Partnership Firm Audit: Requirements & Tax Guide FY 2025-26

Q: What is the tax audit due date for a partnership firm for AY 2026-27?

Form 3CB with Form 3CD is due by 21 October 2026 and the firm's ITR-5 by 21 November 2026 (CBDT Circular No. 07/2026). The 21 November date also applies to the return of each partner of a firm whose accounts must be audited.

Introduction: Simple on the Surface, Not Underneath

A partnership firm looks like the simplest entity to audit — no Companies Act layer, no trust-exemption maze. But that simplicity hides two traps that catch even experienced practitioners: a firm has no basic exemption slab at all, which changes how the presumptive-taxation audit trigger actually bites; and the partnership deed's exact wording, not just the numeric slab limits, decides whether remuneration is deductible.

This is Part 5 of our entity-wise audit series. Our Partnership Firm Registration guide covers the formation side; this piece covers what changes at audit time.

Snapshot

A firm has no basic exemption limit — its very first rupee of income is taxable, which changes how the presumptive opt-out audit trigger works.
Remuneration and interest to partners are deductible only if the partnership deed's exact wording authorises them.
Opting out of Section 44AD after using it can mean five years of mandatory audit, not just one.

The Compliance Stack

Layer 1

Partnership Deed

No statutory audit requirement under the Partnership Act itself — but the deed's exact wording governs remuneration deductions.

Layer 2

Tax Audit

Sec. 44AB / New Sec. 63 — ₹1 crore/₹10 crore (business) or ₹50 lakh/₹75 lakh (professional firm), plus the presumptive opt-out trigger.

Layer 3

GST Reconciliation

GSTR-9C, self-certified once aggregate turnover crosses ₹5 crore.

Issue 1: The Zero-Basic-Exemption Audit Trap

Frequently Misunderstood

The Section 44AD/44ADA presumptive audit trigger requires audit when a taxpayer declares profit below the presumptive rate and total income exceeds the basic exemption limit. For an individual, this leaves room. For a firm, there is no basic exemption slab at all: a firm's income is taxable from the first rupee.

⚠️ Practical Consequence In effect, once a firm opts out of presumptive taxation and declares profit below the deemed rate, the "total income exceeds the basic exemption limit" condition is satisfied automatically. Many practitioners advising firm clients apply the individual-style "you're probably under the slab" reasoning by habit, which simply doesn't hold for a firm.

⚠️ The Five-Year Lock-Out If the firm used Section 44AD in one year and then opts out (or declares lower profit) in a later year while this condition is met, it is barred from re-entering Section 44AD for the following five assessment years, with audit mandatory in each of those years too.

Issue 2: Deed-Drafting Defects on Remuneration

High-Frequency Disallowance

Section 40(b) allows a deduction for partner remuneration and interest only if it is paid to a working partner, authorised by the partnership deed, and computed in a manner consistent with the deed's terms — not merely within the numeric slab caps prescribed by the section.

⚠️ Common Reporting Error Deed clauses that say remuneration will be paid "as mutually decided by the partners from time to time," or "up to the maximum permissible under Section 40(b)," without specifying an actual quantification method, are a recurring ground for disallowance — the deed needs to state either a fixed amount, a fixed percentage of book profit, or a clearly laid-out slab-based computation method.

Limits Revised from AY 2025-26 The Finance (No. 2) Act, 2024 raised the Section 40(b)(v) ceiling. On the first ₹6,00,000 of book profit (or in case of a loss), the limit is ₹3,00,000 or 90% of book profit, whichever is higher; on the balance, it is 60%. Many deeds still hard-code the old slab (the first ₹3,00,000 at 90%, minimum ₹1,50,000). If partners are paid up to the new ceiling without a supplementary deed, the excess over the deed's own formula is disallowed under Section 40(b)(ii).

⚠️ New TDS Duty: Section 194T From 1 April 2025, the firm must deduct TDS at 10% on salary, remuneration, commission, bonus or interest paid or credited to a partner, where the aggregate exceeds ₹20,000 in the year. FY 2025-26 is the first full year, so check compliance and report it under Clause 34 of Form 3CD.

✅ Reporting Impact Before finalising Clause 21(c) of Form 3CD, read the actual deed clause word for word and independently recompute remuneration/interest as the deed's own formula would produce it — then compare that figure to what was actually paid and to the Section 40(b) ceiling. All three should tie out.

Issue 3: Firm-to-Company or Firm-to-LLP Conversion

A firm converting into a company can rely on Section 47(xiii) for tax-neutral treatment, subject to a similar set of cumulative conditions (all assets/liabilities becoming those of the company, partners' shareholding proportion maintained for five years, no other consideration to partners beyond shares). Missing any condition can trigger the same capital-gains exposure seen in company-to-LLP conversions — covered in our LLP Audit Guide.

Issue 4: Dissolution & Retirement Settlements

Amounts paid to a retiring partner beyond their capital account balance, or asset distributions on dissolution, can trigger capital gains at the firm level. Section 45(4) taxes the excess paid over the partner's capital balance, and Rule 8AB attributes the gain to the firm's remaining capital assets. Section 9B deems capital assets or stock-in-trade distributed on dissolution or reconstitution to be transferred by the firm at fair market value. This is the post-Finance Act 2021 framework explained in CBDT Circular No. 14/2021.

Practical Point Treat any partner retirement, admission with revaluation, or dissolution during the year as a distinct audit item requiring its own capital-gains computation review — not a routine capital-account adjustment.

Practical Audit Tips

Never assume a firm is "under the slab" the way an individual might be — the basic exemption limit for a firm is effectively nil.
Read the partnership deed's exact remuneration clause before applying Section 40(b), and recompute independently.
Flag any presumptive-taxation opt-out decision as a five-year strategic call, not a one-year filing choice.
Review any partner retirement, admission, or dissolution event as a dedicated capital-gains item.

Commonly Missed Items

Partnership deed remuneration clause specifies an actual quantification method, not just a reference to statutory limits
Deed amendments (if any) for changes in profit-sharing ratio filed and dated correctly
Presumptive-taxation history checked for five-year lock-out exposure before advising an opt-out
Partner capital accounts reconciled against the deed's stated interest rate on capital
Any retirement/admission during the year reviewed for Section 45(4) capital-gains exposure

Reference Table

Item	Threshold / Rule
Tax audit (Section 44AB/63)	₹1 crore/₹10 crore (business); ₹50 lakh/₹75 lakh (professional firm)
Basic exemption limit	Nil — a firm's income is taxable from the first rupee
Section 44AD lock-out	5 assessment years after an opt-out/lower-profit declaration
Section 40(b) deduction condition	Must be authorised by, and computed as per, the actual partnership deed wording
Section 40(b)(v) ceiling (AY 2025-26 on)	Higher of ₹3 lakh or 90% on first ₹6 lakh of book profit (or loss); 60% on the balance
Section 194T TDS on partner payments	10% where aggregate exceeds ₹20,000 in the year (from 1 April 2025)

Frequently Asked Questions

If our firm's turnover is well below ₹1 crore, can we still be forced into an audit?

Answer: Yes, if the firm previously opted for presumptive taxation and now declares profit below the presumptive rate. Because a firm has no basic exemption limit, this condition is met almost automatically once the firm has any taxable income at all.

Our deed says remuneration will be "as per the Income Tax Act" — is that a problem?

Answer: It can be. Courts and assessing officers have disallowed remuneration where the deed simply references the statutory ceiling without independently specifying how the amount is computed. A fixed amount, a fixed percentage of book profit, or an explicit slab formula is safer.

What is the tax audit due date for a partnership firm for AY 2026-27?

Answer: Form 3CB with Form 3CD is due by 21 October 2026 and the firm's ITR-5 by 21 November 2026 (CBDT Circular No. 07/2026). The 21 November date also applies to the return of each partner of a firm whose accounts must be audited.

📞 Need Your Deed Checked Before It Costs You a Deduction? We review the actual partnership deed wording against amounts paid, not just against Section 40(b) slab limits — and track presumptive-taxation opt-out consequences before they trigger a five-year lock-out.
Book a Consultation →

Audit of a Partnership Firm