts the share of profit of a firm separately assessed as such.)
The exempt share of profit must still be disclosed in Schedule EI (Exempt Income), not in Schedule BP. Tanmay’s ₹18 lakh share is recorded there for transparency, but it does not enter Total Income.
Sec 40(b) ceiling – the firm’s side. A firm cannot deduct partner remuneration above:
- On the first ₹6,00,000 of book profit (or in case of a loss): ₹3 lakh or 90% of book profit, whichever is higher
- On the balance of book profit: 60%
(Section 40(b)(v), as amended by the Finance (No. 2) Act 2024 from AY 2025-26. The limit applies to the remuneration paid to all working partners together.)
Excess remuneration is disallowed in the firm’s hands, so the firm pays tax on it. On the partner’s side, the proviso to Section 28(v) adjusts his income to the extent of the amount disallowed: what the firm cannot deduct is not taxed again in his hands.
The Partnership Deed must authorise both the remuneration and the interest on capital. Payments not authorised by, or not in accordance with, the deed are disallowed in the firm’s hands under Section 40(b)(ii), and the same adjustment applies to the partner.
What flows to your ITR-3. Tanmay reports only:
- Schedule BP partner section: ₹15,00,000 (₹12L + ₹3L)
- Schedule EI: ₹18,00,000 (exempt share of profit)
- Schedule OS: ₹5,500 (savings interest, personal)
He does NOT file the firm’s full P&L on his ITR-3. The firm files ITR-5 with the complete Trading + P&L + BS.
3. The new TDS hook – Sec 194T
The Finance (No. 2) Act 2024 inserted Section 194T with effect from 1 April 2025 – FY 2025-26, the year Tanmay is filing for. The firm must deduct TDS at 10% on salary, remuneration, commission, bonus or interest to a partner, at credit (including to the capital account) or payment, whichever is earlier, unless the total for the year does not exceed ₹20,000.
For Tanmay:
- Remuneration ₹12,00,000 + Interest on capital ₹3,00,000 = ₹15,00,000
- 10% of ₹15,00,000 = ₹1,50,000 TDS
The firm issues Form 16A quarterly. Tanmay claims the TDS in his ITR-3 Schedule TDS-2 (TDS other than salary).
First-year-of-194T trap. If a firm deducted nothing, the remuneration is still fully taxable in your hands – and the firm faces a Sec 40(a)(ia) disallowance of 30% of the payment for not deducting TDS. Your filing isn’t blocked, but you’ll have a higher self-assessment tax outflow because no TDS credit offsets your liability.
4. What you need
| Document | Why |
|---|---|
| Partnership Deed | Confirms remuneration formula + interest-on-capital rate. ITD can ask. |
| Firm’s audited financials | For reconciling share of profit + capital balance. |
| Form 16A (Sec 194T) | TDS credit on remuneration / interest / bonus. |
| Form 26AS | Cross-check the 194T entry. |
| Firm’s PAN | Mandatory in Schedule BP partner section. |
| Bank statements | For receipts. |
| PAN, Aadhaar | Standard. |
| 80C / 80D / 80CCD investment proofs | If old regime turns cheaper. |
5. Step-by-step walkthrough
Step 1 – Sign in
Step 2 – Skip last-year import (manual flow)
Step 3 – Personal information
Step 4 – Questionnaire
In the income-sources questionnaire, tick Business / Profession. A sub-question asks “Are you a partner in any firm?” – select Yes. BharatTax routes the return to ITR-3 and unlocks the partner sub-schedule. The questionnaire also asks whether you have salary, capital gains, foreign assets, and other-sources income; Tanmay marks only Other Sources (his ₹5,500 savings interest) and leaves the rest off.
Step 5 – Partner-in-firm sub-schedule (Schedule BP partner)
Click View on the Business / Profession (partner) card. The sub-schedule asks for one row per firm:
- Firm name: Omega Associates
- Firm PAN: AAEFB1234T (use the firm’s PAN – not your own)
- Capital balance at year-end: ₹25,00,000
- Profit-sharing ratio: 30%
- Remuneration received u/s 28(v): ₹12,00,000
- Interest on capital received u/s 28(v): ₹3,00,000
- Share of profit (exempt) u/s 10(2A): ₹18,00,000
Why the deed matters here. BharatTax’s partner card has a “Deed authorises this rate?” checkbox per row. Tick it for both remuneration and interest. ITD’s processing engine matches the rates against the firm’s ITR-5 disclosures; a mismatch can trigger a notice in either return.
Step 6 – Schedule EI (exempt income disclosure)
The exempt share of profit ₹18,00,000 auto-flows from the partner card into Schedule EI. Verify it appears under “Exempt income from firm under Sec 10(2A)” – the form calls for it.
Step 7 – Schedule TDS-2 (claim 194T credit)
Add a TDS-2 row:
- Deductor TAN: (firm’s TAN)
- Deductor name: Omega Associates
- Section: 194T
- Gross payment: ₹15,00,000
- TDS deducted: ₹1,50,000
Cross-verify against the firm’s Form 16A and your 26AS. Mismatches between Form 16A and 26AS are the firm’s problem to fix (revise the TDS return); don’t claim more credit than 26AS shows.
Step 8 – Chapter VI-A deductions (old regime path)
- 80C (PPF): ₹1,50,000
- 80D (self, age 36, not senior): ₹25,000 (the Section 80D(2)(a) cap for self and family below 60)
- 80CCD(1B) (NPS additional): ₹50,000
- 80TTA (savings interest): ₹5,500 (auto-derived from the OS row)
Important. Partner remuneration is PGBP – so Chapter VI-A deductions DO apply against it (under the old regime). What does NOT apply: the Sec 16(ia) standard deduction of ₹50,000 / ₹75,000. That deduction is only for salary income. Tanmay loses no rupees by entering it elsewhere – BharatTax greys out the salary card when there’s no salary – but it’s a frequent mental error for first-time partner-filers.
Step 9 – Schedule TI
| Line | New regime | Old regime |
|---|---|---|
| Income from PGBP (partner) | ₹15,00,000 | ₹15,00,000 |
| Income from Other Sources | ₹5,500 | ₹5,500 |
| Gross Total Income | ₹15,05,500 | ₹15,05,500 |
| Less: Chapter VI-A | – | ₹2,30,500 |
| Total Income (Sec 288A) | ₹15,05,500 | ₹12,75,000 |
Note: Schedule EI’s ₹18,00,000 exempt share of profit is NOT in any of the lines above. It’s disclosed-but-not-taxed.
Step 10 – Compute tax
Tax for AY 2026-27:
| New regime | Old regime | |
|---|---|---|
| Tax on slab | ₹1,05,825 | ₹1,95,000 |
| 87A rebate | ₹0 (TI > ₹12L) | ₹0 (TI > ₹5L) |
| Surcharge | ₹0 | ₹0 |
| Cess 4% | ₹4,233 | ₹7,800 |
| Total tax | ₹1,10,060 | ₹2,02,800 |
| Less: 194T TDS | ₹1,50,000 | ₹1,50,000 |
| Net result | Refund ₹39,940 | Pay ₹52,800 |
(New regime: Section 115BAC(1A)(iii). No Section 87A rebate: total income exceeds ₹12 lakh and the tax is less than the income above ₹12 lakh, so the marginal-relief proviso gives nothing. Old regime: Part I of the First Schedule to the Finance Act 2026. Totals rounded to the nearest ₹10 under Section 288B.)
New regime wins by ₹92,740 here. At a total income of ₹15 lakh, the AY 2026-27 widened new-regime slabs are decisive. Even with PPF + 80D + 80CCD(1B) and 80TTA totalling ₹2.30 lakh of deductions, the old regime still pays nearly twice as much tax. BharatTax computes both regimes for every filer.
Step 11 – Confirm regime and download JSON
Tanmay confirms New Regime, downloads the ITR-3 JSON, uploads to incometax.gov.in, e-verifies via Aadhaar OTP. The ₹39,940 refund follows on processing.
6. Common mistakes for partner filers
- Reporting share of profit as taxable. Sec 10(2A) makes it exempt. Disclose under Schedule EI only – never in Schedule BP as income.
- Treating partner remuneration as salary. It’s PGBP under Sec 28(v), NOT salary under Sec 17. The Sec 16(ia) standard deduction does NOT apply. Don’t fill the salary card.
- Missing 194T TDS credit. First year of operation (FY 2025-26 onwards). Pull Form 16A from the firm and cross-check 26AS. Don’t forget to add a TDS-2 row.
- Filing ITR-2 or ITR-4. Both excluded for partners. ITR-3 is the only valid form.
- Ignoring the Sec 40(b) ceiling impact. If remuneration to all working partners exceeded the 90%/60% limit, the firm is disallowed the excess, and the proviso to Section 28(v) reduces the partner’s taxable remuneration by the amount disallowed.
- Not disclosing exempt share of profit in Schedule EI. The return form calls for it even though it is not taxed.
- Wrong firm PAN. The Schedule BP partner row asks for the FIRM’s PAN, not yours. Double-check: a firm PAN is in the format AAAFA1234A (4th letter is “F” for firm) versus an individual PAN’s “P”.
- Claiming Sec 80GG (rent paid). 80GG is for taxpayers who do not receive HRA. As a partner you don’t receive HRA – so 80GG is technically available – but only if no residential accommodation is owned by the partner, spouse, minor child or HUF at the place where he lives or works, and no other owned house is claimed as self-occupied (proviso to Section 80GG). The deduction is old-regime only.
7. Frequently asked questions
Q: I’m a sleeping partner – only get share of profit. Same form? A: The share of profit is exempt under Section 10(2A) and goes in Schedule EI. Business income – and with it ITR-3 – arises from interest, salary, bonus, commission or remuneration received from the firm (Section 28(v)); for AY 2026-27, ITR-2 is the form for an individual with no income under the business head.
Q: Can I claim 80C / 80D against partner remuneration? A: Yes – partner remuneration is PGBP, which is part of GTI; all Chapter VI-A deductions apply (subject to their own conditions and to the regime you choose; new regime disables most of them).
Q: My firm’s accounts are audited under Sec 44AB (for a professional firm, gross receipts above ₹50 lakh). Do I personally need a tax audit? A: No – audit is the firm’s obligation. As a partner, your ITR-3 doesn’t trigger a separate audit. Audit applies to the entity that runs the business – the firm files audit + ITR-5; you file ITR-3 without audit. The firm’s audit does move the partner’s due date: under Explanation 2 to Section 139(1), as substituted by the Finance Act 2026, a partner of a firm whose accounts must be audited files by 31 October (31 August where the firm’s accounts need no audit).
Q: I receive remuneration but no interest on capital. Same flow? A: Yes – enter only the remuneration row. Leave interest at zero.
Q: Are travel reimbursements from the firm taxable? A: Per Partnership Deed wording. If “travel reimbursement” is actually structured as additional remuneration → taxable u/s 28(v). If genuinely a reimbursement of expense incurred wholly for the firm’s business → not income (the firm bears the expense in its books).
Q: Capital was withdrawn mid-year. How is interest computed? A: As the Deed provides. The firm’s deduction is limited to 12 per cent simple interest a year (Section 40(b)(iv)), and the partner’s income under Section 28(v) is adjusted for any amount disallowed.
Q: My firm dissolved during FY 2025-26. Do I still file ITR-3? A: Yes. Report the partner remuneration / interest received until dissolution as PGBP. Sections 9B and 45(4) tax the firm, not the partner, on assets or money distributed to partners on dissolution or reconstitution.
Q: I’m a partner in TWO firms. Do I add two rows? A: Yes. Schedule BP partner-section accepts multiple rows, one per firm. Each gets its own remuneration / interest / share-of-profit disclosure. Both Form 16A 194T credits go into Schedule TDS-2.
Q: 194T was deducted at the wrong rate (say 5%). What do I do? A: Claim only what 26AS shows. If the firm under-deducted, that’s the firm’s problem – but you’ll need to pay the differential as self-assessment tax in your ITR-3. Ask the firm to revise their TDS return so 26AS catches up.