New Income Tax Act 2025: What It Means for Your Partnership Deed and LLP Agreement
The Income Tax Act, 1961 governed Indian direct taxation for 65 years. On April 1, 2026, it stood repealed, and the Income Tax Act, 2025 took over — applicable from Tax Year 2026-27 onward. If you run a partnership firm or an LLP anywhere in Kanpur, chances are you've heard the same reassurance everyone else has: "don't worry, it's just renumbering, nothing has really changed."
For most taxpayers, that's a fair summary. For a partnership firm or LLP, it's dangerously incomplete.
Here's why. Partnership and LLP taxation has always worked on a principle that doesn't apply to most other businesses: a deduction can exist perfectly legally in the statute, and your firm can still lose it, because the law also demands that your Partnership Deed or LLP Agreement authorize the payment properly, in the right words, before it's made. The new Act hasn't touched that principle. What it has done is renumber the governing provision, shift the compliance language around it, and — in doing so — turned every deed or agreement still worded for the old law into a document that needs to be checked before your next assessment, not after.
At Rokadh, we're now seeing this play out across Kanpur's partnership firms and LLPs: documents drafted years ago, never revisited, still quoting a section of law that no longer exists. This guide walks through exactly what changed, the precise clauses you need to check in your existing deed or agreement right now, and — because this is the part most guides skip — what actually happens to your firm's tax bill if you don't.
What the Income Tax Act, 2025 Changed — and What It Didn't
It helps to be precise about this, because the vague version of "nothing changed" is exactly what leads firms to skip checking their documents.
The Income Tax Act, 2025 came into force on April 1, 2026, following presidential assent in August 2025, and applies from Tax Year 2026-27. Its stated purpose was simplification: consolidating a law that had grown to over 800 sections across six decades of patchwork amendments into a leaner code of 536 sections. The government has been explicit that tax rates, slabs, and the substance of most deductions remain unchanged. The old "Previous Year" and "Assessment Year" terminology has been merged into a single "Tax Year," and section numbers across the board have moved, in many cases significantly.
For a salaried individual, this mostly means a different section number on their Form 130 instead of Form 16. For a partnership firm or LLP, it means something more consequential: the exact section your Partnership Deed or LLP Agreement almost certainly names — the one authorizing partner remuneration and interest — has been repealed and re-enacted under a new number. Your document may still be pointing at a law that no longer exists.
Why Partnership Firms and LLPs Are Uniquely Exposed
Under both the old Act and the new one, a firm or LLP can pay its working partners a salary, bonus, or commission, and pay interest on partner capital, and deduct these as business expenses before arriving at taxable profit. But that deduction has never been automatic — it has always depended entirely on the Partnership Deed or LLP Agreement explicitly authorizing the payment, specifying the amount or a clear method of computing it, and confining it to partners who are genuinely working in the business.
This was governed by Section 40(b) under the Income Tax Act, 1961. It is now governed by Section 35(e) of the Income Tax Act, 2025, applicable from Tax Year 2026-27. The underlying policy hasn't been rewritten — tax professionals reviewing the transition have consistently described it as continuity, not reform. But continuity in the law is not the same as your existing paperwork being fine. The statute continues to demand proper authorization; the risk sits entirely in how your document is worded, and whether it still refers to a provision that has ceased to exist.
This applies equally to LLPs. An LLP Agreement is treated under income tax law exactly the way a Partnership Deed is — as the document that must authorize partner remuneration and interest before any deduction can be claimed. If your LLP Agreement was drafted years ago and never revisited, it carries the identical risk as an outdated Partnership Deed.
The Complete Checklist: What to Verify in Your Existing Deed Today
This is the part that actually protects your firm's money. Go through your current Partnership Deed or LLP Agreement against each of the following points. If even one of these is missing, vague, or references the old Act by name, your document needs professional attention before this year's payments go out.
1. Does the deed identify working partners by name? Remuneration paid to a non-working partner is fully disallowed, with no exceptions, regardless of what else the deed says. Your document must clearly distinguish which partners are working partners — actively engaged in conducting the business — and which are not. A deed that's silent or ambiguous on this point leaves the determination open to dispute during assessment.
2. Does the remuneration clause specify an amount or a computation method — not just "as mutually agreed"? This is the single most common drafting failure we see. A clause stating that partners "may draw such remuneration as mutually decided from time to time" does not meet the authorization standard the law requires. The deed needs to either state a specific figure or, better, tie remuneration to the statutory book-profit formula directly, so it remains valid automatically as profits change year to year.
3. Is the remuneration ceiling correctly reflected? Total remuneration to all partners combined is capped at the higher of ₹3,00,000, or 90% of the first ₹6,00,000 of book profit plus 60% of the remaining book profit. If your deed states a fixed rupee figure that could exceed this ceiling in a strong year, the excess will be disallowed regardless of the deed's wording.
4. Does the interest clause cap the rate at 12% per annum, and is it explicitly authorized? Interest paid to partners on capital or loan accounts is deductible only where the deed specifically authorizes it, and only up to 12% simple interest per annum. A deed that's silent on interest, or that doesn't state a ceiling, risks the entire interest payment being disallowed — not just the portion above 12%.
5. Does the deed reference the correct, current law? If your document says "as permitted under Section 40(b) of the Income Tax Act, 1961," it is now referencing a repealed provision. This should be updated to reflect Section 35(e) of the Income Tax Act, 2025, or worded generically enough to survive future renumbering without requiring repeated amendments.
6. Are profit-sharing ratios stated precisely, not vaguely? Language like "profits shared equally" without accounting for the actual number of partners, or without a clear percentage breakdown, creates ambiguity that surfaces exactly when a dispute or an assessment forces the question.
7. Does the deed address partner admission, retirement, and death? These clauses don't affect remuneration deductibility directly, but an outdated deed silent on these events creates operational and legal risk that compounds the tax risk — particularly if a partner's exit changes the working-partner composition your remuneration clause depends on.
8. Is TDS on partner payments being handled correctly, separate from the deed itself? This isn't a clause in your deed, but it's a compliance check that goes hand in hand with reviewing it. Under the provision corresponding to the erstwhile Section 194T, firms must deduct 10% TDS on salary, remuneration, commission, bonus, or interest paid to a partner where the aggregate crosses ₹20,000 in a financial year — regardless of whether that payment falls within the Section 35(e) deduction limits.
If your deed or agreement was executed before 2026 and you haven't checked it against this list, treat that as your starting point this week, not after your next tax filing.
The Real Consequences of an Outdated or Poorly Worded Deed
This is where most articles on this topic stay vague. Here's specifically what happens to your firm if your document doesn't hold up.
Full disallowance of remuneration to non-working or unclearly designated partners. If the deed doesn't clearly name working partners, an assessing officer can treat remuneration paid to any ambiguously classified partner as fully non-deductible — not reduced, not partially allowed, entirely added back to your firm's taxable profit.
Disallowance of remuneration paid under a vague or unauthorized clause. If your remuneration clause doesn't specify an amount or method, the entire remuneration deduction for that period can be denied, even if the amount paid was well within the statutory ceiling. The statute doesn't ask whether the payment was reasonable — it asks whether the deed authorized it properly.
Disallowance of the excess over the statutory ceiling. Where remuneration exceeds the book-profit-linked formula, only the excess is disallowed, but that excess is added straight back to taxable income, increasing your firm's tax liability for that year with no corresponding adjustment for the partner who already received and was taxed on that amount as personal income — creating a genuine double-taxation outcome for that portion.
Disallowance of interest above 12%, or of the entire interest payment if unauthorized. Interest paid above the statutory cap is disallowed on the excess. But interest paid without explicit deed authorization can be disallowed in full, regardless of the rate.
No retrospective fix. This is the consequence that catches firms off guard most often. If your deed didn't authorize a payment properly at the time it was made, amending the deed afterward does not retroactively validate that payment. The disallowance for that Tax Year stands. This is precisely why reviewing your deed now, before Tax Year 2026-27 payments go out, matters more than reviewing it after your return is filed.
Increased scrutiny and litigation risk. Tax authorities have consistently interpreted partner remuneration and interest deduction provisions strictly, not generously. A deed that references a repealed section, or that a firm treats as "probably still fine," is exactly the kind of document that invites a detailed query during assessment — turning a routine filing into a drawn-out, avoidable dispute.
TDS exposure independent of deduction status. Even where remuneration or interest ends up disallowed as a deduction, the obligation to deduct TDS on that payment doesn't go away. Firms that assumed disallowed payments were somehow exempt from TDS obligations often discover this gap only when a TDS default notice arrives separately from the assessment itself.
Taken together, these aren't abstract compliance risks. They translate directly into higher taxable profit, real cash tax outflow, penalty and interest exposure on top of the disallowed amount, and, for firms that end up in dispute, professional fees and time spent defending a position that a properly worded deed would have avoided entirely.
What This Means If You're Forming a New Firm or LLP Right Now
If you're registering a new partnership firm or LLP in the current environment, there's no excuse for drafting a deed or agreement around outdated language — you're starting fresh, and it should be built correctly for the Income Tax Act, 2025 from day one, with the remuneration clause tied to the statutory formula and the interest clause capped explicitly at the current permissible rate. Explore our Partnership Firm Registration services, or if you're deciding between structures, our Company/LLP Incorporation services will help you compare your options.
How Rokadh Reviews and Fixes Existing Deeds and Agreements
We run every Partnership Deed or LLP Agreement we review against the checklist above, clause by clause, and flag exactly what's missing or outdated. Where a document needs correction, we draft a supplementary deed or amendment that updates the working-partner designation, restates the remuneration clause against the current book-profit formula, reconfirms the interest ceiling, and removes any reference to repealed law — executed properly, on the correct stamp paper, and filed wherever required.
You're working with a dedicated CA or CS who treats this document as what it actually is: your firm's primary tax-planning instrument, not paperwork to file once and forget. Beyond the deed itself, we support ongoing compliance including GST Registration, TDS/TCS Return Filing, and Annual Compliances of LLP where applicable, so the review doesn't stop at the document — it extends to how your firm actually operates under it.
👉 Get a Free Partnership Deed / LLP Agreement Review today.
👉 Explore our full range of Business Registrations.
Frequently Asked Questions
Does the Income Tax Act, 2025 apply to LLPs the same way it applies to partnership firms? Yes. LLPs are governed by the same remuneration and interest deduction principles under Section 35(e), and the LLP Agreement plays the identical role that a Partnership Deed plays for a firm — it must authorize payments properly before they can be claimed as deductions.
My deed still names "Section 40(b)." Do I need to change it immediately? You don't need to panic, but you do need to act. The underlying policy has carried over largely unchanged, so the risk isn't that your firm has been doing something wrong — it's that the document itself now references a repealed provision, which weakens its authority the moment it's scrutinized. A supplementary deed correcting this is a straightforward fix.
Can I amend my deed now and apply it to remuneration I've already paid this year? No. Amendments apply only from the date they're executed onward. Payments made before the correction, under an inadequately worded deed, remain exposed to disallowance for that period.
What's the single most common mistake you find when reviewing existing deeds? A remuneration clause that says "as mutually agreed between the partners" instead of stating a specific computation method. It feels flexible when it's drafted, but it's precisely the kind of vague language that fails the authorization standard when tested.
Is there a deadline to update our deed? There's no statutory deadline to amend a deed itself, but because corrections can't be applied retroactively, every payment cycle that passes under an unrevised deed is a payment cycle carrying disallowance risk. The practical deadline is before your next remuneration or interest payment goes out.
Do we need to inform the Registrar of Firms or MCA about a deed amendment? Depending on the nature of the change, updates may need to be filed with the Registrar of Firms for a partnership, or with the MCA for an LLP Agreement amendment. Our team handles this filing as part of the review and amendment process.
Your Deed Is a Tax Document First, a Formality Second
Most firms treat their Partnership Deed or LLP Agreement as something they signed once, filed away, and never think about again. Under the Income Tax Act, 2025, that mindset is exactly what turns a routine transition into a preventable tax bill. The firms that come out of this transition unaffected are the ones checking their documents now — not the ones waiting for an assessment notice to find out the hard way.
Rokadh has reviewed, amended, and drafted Partnership Deeds and LLP Agreements for businesses across Kanpur, Lucknow, and the wider NCR region to bring them fully in line with the Income Tax Act, 2025.
👉 Get a Free Deed Review from our experts today.
👉 Explore our Partnership Firm Registration services.
A document written for a law that no longer exists isn't protecting your firm anymore. Let's fix that before it costs you.
Rokadh is a compliance and business registration platform helping entrepreneurs across India with partnership firm, LLP, and company registration, GST, intellectual property, and ongoing tax and regulatory compliance. This article is for general informational purposes and does not constitute legal or tax advice; please consult our team for guidance specific to your firm. Explore our full range of Business Registrations →
