Section 325 of the Income-tax Act, 2025 — Assessment as a Firm

In plain language

What Section 325 actually says

Section 325 of the Income-tax Act, 2025 sets out the conditions a partnership firm must satisfy to be assessed as a firm — that is, to be taxed as a firm and, crucially, to be allowed to deduct interest, salary, bonus, commission or remuneration paid to its partners. It is the direct successor to Section 184 of the Income-tax Act, 1961 and carries the same core discipline into the new Act, which takes effect from 1 April 2026.

Being "assessed as a firm" is not automatic. A partnership only gets this favourable status if it meets two basic tests and keeps its paperwork in order.

The two core conditions

• Evidenced by an instrument: The partnership must be evidenced by a written instrument of partnership (a partnership deed). A purely oral partnership cannot be assessed as a firm.
• Individual shares specified: The individual shares of the partners in the profits (and losses) must be specified in that instrument. Vague or missing profit-sharing ratios break the condition.

The documentation and certification rule

• A certified copy of the partnership instrument must accompany the return of income for the first tax year in which assessment as a firm is sought.
• The copy must be certified in writing by all the partners (other than minors). If the return is filed after the firm has dissolved, it is certified by all persons (not minors) who were partners immediately before dissolution.
• Once a firm has been assessed as a firm, it continues to be assessed in the same capacity for every later year — provided there is no change in the constitution of the firm or in the partners' shares.
• If there is a change (a partner joins or leaves, or profit ratios change), the firm must file a certified copy of the revised instrument along with the return for that year.

Who it applies to

• Partnership firms governed by the Indian Partnership Act, 1932.
• Limited Liability Partnerships (LLPs), which are treated as firms for income-tax purposes; the LLP agreement serves as the instrument.
• It does not apply to sole proprietorships, companies, HUFs or AOPs that are not firms.

How it interacts with related sections

• Section 326 is the penalty engine: if Section 325 is not complied with for a tax year, no deduction is allowed for interest, salary, bonus, commission or remuneration paid to partners while computing the firm's business income. Correspondingly, those amounts are not taxed in the partners' hands under Section 26(2)(g).
• Section 26(2)(g) is the mirror provision that makes partner remuneration/interest taxable as business income of the partner — but only where the firm was allowed the deduction.
• The limits on deductible partner remuneration and interest (the equivalents of the old Section 40(b) — for example, interest capped at the deed rate up to a ceiling, and remuneration capped on a book-profit slab) sit alongside Section 325; you must first clear Section 325 before those deduction limits even come into play.

Practical implications

• The firm's tax rate is a flat 30% plus surcharge and cess, but the real value lies in deducting partner remuneration and interest — which is exactly what Section 325 protects.
• Failing Section 325 does not stop the firm being taxed; it simply disallows partner payments, inflating the firm's taxable profit and its tax bill.
• Keep the deed signed, dated and specific about profit ratios, remuneration and interest, and refresh it whenever partners or ratios change — then file the certified copy with the very next return.
• Because minors cannot certify, ensure a guardian/adult partner set-up is correctly reflected where a minor is admitted to benefits.