Independent Directors: Appointment, Roles And Duties

Jun 3, 2025
Private Limited Company vs. Limited Liability Partnerships

As a company scales, especially into the public space or handles significant external investment, governance becomes just as important as growth. That’s where independent directors step in, professionals who are not involved in the company’s daily business but are legally empowered to hold the board accountable.

Under the Companies Act, 2013, they are defined as non-executive directors with no material or financial ties to the company.

In this blog, we’ll break down the definition, eligibility, appointment process, responsibilities, and legal framework governing independent directors in India.

Table of Contents

Who is the Independent Director?

The Companies Act, 2013 mandates the appointment of independent directors for certain classes of companies to improve governance standards. An Independent Director is a non-executive board member unrelated to the promoters or management and has no financial or material interest in the company that could affect their independence.

They are expected to bring an impartial voice to boardroom decisions, safeguard the interests of all stakeholders, particularly minority shareholders, and maintain high standards of integrity and objectivity

Applicability of Appointing an Independent Director

Listed Companies

All listed public companies are required to have at least one-third of the total number of directors as independent directors.

Unlisted Public Companies

The following unlisted public companies must appoint at least two independent directors:

  • Paid-up share capital of Rs. 10 crores or more;
  • Turnover of Rs. 100 crores or more;
  • Outstanding loans, debentures, and deposits exceeding Rs. 50 crores.

These thresholds are calculated based on the latest audited financial statements. Independent directors must declare their independence at the time of appointment and thereafter annually. Details of their appointment, including terms and roles, must be published on the company’s website.

Certain companies are exempt, including:

  • Joint ventures
  • Wholly-owned subsidiaries
  • Dormant companies

Criteria for Independent Directors, Companies Act 2013

Key eligibility conditions under the Companies Act, 2013 include:

  • Must possess a valid DIN (Section 152(3)).
  • Must not be disqualified under Section 164.
  • Should adhere to the Code of Conduct as per Schedule IV.
  • Cannot hold directorships in more than 20 companies (Section 165), with a maximum of 10 public companies.
  • Must register in a databank maintained by a government-authorised body (Section 150).
  • Shareholders must approve the appointment via a special resolution (as per SEBI regulations).
  • Disclosure requirements include their professional profile, relationship with other board members, existing directorships, and skill set relevant to the board.

Role of an Independent Director

Independent directors are essential for maintaining the credibility of a company’s governance. Their responsibilities include:

  • Providing unbiased opinions on company strategies, operations, and risk.
  • Participating in various board committees such as audit, nomination, and remuneration.
  • Monitoring the performance of executive management.
  • Ensuring the interests of minority shareholders are protected.
  • Involvement in succession planning and key managerial evaluations.
  • Overseeing the integrity of financial reporting and compliance with laws.

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Conduct of an Independent Director

Independent directors are expected to adhere to the highest standards of professional conduct. Their responsibilities include:

  • Exercising independent judgment in the best interest of the company.
  • Avoiding conflicts of interest and disclosing any potential conflicts.
  • Acting objectively without bias or influence.
  • Ensuring the confidentiality of sensitive boardroom discussions.
  • Upholding ethical standards and promoting transparency.
  • Informing the board if their independence is compromised.

Duties of an Independent Director

The Companies Act and SEBI's corporate governance norms outline several duties for independent directors:

  • Attend all board and committee meetings.
  • Remain informed about the company’s business and industry.
  • Safeguard the interests of stakeholders, particularly minority shareholders.
  • Report unethical behaviour or suspected fraud.
  • Maintain confidentiality of non-public information.
  • Participate in the functioning of the vigil mechanism and whistleblower policies.
  • Guide management on strategic direction and risk management.

Procedure to Appoint an Independent Director for a Company

  1. Obtain Consent and Declarations:
    • DIR-2 (Consent to act as a director)
    • DIR-8 (Non-disqualification declaration)
    • MBP-1 (Disclosure of interest)
    • Declaration of Independence
  2. Nomination and Remuneration Committee Approval:
    • Evaluate candidate suitability and recommend to the board.
  3. Board Resolution:
    • Pass a board resolution for the appointment.
  4. Shareholders’ Approval:
    • Approve the appointment via special resolution at the next general meeting.
  5. Post-Appointment Compliance:
    • File DIR-12 with ROC.
    • Make disclosures to the stock exchange (if applicable).
    • Update the company’s website.
    • Issue a formal appointment letter.
    • Submit Form B to the stock exchange (for listed companies).
    • Update registers and statutory records.

How long does an independent director remain in his position?

An independent director can be appointed for a term of up to five years. They may be reappointed for one more term (another five years) by passing a special resolution. However, they cannot hold office for more than two consecutive terms.

After serving two terms (a total of 10 years), the individual must step down and can be reappointed only after a three-year cooling-off period, during which they should not be associated with the company in any capacity.

Conclusion

In an era of high public scrutiny and fragile trust in institutions, independent directors play a vital role in reinforcing credibility. They offer a much-needed outside-in view, hold the board accountable, and ensure that shareholder value is not built at the cost of ethics.

Under the Companies Act, 2013, and SEBI norms, companies are not just expected to have independent directors- they are expected to empower them. When selected thoughtfully, these directors offer more than oversight; they provide insight, foresight, and a balanced voice at the table.

Frequently Asked Questions

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Frequently Asked Questions

What is the tenure of appointment of independent directors?

As per Section 149(10) of the Companies Act, 2013, an Independent Director can be appointed for a term of up to five consecutive years. They are eligible for reappointment for another five-year term, subject to the passing of a special resolution by shareholders.

Who is an Independent Director under the Companies Act, 2013?

Under Section 149(6) of the Companies Act, 2013, an Independent Director is defined as a non-executive director who:

  • Has no material or financial relationship with the company, promoters, or directors.
  • Is not a promoter or related to promoters or directors of the company.
  • Has not been an employee or partner of the company, its auditors, or legal/consulting firms associated with the company in the last 3 years.
  • Does not hold 2% or more of the total voting power of the company (either individually or with relatives).
  • Possesses relevant expertise, integrity, and experience required for the role.

Who cannot be an Independent Director?

The following persons are disqualified from becoming an Independent Director:

  • Promoters of the company or any of its group entities.
  • Persons related to promoters or directors of the company.
  • Any employees or former employees of the company, its holding, subsidiary, or associate in the last 3 financial years.
  • Partners or employees of the company's audit, legal, or consulting firms in the past 3 years.
  • Individuals holding a substantial shareholding (2% or more) in the company.

How do I register myself as an Independent Director?

To register as an Independent Director in India:

  • Enroll on the Independent Directors' Databank maintained by the Indian Institute of Corporate Affairs (IICA) via www.independentdirectorsdatabank.in.
  • Provide your personal, professional, and educational details.
  • Submit a declaration of independence and consent forms (like DIR-2 and DIR-8) when appointed.
  • If not already a director, obtain a Director Identification Number (DIN) by filing Form DIR-3 with the Registrar of Companies.
  • If you do not have experience as a director, you may need to pass an online proficiency self-assessment test within one year of registration (as per MCA rules).

Who is eligible to be an Independent Director?

Eligibility criteria under Section 149(6) and SEBI (LODR) Regulations include:

  • Minimum age: Generally 21 years
  • Must be a person of integrity and possess relevant expertise and experience.
  • Must meet all the independence criteria as listed above (no financial, employment, or family ties to the company).
  • Must not be disqualified under Section 164 of the Companies Act.
  • Should not be an independent director in more than seven listed companies (or three if already serving as a whole-time director in any listed company).
  • Must be registered on the IICA databank and may need to clear the online test (unless exempted due to experience).

Related Posts

A guide to Company Registration In USA from India: LLC or C-Corp?

A guide to Company Registration In USA from India: LLC or C-Corp?

In recent years, there has been a discernible shift among Indian entrepreneurs towards incorporating their companies in the United States. The surge in Indian startups seeking investment from U.S. sources has contributed significantly to this inclination to establish a foothold in the American market.

This trend is driven by several factors, including access to a larger pool of venture capital and angel investors in the U.S., as well as the desire to tap into the vast market potential.

The essentials of US Incorporations - documents, eligibility and process.

In today’s blog, we'll explore the essentials of U.S. incorporations, covering essential factors and offering insightful guidance on navigating cross-border requirements.

Table of Contents

Benefits of USA Company Registration

It is highly advisable to go for U.S. incorporation when aiming to raise capital from U.S. investors or penetrate the U.S. market with product sales. Beyond the inherent credibility associated with a U.S. business entity, it instills investor confidence and aligns with U.S. regulatory expectations.

  • It boasts a thriving and a diverse business ecosystem, providing access to a vast market, diverse consumer base, and a network of established businesses and startups.
  • Companies incorporated in the U.S. often find it easier to attract investment, whether through venture capital, private equity, or public markets.
  • It is home to renowned innovation hubs such as Silicon Valley, which fosters creativity, collaboration, and technological advancement. This can be especially beneficial for tech startups and businesses in emerging industries.
  • It offers a relatively straightforward process for business incorporation. Many states, like Delaware, have business-friendly regulations and efficient online platforms that facilitate the setup and management of companies.
  • While the U.S. tax system is complex, businesses may find advantages in various tax incentives and deductions, especially if structured as certain types of corporations.
  • It can serve as a strategic base for international expansion, providing a gateway to both North American and global markets.

Types for Company Registration in USA from India

The United States offers several types of legal structures for businesses, each with its own characteristics and implications. Here are some of the most common types:

•  Single-Person Businesses

•  S Corporations

•  C- Corporations (C-Corp)

•  Limited Liability Companies (LLCs)

•  Non-profit Organizations

Regarding U.S. business structures, two predominant forms of incorporation stand out: Limited Liability Companies (LLCs) and C-Corporations (C-Corps). These structures offer distinct features tailored to diverse business needs and goals.

  • If you want lower compliance and small franchise fees: An LLC may be a suitable choice, especially for small businesses or startups with simpler structures and a desire for reduced administrative burdens.
  • If you want to raise funds: If the goal is to attract external investment, issue stock, or go public in the future, a C Corporation is often more attractive to investors and provides the necessary flexibility for these activities.

Minimum Requirements to register a company in the U.S.

To register a company in the U.S., several essential criteria must be met.

  • Minimum Number of Individuals:
    At least one person is required to register a company in the U.S. This person can act as the sole owner or be part of a group of owners (members or shareholders), depending on the chosen business structure (e.g., LLC, corporation).
  • Registered Agent in Delaware:
    If choosing to register the company in Delaware, having a registered agent in the state is a legal requirement. The registered agent is a person or entity designated to receive legal documents, official correspondence, and other important information on behalf of the company.
  • U.S. Address:
    A U.S. address is required for official correspondence and legal purposes. This address can be either a physical location (such as a brick-and-mortar office) or a virtual address, depending on the nature of the business and the chosen state of registration.

Documents required for U.S. Incorporation

A succinct breakdown of the documents needed for the initial stages of business registration.

  • Name Approval:
    The process for name approval is straightforward. In Delaware, you can perform a real-time search for the desired business name and immediately reserve it if available. This reservation ensures that your chosen business name is secured for your use.
  • Director Details:
    Provide details about the directors or members of the company. This typically includes full names, addresses, contact information, and roles or titles within the company.
  • Number of Shares and Value Per Share:
    Specify the number of authorized shares the company is allowed to issue. Also, determine the par value or the assigned value to each share.

Process for Company Registration in the USA

A roadmap of Company registration in USA

Must-Have Documents After Incorporation

Here’s a list of documents that a business typically receives after the registration process:

1. Certificate of Incorporation

  • This document, issued by the state authorities, officially recognizes the establishment of the corporation. It includes important details such as the company's name, location, and date of incorporation.

2. EIN (Employer Identification Number)

  • The EIN is a unique identifier assigned by the IRS for tax purposes. It typically takes 3 to 4 weeks through standard processing, but an expedited option is available, reducing the timeline to 3 days if you already possess a Social Security Number (SSN).
    This unique identifier, similar to India's PAN (Permanent Account Number), is necessary for various business activities, including opening a bank account, hiring employees, and filing tax returns.

3. Bylaws of the Company (Similar to Articles of Association)

  • Bylaws are internal rules that govern the operation and management of the company. They outline procedures for meetings, decision-making, and other essential aspects of corporate governance.
    In some ways, they are similar to the Articles of Association mandated in India.

4. Banking Resolution

  • A banking resolution is a formal document that authorizes specific individuals within the company to open and manage bank accounts on behalf of the corporation. It provides clarity and legal authority for banking-related activities.

5. Common Stock Certificate

  • Common stock certificates represent ownership in the company. When shares are issued, these certificates are given to shareholders as evidence of their ownership stake in the corporation. They typically include details such as the shareholder's name, the number of shares, and the date of issuance.

Compliances for U.S.- Incorporated Companies

Let's dive into the detailed aspects of compliance for businesses in the US, particularly those with C-Corporation structures and operations in Delaware.

1. Federal Income Tax

  • The Federal Income Tax rate of 21% applies to C-corporations in the United States. They are required to file a tax return annually using the IRS Form 1120. This form outlines the corporation's income, deductions, credits, and taxes owed, etc.

2. Withholding Tax and Related Party Transactions Disclosure

  • Similar to Tax Deducted at Source (TDS), withholding Tax in the U.S. involves deducting a portion of payments made to non-residents for services, dividends, or interest. Additionally, disclosure of related party transactions is a key compliance requirement, ensuring transparency in financial dealings with affiliated entities.

3. Delaware State Franchise Tax

  • Delaware imposes an annual franchise tax on corporations, and the amount varies depending on the type and size of the corporation. The calculation is often based on factors such as authorized shares or assumed par value capital.

4. Delaware State Corporate Income Tax

  • In addition to federal taxes, C-Corporations operating within the state of Delaware are subject to state corporate income tax at a rate of 8.7% on income generated within the state.
    To meet state tax obligations, C-Corporations file the Delaware Form 1100, providing detailed information on income, deductions, and other relevant financial data.

5. Other Regulatory Compliances in Delaware

  • Beyond tax-related obligations, businesses in Delaware must adhere to additional regulatory requirements. This includes filing an annual report with the Delaware Secretary of State.

In a nutshell, be it India or the U.S., there will be a lot of compliances to keep a record of. By diligently meeting these obligations, you can fulfill legal mandates and contribute to a robust and trustworthy business environment.

Incorporation in U.S. vs India

When expanding operations from India to the United States, a common strategy involves incorporating a new U.S. company, followed by transferring shares from the Indian parent company (which must be a Private Limited Company) to the newly formed U.S. entity. The Indian company would become a subsidiary of the U.S. company, and there is no such limit to the number of subsidiaries an entity can have.

Difference between Company registration in India & USA

Keep in mind the compliances and FEMA guidelines to be adhered to during this process, which establishes the U.S. company as a subsidiary of its Indian counterpart, creating a legal and financial separation. The benefits of this approach include improved access to U.S. markets, legal autonomy for each entity, and strategic financial advantages.

Incorporation in the U.S. Company Registration in India
Time Duration 4–5 Days (To get a COI) 7–10 Days(To get a COI)
Cost Ideally, it ranges around $200–500, including Government Fees, Professional Fees, etc. Depends on company type, professional fees, stamp duties, etc.
Registered Agent Required for legal correspondence Not Mandatory
Ideal for If you want to raise funds in the U.S. or expand, then U.S. incorporation is advisable. If your targeted market is in India, then registering your company in India is advisable.
Name Approval Simultaneous real-time search and reservation. Company Name Search and Reservation happen separately
Documentation COI, EIN, Company Bylaws, etc. COI, Articles of Association (AoA), Memorandum of Association (MoA), Director's Identification Number (DIN), etc.
Compliances Federal and state-level compliances, annual reports, IRS filings Registrar of Companies (RoC) filings, Annual General Meetings (AGMs), Income Tax Returns

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Frequently Asked Questions

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Partnership Firm Tax Rate and Tax Return Filing Explained

Partnership Firm Tax Rate and Tax Return Filing Explained

A partnership firm is a business structure where two or more individuals come together to form a business entity. Each individual in the firm is referred to as a "partner." There are two types of partnership firms: registered and unregistered. A registered partnership firm obtains a registration certificate from the Registrar of Companies, while an unregistered firm does not have one.

Partnership firm e-filing involves submitting tax returns electronically using the Income Tax Department portal. In this article, we will focus on taxation for partnership firms, including partnership firm tax rate, deductions, ITR filing requirements, and the e-filing process. Whether you're a new partnership firm or an established one, this article will provide you with the essential information to navigate the partnership firm tax rate landscape with ease.

Table of Contents

Partnership Firm Tax Rate Explained

The income tax on partnership firms in India is levied at a flat rate of 30% on the total income earned by the firm. This rate applies irrespective of the quantum of income generated. Additionally, a surcharge of 12% is applicable if the total income exceeds ₹1 crore, effectively increasing the tax rate to 33.6%. Furthermore, a health and education cess of 4% is levied on the income tax (including surcharge, if applicable).

It's important to note that there is no basic exemption limit for partnership firms, unlike individual taxpayers. Moreover, partnership firms are not subject to Minimum Alternate Tax (MAT), which is applicable to companies.

Let's compare the tax rates for partnership firms with other business structures:

  • LLP Registration: Limited Liability Partnerships (LLPs) have the same base tax rate of 30% as partnership firms. However, the surcharge for LLPs kicks in only when the total income exceeds ₹1 crore, at a rate of 12%.
  • Companies: Companies have a flat base tax rate of 30% (25% for those with a turnover of up to ₹400 crore). However, companies are also subject to MAT.
  • Individuals: The peak tax rate for individuals earning over ₹15 lakhs annually is 30%, which is the same as the flat rate for partnership firms.

Here's a simple partnership firm income tax calculation example to illustrate:

  • Total income of partnership firm: ₹10,00,000
  • Base tax rate: 30%
  • Tax amount: ₹3,00,000 (30% of ₹10,00,000)
  • Education cess: ₹36,000 (12% of ₹3,00,000)
  • Health cess: ₹12,000 (4% of ₹3,00,000)
  • Total tax payable: ₹3,48,000 (₹3,00,000 + ₹36,000 + ₹12,000)

It's important to note that the share of profit received by partners from the firm is exempt from tax and excluded from their total income. However, partners have to pay tax on remuneration and interest income received from the firm.

Tax Deductions Allowed for Partnership Firms

Understanding deductions is crucial for reducing income tax liability for partnership firms. Deductions are allowed for specific firm expenses, such as:

  • Remuneration (salaries, bonuses, or commissions) paid to partners, subject to limits
  • Interest paid to partners on capital, subject to a maximum rate of 12% p.a.

For remuneration, the allowable deduction limit is:

Book Profit Deduction Limit
On first ₹3,00,000 90% of book profit or ₹1,50,000 (whichever is higher)
On balance book profit 60%

Any remuneration or interest paid to partners in excess of these limits is not tax-deductible for the firm. It's important to note that tax deductions will not apply to payments made to partners that are not in accordance with the partnership deed or for transactions made before the partnership deed is executed.

How to File Your Tax Return for a Partnership Firm Online?

A partnership firm must file its income tax return using Form ITR-5 on the Income Tax Department’s e-filing portal. Here’s a step-by-step guide:

1. Access the Income Tax Department's e-filing portal

  • Visit www.incometax.gov.in and log in using the firm’s PAN and password.

2. Gather Required Financial Information

  • Keep financial records ready, including:
    • Profit & Loss Account
    • Balance Sheet
    • Tax computation statements
    • GST and TDS details (if applicable)

3. Fill and Submit Form ITR-5

  • Select Form ITR-5 under the “Income Tax Return” section.
  • Enter income details, deductions, and tax payments.
  • Cross-check the information before submitting, as no attachments are required.

4. Verify the Return

Verification is mandatory and can be done using:

  • Digital Signature Certificate (DSC) – Class 3: Required for all partners if the firm is subject to audit.
  • Electronic Verification Code (EVC): OTP-based verification via Aadhaar, net banking, or Demat account.

5. Audit Applicability

  • If the firm’s turnover exceeds ₹1 crore (₹50 lakh for professional firms), a tax audit is mandatory.
  • The audit report must be e-filed before submitting ITR-5, and DSC is required.

6. Submission and Record-Keeping

  • Once submitted, download and keep the ITR-V acknowledgment for records.
  • Maintain supporting documents, including books of accounts, tax payments, and financial statements, for future reference.

Following this process will ensure smooth filing of your itr for partnership firm.

What are the Deadlines for Filing a Partnership Firm Tax Return?

The income tax return filing deadlines for partnership firms in India are based on audit requirements:

  • Firms not requiring an audit must file returns by 31st July
  • Firms requiring an audit must file by 31st October
    If the partnership firm fails to file the return by the due date, the following consequences may arise:
    • A late filing fee of ₹5,000 is applicable if the return is filed after the due date but before December 31st.
    • The late filing fee increases to ₹10,000 if the return is filed after December 31st.
    • Interest under Section 234A will be levied for the delay in filing the return.
    • Penalties under Section 271F may be imposed for non-filing of the return.

It's crucial to meet these deadlines to ensure compliance and avoid penalties. Keep in mind that deadlines may change, so it's advisable to check the official website or consult Razorpay for updates and timely filing.

Common Errors While Filing Tax Returns & How to Avoid Them

Some common mistakes made while filing partnership firm tax returns include:

  1. Not obtaining a Digital Signature Certificate (DSC) for e-filing
  2. Missing the filing deadline
  3. Incorrect or incomplete details of partners
  4. Mismatch in income and expenditure as per books vs. ITR
  5. Not reporting all income sources
  6. Errors in deductions and exemptions claimed
  7. Improper verification

To avoid these errors:

  • Ensure all partners obtain a valid DSC well in advance
  • Ensure you file your return by the applicable due date to avoid penalties.
  • Maintain accurate books of accounts and reconcile with ITR figures
  • Report all income from business, investments, capital gains, etc.
  • Claim only allowable deductions and exemptions as per limits
  • Cross-check all details before submitting the return
  • Ensure that all partners participate in the verification process using DSC or EVC.

Conclusion

Understanding the partnership firm tax rate and the filing process is essential for every partnership firm in India. E-filing tax returns for a partnership firm ensures a quick, efficient, and hassle-free process. Understanding firm types, taxation rules, eligible deductions, and filing procedures helps in accurate reporting and compliance. By staying informed about the applicable tax rates, deductions, and deadlines, you can ensure timely compliance and avoid penalties. Remember to maintain accurate records, file your ITR for partnership firm using ITR-5, and verify the return with the participation of all partners. With this comprehensive guide, you are now equipped with the knowledge to navigate the partnership firm income tax landscape confidently.

Frequently Asked Questions

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Private Limited Company
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Limited Liability Partnership
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  • Professional services 
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One Person Company
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1,499 + Govt. Fee
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  • Freelancers, Small-scale businesses
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Private Limited Company
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1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

Frequently Asked Questions

How to file an income tax return for a partnership firm?

Partnership firms must file their income tax return using Form ITR-5. The return has to be filed electronically using a Digital Signature Certificate (DSC). Detailed income and expense statements, along with partner details, have to be provided in the return.

Can we file ITR-5 for a partnership firm?

Yes, ITR-5 is the designated form for filing income tax returns for partnership firms. It is specifically designed to capture the income details and tax computation of firms.

Is ITR-4 applicable for partnership firms?

No, ITR-4 is not applicable for partnership firms. ITR-4 is meant for individuals and Hindu Undivided Families (HUFs) having income from business or profession. Partnership firms must use ITR-5 for filing their tax returns.

Can a partnership firm file ITR-3?

No, a partnership firm cannot file ITR-3. ITR-3 is applicable for individuals and HUFs having income from business or profession. Partnership firms must file their return using ITR-5 only.

How much TDS is deducted on a partnership firm?

TDS (Tax Deducted at Source) rates for partnership firms are as follows:

  1. 10% on interest paid by banks and co-operative societies
  2. 10% on rental income exceeding ₹2,40,000 per annum
  3. 2% on payments to contractors exceeding ₹30,000 (1% if the contractor is an individual or HUF)
  4. 10% on commission or brokerage exceeding ₹15,000 per annum

Is partnership firm taxable income?

Yes, the income of a partnership firm is taxable. The firm is taxed as a separate entity at a flat base rate of 30% plus applicable cess. The share of profit received by partners is exempt, but they have to pay tax on remuneration and interest received from the firm.

Partnership Deed for Firms in India: Format, Fees, Validity

Partnership Deed for Firms in India: Format, Fees, Validity

A Partnership Deed is a legal document that outlines the rights, responsibilities, and obligations of individuals forming a partnership.

Typically drafted at the beginning of the partnership, the deed includes essential details such as the business name, purpose, and location. It also incorporates various clauses that highlight details about the partners, including aspects such as profit-loss sharing, salary, interest on capital, drawings, and the procedures for admitting a new partner.

In this blog, we’ll talk about how the Partnership Deed acts as the foundation for all partnership operations.

Table of Contents

Format of a Partnership Deed

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The format of a partnership deed may vary based on the specific requirements of the partners and the nature of the business. However, a typical partnership deed includes the following essential elements:

  • Name of the Partnership:
    The official business name under which the partnership operates is stated, along with the physical address where the primary business activities occur. This section also highlights the duration of the partnership firm alongside the date of the commencement.
  • Details of the Partners:
    This section includes the full name, address, and relevant particulars of the Individuals participating in the Partnership.
  • Purpose:
    Here, the nature and scope of the business activities conducted by the partnership is clearly stated. The firm shall have the power to fulfill the objectives of thecompany and conduct any such lawful business activities.
  • Capital Contribution:
    The total capital of the firm and the individual share contributed by each partner are to be mentioned here. The contribution can be in cash, goods, or property on agreed values.
  • Profit and Loss Sharing:
    It clearly articulates the agreed-upon ratio or percentage in which profits and losses will be distributed among the partners.
  • Financial Decisions:
    It includes information such as the partners' salary and commission, permissive drawings from the firm for each partner, the interest payable to the firm on these drawings, partnership loans, and other relevant details.
  • Admission and Retirement of Partners:
    This part outlines the criteria and process for admitting new partners into the business. Similarly, it details the procedures for the retirement or withdrawal of existing partners.
  • Dispute Resolution:
    Procedures for resolving disputes among partners are established. This may include mechanisms for mediation or arbitration to address conflicts and maintain a harmonious partnership.
  • Dissolution:
    It states the conditions and procedures for the dissolution of the partnership which highlights the distribution of assets, settlement of liabilities, and the overall process of winding up the business.
  • Witnesses and Signatures:
    The partnership deed is formally executed with the signatures of all partners, and done in the presence of witnesses.

How to draft a Partnership Deed?

A partnership deed can be a verbal or written agreement outlining the rights, responsibilities, profit-sharing, and other obligations of the partners.

While it can be recorded verbally, it is highly advisable to formalize a written partnership deed with the Registrar of Firms as it aids in resolving potential disputes. It also proves beneficial for tax purposes and ensures the formal registration of the partnership firm.

  • The Partnership Deed, formulated by the partners, must be executed on stamp paper with a minimum value of Rs. 200, as per the Indian Stamp Act.
  • Each partner should retain a copy of the partnership deed for future reference.
  • Once stamped, the Partnership deed is attached with the application to the Registrar of Firms for formal registration and legal validation.

As per the Partnership Act, Registration of Partnership Firms is optional, but if you still choose to register your firm-

The application should be accompanied by essential documents, including a duly filled affidavit, a certified true copy of the Partnership Deed, and proof of ownership or a rental/lease agreement for the main business location.

Validity of the Partnership Deed

The validity of the firm is mentioned in the deed, whether it's for a limited period, for a specific project or for an unlimited period.

Note: A partnership deed that has been notarized alone does not hold legal validity in the event of legal disputes. However, if the partnership firm is formally registered with RoF, the partnership deed will be recognized as having legal standing.

Fees for the Partnership Deed in India

The Partnership Deed must be executed on a stamp paper with a minimum value of Rs. 200, as per the Indian Stamp Act.

However, Partnership registration fees vary among states due to different compliance requirements and stamp duty rates. The cost for registering a Partnership Firm ranges from Rs. 500 to Rs. 3000.

Note: Stamp duty is calculated based on partner contributions and follows state-specific regulations.

Alterations in the Partnership Deed

Partners have the flexibility to modify, alter, or change the partnership deed through mutual agreement. All partners are required to sign the amended deed.

Subsequently, the modified partnership deed should be registered at the Sub-Registrar's office, where the original deed was registered. Additionally, it is necessary to submit the modified deed to the Registrar of Firms for record-keeping purposes.

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Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


One Person Company
(OPC)

1,499 + Govt. Fee
BEST SUITED FOR
  • Freelancers, Small-scale businesses
  • Businesses looking for minimal compliance
  • Businesses looking for single-ownership

Private Limited Company
(Pvt. Ltd.)

1,499 + Govt. Fee
BEST SUITED FOR
  • Service-based businesses
  • Businesses looking to issue shares
  • Businesses seeking investment through equity-based funding


Limited Liability Partnership
(LLP)

1,499 + Govt. Fee
BEST SUITED FOR
  • Professional services 
  • Firms seeking any capital contribution from Partners
  • Firms sharing resources with limited liability 

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