Partnership Firm · Chapter 3
The Partnership Deed: what it must say
In short
A partnership deed is the written agreement between partners. It should cover the firm name, business, capital, profit ratio, partners' interest and remuneration, admission, exit and dissolution.
A partnership deed is the written agreement between the partners that sets out how the firm will be run. At a minimum it should state the firm name and business, each partner's capital, the profit-sharing ratio, interest and remuneration to partners, how partners join or leave, and how the firm is dissolved. It must be on stamp paper of the value your state prescribes.
Why does a partnership deed matter so much?
The Indian Partnership Act, 1932 allows a partnership to be formed even orally. But without a written deed:
- Default rules apply — profits shared equally, no salary to any partner, no interest on capital (section 13).
- Tax deductions are lost — the firm can deduct partners' interest and remuneration only if a written deed authorises and quantifies them.
- Paperwork stalls — PAN, bank account, GST Registration and Registrar of Firms all ask for the deed.
- Disputes are harder — there is no record of what was agreed.
What must a partnership deed contain?
| Clause | What to cover |
|---|---|
| Name and address | Firm name, principal place of business and any branches |
| Partners | Full name, age and address of each partner |
| Business | Nature of business the firm will carry on |
| Commencement and duration | Start date; whether the partnership is at will or for a fixed term |
| Capital | Amount and form (cash or property) of each partner's contribution |
| Profit and loss sharing | The ratio in which profits and losses are shared |
| Interest on capital | Rate, if any (the tax deduction is limited to 12% simple a year) |
| Remuneration | Which partners are "working partners" and the amount or formula for their remuneration |
| Drawings | Limits and any interest on drawings |
| Management and authority | Who operates the bank account, signs contracts and hires staff |
| Books and accounts | Where books are kept, accounting year and audit |
| Admission, retirement and death | How a partner joins or leaves, and whether the firm continues on death |
| Goodwill and settlement | How an outgoing partner's share is valued and paid |
| Disputes | Arbitration or mediation clause |
| Dissolution | Circumstances and procedure for closing the firm |
How should the tax clauses be worded?
For the firm to deduct payments to partners, the Income-tax law expects the deed to authorise them and to specify the amount or the method of calculating them. In practice:
- Interest on capital: state the rate, not more than 12% simple interest a year, to be fully deductible.
- Remuneration: name the working partners and give the amount or a formula (for example, "as per the maximum allowed under the Income-tax law, divided equally among working partners"). Vague wording like "as decided by partners" risks disallowance.
- Deductible remuneration is capped: on the first ₹6 lakh of book profit (or a loss), the higher of ₹3 lakh or 90% of book profit; on the balance, 60% of book profit.
What happens if the deed is silent?
Section 13 of the Act fills the gaps. Unless the partners agree otherwise:
- Profits and losses are shared equally.
- No partner gets remuneration for taking part in the business.
- No interest is paid on capital.
- A partner who advances money beyond agreed capital gets interest at 6% a year.
Other defaults: a new partner can join only with the consent of all partners (section 31), and a firm without a fixed term is a partnership at will, which any partner can end by written notice.
How much stamp duty does a partnership deed need?
Stamp duty is a state subject, so the amount varies by state. Always check your state's current Stamp Act schedule before buying stamp paper or paying e-stamp duty.
Example: Maharashtra
Under Article 47 of the Maharashtra Stamp Act (as amended in 2015):
| Capital contributed | Stamp duty |
|---|---|
| In cash, up to ₹50,000 | ₹500 |
| In cash, above ₹50,000 | 1% of the capital, maximum ₹15,000 |
| Immovable property brought in as capital | At conveyance rates on the market value of the property |
In Maharashtra, stamp duty can be paid by e-stamping or through the state's online payment system; see the Department of Registration and Stamps.
How is the deed executed?
- Draft the deed and have every partner read it.
- Print it on stamp paper of the correct value, or pay e-stamp duty.
- All partners sign, with two witnesses. Notarisation is common and often asked for by banks.
- Registration with the sub-registrar is generally not needed, unless immovable property is being transferred to the firm.
- Keep the original safely; you will need certified copies for PAN, bank, GST and the Registrar of Firms.
Key takeaways
- A written, properly stamped deed is essential even though the Act allows oral partnerships.
- Without a deed, profits are shared equally and no salary or interest on capital is allowed.
- Name the working partners and quantify interest (up to 12%) and remuneration, or the tax deduction may be lost.
- Stamp duty varies by state; in Maharashtra it is ₹500, or 1% of cash capital above ₹50,000 up to ₹15,000.
Frequently asked questions
Is a partnership deed mandatory in India?
The Indian Partnership Act, 1932 allows a partnership to be formed orally, so a written deed is not strictly required by that Act. In practice it is essential. Banks, the Income-tax Department, GST authorities and the Registrar of Firms ask for it, and the firm cannot deduct interest or remuneration paid to partners for tax unless a written deed authorises and quantifies them.
How much is the stamp duty on a partnership deed in Maharashtra?
Under Article 47 of the Maharashtra Stamp Act, as amended in 2015, a partnership deed where capital is contributed in cash attracts stamp duty of ₹500 if capital is up to ₹50,000. Above ₹50,000 it is 1% of the capital, subject to a maximum of ₹15,000. If a partner brings immovable property as capital, duty is charged at conveyance rates on its market value. Other states have different rates.
What happens if there is no partnership deed?
If partners have not agreed otherwise, the Indian Partnership Act, 1932 applies default rules. Profits and losses are shared equally, no partner is entitled to remuneration, no interest is paid on capital, and advances beyond agreed capital earn 6% a year. The firm is usually a partnership at will, which any partner can dissolve by notice. These defaults often do not match what partners actually intended.
Does a partnership deed need to be registered with the sub-registrar?
Generally, no. A partnership deed must be on stamp paper of the correct value and signed by all partners, and it is often notarised, but Registration with the sub-registrar is not usually required. It may be required where the deed transfers immovable property to the firm. Registering the firm with the Registrar of Firms is a separate process under the Indian Partnership Act.
Can a partnership deed be changed later?
Yes. Partners can change the deed at any time with the consent of all partners, by executing a supplementary deed or a fresh deed on appropriate stamp paper. Common changes include admitting or retiring partners, changing the profit ratio or revising remuneration. If the firm is registered, changes in partners, name or places of business must also be notified to the Registrar of Firms under the Act.
