Section 326 of the Income-tax Act, 2025 — Assessment When Section 325 (Firm Status) Is Not Complied With

In plain language

What Section 326 actually says

Section 326 of the Income-tax Act, 2025 (effective 1 April 2026, as amended by the Finance Act, 2026) is a short but powerful consequence provision. It tells you what happens when a partnership firm fails to satisfy the conditions in Section 325 — the section that lets a firm be assessed "as a firm" in the first place.

In plain words: if your firm does not comply with Section 325 for a tax year, the firm cannot claim any deduction for interest, salary, bonus, commission or remuneration paid to its partners. To balance this, those very same amounts are not taxed again in the hands of the partners under Section 26(2)(g). It is the successor to Section 185 of the old Income-tax Act, 1961 (with Section 325 replacing the old Section 184).

The two consequences, spelt out

• Deduction disallowed at firm level: No deduction for any payment of interest, salary, bonus, commission or remuneration "by whatever name called" made by the firm to any partner is allowed while computing income under "Profits and gains of business or profession".
• Not taxable in partner's hands: That interest/remuneration is not chargeable to income-tax under Section 26(2)(g) in the hands of the partners — so partners are not double-taxed on money the firm was refused a deduction for.

What Section 325 requires (the trigger)

Section 326 only bites when Section 325 is breached. To be assessed as a firm, Section 325 needs:

• A written partnership deed — the partnership must be "evidenced by an instrument".
• Specified partner shares — the individual shares of the partners must be stated in that instrument.
• A certified copy filed with the return — a certified copy of the deed must accompany the return of income for the year in which firm status is first sought, and a revised certified copy when the constitution or shares change.

If any of these is missing — no deed, unspecified shares, or the certified copy not filed — Section 326 kicks in.

Who this applies to

• Partnership firms (including those governed by the Indian Partnership Act, 1932) that pay remuneration or interest to partners.
• LLPs are also assessed as firms for income-tax and must respect the same documentation discipline.
• Firms that are otherwise well-run but sloppy with paperwork — this is largely a compliance/documentation trap rather than an anti-abuse rule.

How it interacts with related sections

• Section 325 — the eligibility rule; Section 326 is its enforcement teeth.
• Section 26(2)(g) — normally makes partner remuneration/interest taxable in the partner's hands; switched off when Section 326 applies.
• Section 28 / Section 34 (deduction rules for partner remuneration and interest) — the ceilings on allowable remuneration (book-profit slabs) and the 12% cap on partner interest apply only after the firm clears Section 325; if it fails, even eligible amounts are fully disallowed.
• Best-judgment assessment provisions — a firm that also fails to file or produce accounts can face assessment on an estimated basis in addition to losing the deduction.

Practical implications

• The disallowance is 100% of the partner payments, not a partial one — this can dramatically increase the firm's taxable profit.
• Because the amounts are not taxed in partners' hands, the net effect is a shift of the whole payment into the firm's taxable income, taxed at the firm rate of 30% (plus surcharge and 4% cess).
• The fix is almost always administrative: execute a proper deed, specify shares, and file the certified copy. Keep the deed updated whenever a partner joins, exits, or profit-sharing ratios change.