How an NRI Partner in an Indian Firm or LLP Is Taxed: Profit Share, Remuneration, Interest and the New 194T TDS

You sign a partnership deed for a firm in Pune, or you are added as a designated partner in an LLP your cousin runs in Bengaluru. You put in Rs 50 lakh of capital. At year end the accountant tells you the firm made Rs 80 lakh of profit, your 40% share is Rs 32 lakh, and you also drew Rs 12 lakh as remuneration and earned Rs 6 lakh of interest on your capital. Now the question that keeps NRI partners up at night: how much of that Rs 50 lakh of cash flowing to you is taxable in India, what gets taxed at the firm level, and what does the bank in your country of residence do with all of it.

The 30-second answer: An Indian partnership firm or LLP is a separate taxpayer. It pays 30% tax plus 12% surcharge above Rs 1 crore and 4% cess on its book profit. Your share of profit is then exempt in your hands under Section 10(2A) to avoid double tax. But interest on your capital and any remuneration or salary you draw as a working partner are fully taxable to you as business income, and deductible to the firm within the revised Section 40(b) limits. From April 1, 2025, Section 194T makes the firm deduct 10% TDS on remuneration and interest paid to you once they cross Rs 20,000 in a year. FEMA generally allows an NRI to be a partner only on a non-repatriation basis. Then your home country taxes the lot, with foreign tax credit.

For tax-season context across all of this, the master reference is the ITR filing season 2026 master guide.

This guide walks through the full chain. We start with how the firm itself is taxed, then the Section 10(2A) exemption that protects your profit share, then the parts that are not protected (interest and remuneration) and the Section 40(b) limits that govern how much the firm can deduct. We cover the new Section 194T TDS that began in April 2025 and how it interacts with your NRI status. We look at the FEMA rules that decide whether you can be a partner at all and on what terms. We finish with how your country of residence taxes the income, where the foreign tax credit fits, a worked example with real rupee figures, the edge cases that trip people up, and the honest read on what NRI partners consistently get wrong.

A firm or LLP is its own taxpayer, taxed at 30%

The first thing to internalise is that an Indian partnership firm and an LLP are not pass-through entities the way some structures are in the US or UK. Under the Income Tax Act, a firm and an LLP are separate assessees. The firm computes its own income, files its own return, and pays its own tax before anything reaches the partners.

The rate is flat and high. A partnership firm or LLP is taxed at a flat 30% on its total income. There is no slab structure, no basic exemption, and no concessional regime of the kind individuals enjoy. On top of the 30%, a surcharge of 12% applies where the firm's total income exceeds Rs 1 crore, subject to marginal relief so that the jump at the Rs 1 crore line does not exceed the extra income earned. Then a health and education cess of 4% is levied on the tax plus surcharge.

So the effective rate on a firm with income above Rs 1 crore works out to roughly 34.94% (30% grossed up by 12% surcharge and 4% cess). Below Rs 1 crore, with no surcharge, the effective rate is 31.2% (30% plus 4% cess). This is the tax the firm pays on its book profit, and it is paid before any distribution.

This matters for you as an NRI partner because it is the reason your profit share is later exempt. The income has already been taxed once, at the entity level, at a rate close to or above the top individual rate. Taxing it again in your hands would be double taxation on the same rupee.

Section 10(2A): why your share of profit is exempt

Here is the piece that surprises most new partners, pleasantly. The share of profit you receive from a firm or LLP is fully exempt in your hands under Section 10(2A). It does not matter whether you are resident or non-resident. It does not matter how large the share is. If it is genuinely your share of the firm's profit, distributed per the partnership deed or LLP agreement, it is exempt.

The logic is clean. The firm has already paid 30% plus surcharge and cess on its book profit. Your profit share comes out of that already-taxed profit. To tax it again at your level would be to tax the same income twice. Section 10(2A) exists precisely to prevent that double tax.

A few details worth nailing down:

• The exemption is on the share of total income of the firm, computed in the manner the section prescribes, not simply on whatever cash you withdrew. The mechanism looks at the profit on which the firm has been assessed and exempts your proportionate share.
• The exemption survives even where part of the firm's income was itself exempt under other provisions. Courts have held that a partner can claim 10(2A) on the share of profit even if it includes income that was exempt at the firm level. The partner is not taxed on the firm's exempt income either.
• The exemption applies to LLPs exactly as it applies to firms, because an LLP is treated as a firm under the Income Tax Act. A share of profit from an LLP is exempt under 10(2A) in the same way.

What the exemption does not cover is the part that did not bear tax at the firm level as profit, namely interest on capital and remuneration. The firm deducted those amounts before arriving at its taxable book profit, so they were never taxed at the firm level. That is why they get taxed in your hands instead. We turn to those next.

What is taxable in your hands: interest on capital and remuneration

If the profit share is the protected part, interest on your capital and your remuneration as a working partner are the exposed part. Both are fully taxable in your hands, and both are taxed under the head "Profits and gains of business or profession" (PGBP), not as salary and not as other income.

The reason they are taxable to you is the mirror image of why the profit share is exempt. When the firm computes its book profit, it is allowed to deduct the interest it pays you on your capital and the remuneration it pays you as a working partner, within the Section 40(b) limits. Those deductions reduce the firm's taxable income, so the firm did not pay 30% on them. The Act collects the tax on those amounts from you instead. The income is taxed once, just at your level rather than the firm's.

For an NRI, this taxable business income from an Indian firm is India-sourced income and is taxable in India regardless of your residential status. You are taxed on it at your applicable individual rates. As an NRI you do not get certain reliefs that residents enjoy, but the basic exemption position for non-residents is its own topic; see why NRIs get no basic exemption on capital gains for the related principle on how non-resident thresholds work.

Three things to keep straight:

1. Interest on capital is taxable to you only to the extent the firm was entitled to deduct it. If the partnership deed allows 12% interest but Section 40(b) caps the firm's deduction at 12%, and the firm pays exactly 12%, the whole 12% is taxable to you. If the deed allowed 18% but the firm could only deduct 12%, the excess 6% that the firm could not deduct is not taxable in your hands, because it was already effectively taxed at the firm level (the firm could not reduce its income by it).
2. Remuneration, salary, bonus and commission to a working partner are taxable to you in the same way, again limited to the amount the firm was allowed to deduct under Section 40(b). Anything above the 40(b) limit that the firm could not deduct is not taxed again in your hands.
3. Only a working partner can receive deductible remuneration. A sleeping or non-working partner cannot be paid deductible remuneration, and if a firm pays it anyway, the firm cannot deduct it and you are not taxed on it as PGBP. As an NRI who is often not physically present in India, whether you qualify as a "working partner" is a genuine question, which we cover in the edge cases.

The Section 40(b) limits, revised from April 2025

Section 40(b) is the rule that caps how much remuneration and interest the firm can deduct. It does not cap what the firm can pay you. It caps what the firm can claim as an expense. Anything beyond the limit is simply added back to the firm's income and taxed at 30%.

Interest on capital: the firm can deduct interest paid to partners up to 12% per annum, provided the partnership deed authorises it. Interest beyond 12% is disallowed at the firm level.

Remuneration to working partners: this is where the Finance Act 2024 made an important change, effective April 1, 2025 (AY 2025-26). The earlier slab had been in place for years. The revised limits roughly double the deductible remuneration:

• On the first Rs 6,00,000 of book profit (or in case of a loss), the firm can deduct Rs 3,00,000 or 90% of book profit, whichever is higher.
• On the balance of book profit above Rs 6,00,000, the firm can deduct 60%.

To compare, the old limits applied 90% on the first Rs 3,00,000 (with a Rs 1,50,000 floor) and 60% thereafter. So the threshold for the higher 90% rate moved from Rs 3,00,000 to Rs 6,00,000, and the floor moved from Rs 1,50,000 to Rs 3,00,000. The practical effect is that firms can now pay and deduct meaningfully more remuneration to working partners, which in turn means more of the firm's income flows out as taxable-to-the-partner remuneration rather than staying as exempt-to-the-partner profit share.

Two conditions are non-negotiable for any of this to be deductible:

• The partnership deed must authorise the remuneration and the interest, and must specify the manner of computing them. A deed silent on remuneration means no deduction.
• The remuneration must relate to a period after the date of the deed that authorised it. Retrospective remuneration is disallowed.

For NRI partners, the planning point is subtle. Because profit share is exempt to you but remuneration and interest are taxable to you, there is a natural tension. The firm wants to deduct remuneration and interest to reduce its 30% tax. You, as the partner, would rather take exempt profit share than taxable remuneration, all else equal. The optimal split depends on the firm's profit level, your individual tax rate in India, and crucially your home-country tax, which often does not recognise the Indian exemption at all. More on that below.

Section 194T: the new TDS on partner payments from April 2025

This is the change that has caught firms and partners off guard, and it matters to NRI partners specifically. Section 194T came into effect on April 1, 2025, and applies from FY 2025-26 onward. Until then, payments from a firm to its partners carried no TDS. That era is over.

Here is the rule:

• The firm or LLP must deduct TDS at 10% on any salary, remuneration, commission, bonus or interest (whether interest on capital or interest on a loan) paid or credited to a partner.
• TDS kicks in once the aggregate of such payments to a partner exceeds Rs 20,000 in the financial year. Once you cross Rs 20,000, the firm deducts on the entire amount, not just the slice above Rs 20,000.
• The deduction happens at the earlier of the credit of the amount to the partner's account (including the capital account) or the actual payment.
• Profit share and capital withdrawals (drawings) are excluded. Section 194T does not touch your exempt profit share, and it does not touch capital you withdraw. It only bites the taxable streams: interest and remuneration.

Two NRI-specific points are important. First, hold a valid PAN. Under Section 206AA, if you do not furnish a PAN, the firm must deduct at 20% instead of 10%. For an NRI partner without a PAN, that is a real cash-flow hit and a refund headache. If you do not have one yet, start with PAN for NRIs.

Second, the 10% rate under 194T is a domestic-law rate. NRIs are used to thinking about Section 195 (TDS on payments to non-residents) and DTAA rates. Section 194T is drafted as a general TDS provision applying to all partners, and the prevailing reading is that it applies to NRI partners as well at 10% on the interest and remuneration streams, separate from the higher Section 195 machinery that applies to other kinds of payments to non-residents. The interaction between 194T and 195 for a non-resident partner is an area where firms should take a clear position with their advisor, because the law is new and practice is still settling. Where the field is genuinely unsettled, that is exactly where you want the position documented.

The credit for this TDS shows up in your Form 26AS and AIS, and you claim it against your final Indian tax liability when you file. If the TDS exceeds your actual Indian tax, you claim a refund. See Form 26AS and AIS for NRIs and TDS for NRIs and refunds for how to reconcile and recover.

FEMA: can an NRI even be a partner, and on what basis

Before any of the tax analysis matters, you have to be allowed to hold the partnership interest. This is governed by FEMA, not the Income Tax Act, and the two regimes are entirely separate.

The general position under the FEMA framework is that an NRI or OCI can invest in a partnership firm or LLP on a non-repatriation basis, provided the firm is engaged in an industrial, commercial or trading activity. "Non-repatriation basis" is the key phrase, and it has a precise meaning. It means:

• The capital you invest and the income or profit it generates cannot be remitted abroad. It stays within the Indian financial system.
• The investment and returns are typically routed through your NRO account, not your NRE account.
• The investment is treated as domestic investment, on par with a resident's, for FEMA purposes.

There are hard sector restrictions on even the non-repatriation route. An NRI cannot be a partner in a firm or LLP that is:

• engaged in any agricultural or plantation activity,
• engaged in real estate business in the sense of dealing in land and immovable property for profit (note that this does not bar normal development or construction, but it does bar pure trading in land), or
• engaged in print media or other sectors specifically prohibited.

The agricultural and real-estate-trading bar is the one that trips people up, because many family firms in India have some land or farming activity bundled in. If the firm touches a prohibited sector, the NRI simply cannot be a partner on the non-repatriation route.

Repatriation-basis partnership investment, where you could one day take the capital and profits out of India, is not the default and generally requires prior RBI approval. It is not something you assume; it is something you apply for. For most NRI partners in family or professional firms, the realistic answer is non-repatriation, with the funds locked into the Indian system. Understand that before you commit capital, because it changes your whole liquidity picture. For how the NRO route and repatriation caps work, see NRO repatriation process and the NRO repatriation cap on investments.

The honest framing here: the FEMA non-repatriation reality means a partnership interest in India is, for most NRIs, a relatively illiquid, India-locked asset. That is fine if you are building an India corpus deliberately. It is a problem if you assumed you could pull the money to your country of residence on demand. Decide which you are.

Your home country taxes all of it, with foreign tax credit

Here is where NRI partners get the rudest surprise. Your country of residence taxes your worldwide income, and it does not care that India exempts your profit share under Section 10(2A). The Indian exemption is an Indian concept. The US, UK, Canada and most other countries will tax your share of the firm's profit as it is earned, often regardless of whether you actually received cash.

This creates a fundamental mismatch:

• In India, your profit share is exempt (10(2A)) and only your interest and remuneration are taxable.
• In your home country, the profit share is usually taxable to you, frequently on a flow-through or partnership-look-through basis, and you may owe tax there on income that bore no tax in your own hands in India (it was taxed at the firm level, but that is the firm's tax, not yours).

The foreign tax credit (FTC) is supposed to relieve double taxation, but it works imperfectly here. The credit generally lets you offset foreign tax you paid on the same income against your home-country tax on that income. The problem is that the Indian tax on the profit share was paid by the firm, not by you. Many home-country tax systems will not let you claim a credit for tax paid by a separate Indian entity against your personal tax. So the profit share can end up taxed at the firm level in India (30% plus surcharge and cess) and then taxed again in your hands abroad with little or no credit. That is the structural double-tax trap that the 10(2A) exemption does not, and cannot, fix internationally.

For the streams that are taxed in your hands in India (interest and remuneration), the FTC mechanics are cleaner. You paid Indian tax on that income personally, so you generally claim a credit for that Indian tax against your home-country tax on the same income, subject to the relevant DTAA and your home country's FTC rules and timing. The classic problem is timing mismatch, where the two countries tax the same income in different years; see the NRI foreign tax credit timing mismatch and, for the India-side mechanics, foreign tax credit and Form 67. The treaty position itself depends on your country; the DTAA relief for NRIs guide is the starting point, with country-specific deep dives such as the India-US DTAA, India-UK DTAA, India-UAE DTAA and India-Canada DTAA.

The honest read on the cross-border piece: do not assume the Indian exemption protects you globally. It protects you in India. Whether you are protected in your country of residence depends entirely on that country's law and treaty, and for the profit share specifically, you are often not fully protected. Model the combined tax before you decide how much capital to put into an Indian firm and how to split your returns between profit share and remuneration.

Worked example: an NRI partner in an LLP

Let us put real numbers on it. Assume you are an NRI partner in an Indian LLP for FY 2025-26. The deed authorises interest on capital and remuneration to you as a working partner.

Step 1: The LLP's book profit before partner payments

The LLP earns a book profit, before deducting partner interest and remuneration, of Rs 1,00,00,000 (Rs 1 crore).

Step 2: Interest on your capital

You contributed Rs 50,00,000 of capital. The deed allows 12% interest, which is the Section 40(b) ceiling. The LLP pays and deducts:

• Interest on capital = 12% of Rs 50,00,000 = Rs 6,00,000

Step 3: Remuneration under the revised Section 40(b) limits

Book profit for the remuneration computation, after deducting the Rs 6,00,000 interest, is Rs 1,00,00,000 minus Rs 6,00,000 = Rs 94,00,000.

Revised 40(b) limit on deductible remuneration:

• On the first Rs 6,00,000 of book profit: 90% = Rs 5,40,000 (this exceeds the Rs 3,00,000 floor, so Rs 5,40,000 applies)
• On the balance Rs 88,00,000: 60% = Rs 52,80,000
• Total deductible remuneration ceiling = Rs 5,40,000 plus Rs 52,80,000 = Rs 58,20,000

Assume the deed and the partners agree that your remuneration is Rs 12,00,000, comfortably within the firm's overall deductible ceiling. The LLP deducts your Rs 12,00,000.

Step 4: The LLP's taxable income and tax

• Book profit before partner payments: Rs 1,00,00,000
• Less interest on capital: Rs 6,00,000
• Less remuneration: Rs 12,00,000
• LLP taxable income: Rs 82,00,000

Tax at 30% = Rs 24,60,000. Income is below Rs 1 crore, so no surcharge. Cess at 4% = Rs 98,400.

• LLP tax payable = Rs 25,58,400

Step 5: Your profit share, and what is exempt

The LLP's profit after its own tax is distributed per the deed. Say your profit-sharing ratio is 40%. Your share of the LLP's taxable profit of Rs 82,00,000 is Rs 32,80,000. This Rs 32,80,000 profit share is exempt in your hands under Section 10(2A). You owe no Indian tax on it personally, because the LLP already paid tax on that income.

Step 6: What is taxable to you in India

• Interest on capital: Rs 6,00,000 (taxable, PGBP)
• Remuneration: Rs 12,00,000 (taxable, PGBP)
• Total taxable in your hands: Rs 18,00,000

Step 7: Section 194T TDS

Both the interest (Rs 6,00,000) and remuneration (Rs 12,00,000) exceed the Rs 20,000 threshold, so the LLP deducts 10% TDS on the full Rs 18,00,000:

• 194T TDS = 10% of Rs 18,00,000 = Rs 1,80,000

This Rs 1,80,000 is credited to your PAN, shows in your Form 26AS and AIS, and you claim it when you file. Note: had you not furnished a PAN, the LLP would deduct at 20% under Section 206AA, that is Rs 3,60,000.

Step 8: Your Indian tax on the Rs 18,00,000

You compute your individual Indian tax on the Rs 18,00,000 of taxable business income (along with any other Indian income), claim the Rs 1,80,000 of 194T TDS against it, and pay the balance or claim a refund. The exact figure depends on your regime and other income, but the structure is the point: Rs 32,80,000 exempt, Rs 18,00,000 taxable, Rs 1,80,000 already deducted at source.

Step 9: Your home country

Your country of residence will likely tax your Rs 32,80,000 profit share as well, even though India exempted it, and will tax the interest and remuneration too. You claim FTC for the Indian tax you personally paid on the Rs 18,00,000. For the Rs 32,80,000, the credit position is weak because the Indian tax on it was the LLP's, not yours. That is the cross-border gap to plan around.

Edge cases

LLP versus partnership firm. For income tax, an LLP is treated as a firm, so the 30% rate, Section 10(2A), Section 40(b) and Section 194T apply identically. The differences are in liability and governance, not tax. An LLP gives you limited liability and a separate legal personality; a traditional firm does not. For an NRI putting capital into a structure run by others, the limited liability of an LLP is usually the safer choice, but the tax outcome is the same either way.

Are you a "working partner" at all? Deductible remuneration can only go to a working partner. If you are an NRI sitting abroad with no active role, calling yourself a working partner and drawing remuneration invites scrutiny. If the remuneration is later held to be to a non-working partner, the firm loses the deduction and the characterisation unravels. Be honest about your role. If you genuinely do not work in the firm, take your return as interest on capital and profit share, not remuneration.

FEMA repatriability. As covered above, the realistic route is non-repatriation, with the money locked into India through your NRO account. Do not assume you can take the capital out. If repatriation matters to you, you need prior RBI approval, which is not the norm for partnership investments. Many NRIs discover this only when they try to exit, which is the worst time to find out.

Prohibited sectors for foreign partners. Even on the non-repatriation route, you cannot be a partner in a firm engaged in agriculture, plantation, real estate business in the land-trading sense, or print media and other restricted sectors. Family firms often have a stray agricultural or land-dealing activity that disqualifies the whole structure. Check the firm's actual activities, not just its name, before you sign.

The revised 40(b) limits and timing. The higher remuneration limits apply from AY 2025-26 (FY 2024-25 onward, with the new figures effective from April 1, 2025 for the relevant computations). If you are looking at a deed drafted before the change, it may use the old slabs and old floor, and may need amending to let the firm use the new, higher deductible remuneration. A deed that does not authorise remuneration in the right manner means no deduction, full stop.

194T and the Rs 20,000 cliff. The Rs 20,000 threshold is per partner per year and, once crossed, applies to the whole amount. There is no way to structure small monthly payments under Rs 20,000 to dodge it, because the test is aggregate for the year. Plan for the 10% deduction on your full interest and remuneration from FY 2025-26 onward.

Advance tax. Because 194T only takes 10% and your actual rate on the taxable business income may be higher, you can still have an advance-tax liability in India on the interest and remuneration. See advance tax for NRIs so you do not get hit with interest under Sections 234B and 234C.

The closing read

The structure is cleaner than it first looks once you separate the three streams. The firm pays 30% plus surcharge and cess on its book profit. Your profit share is exempt under Section 10(2A) because that profit was already taxed at the firm level. Your interest on capital and your remuneration are taxable in your hands as business income, because the firm deducted them and never paid tax on them, all of it now subject to 10% TDS under Section 194T from April 1, 2025. Hold a PAN so that TDS stays at 10% and not 20%.

The two things NRI partners consistently miss are the FEMA reality and the home-country reality. On FEMA, your partnership interest is almost certainly a non-repatriation, India-locked asset, so do not put in capital you might need back abroad. On the home-country side, the Indian 10(2A) exemption does not travel; your country of residence will likely tax the profit share anyway, and the foreign tax credit is weak on that piece because the Indian tax was the firm's, not yours. Model the combined Indian-plus-home tax, and the liquidity lock, before you sign the deed. The partnership can be a sound way to build an India corpus. Just go in with your eyes open on both the tax and the exit.

Related guides

• PAN for NRIs
• TDS for NRIs and refunds
• Form 26AS and AIS for NRIs
• Advance tax for NRIs
• NRI presumptive taxation under Section 44ADA
• DTAA relief for NRIs
• Foreign tax credit and Form 67
• India-US DTAA deep dive
• India-UK DTAA deep dive
• NRI foreign tax credit timing mismatch
• NRO repatriation process
• The NRO repatriation cap on investments
• Why NRIs get no basic exemption on capital gains
• ITR filing for NRIs, AY 2026-27
• Tax on NRO interest

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Disclaimer: This guide is general information, not tax, legal or investment advice. The taxation of partnership and LLP income, the Section 40(b) limits, Section 194T TDS and the FEMA rules on NRI partnership investment are technical and fact-specific, and the cross-border treatment depends on your country of residence and the relevant tax treaty. Section 194T is new (effective April 1, 2025) and practice on its application to non-resident partners is still settling. Rates, thresholds and rules change with each Budget and Finance Act. Verify the current position and consult a qualified chartered accountant in India and a tax adviser in your country of residence before acting on anything here.