Section 326: consequence of not complying with Section 325

Introduction

Where a firm fails to meet the specified requirement in section 325, section 326 changes how amounts paid to partners are treated in the firm’s and partners’ computations.

Key takeaways

The consequence

Irrespective of any other provision of the Act, where a firm does not comply with the provisions of section 325 for any tax year: no deduction is allowed, in computing its income chargeable under "Profits and gains of business or profession", for any payment of interest, salary, bonus, commission or remuneration (by whatever name called) made by the firm to a partner; and such interest, salary, bonus, commission or remuneration is not chargeable to income-tax under section 26(2)(g) in the hands of the firm's partners.

When this provision applies

Identify the particular Section 325 requirement and the tax year affected. That section includes the partnership instrument, individual shares, certified-copy and change requirements, as well as the separate consequence of a failure referred to in Section 271. Do not reduce the review to the existence of a signed deed alone.

Map every affected payment to a partner and classify it by substance. The listed interest, salary, bonus, commission and remuneration are covered regardless of the label used; a ledger description does not by itself remove a payment from the rule.

Limits and procedural safeguards

The matching partner-side rule is specifically that these payments are not chargeable under Section 26(2)(g). It should not be restated as a blanket exemption for every receipt or source of income of the partner.

Section 326 addresses the stated partner payments and their business-income deduction. It does not say that every unrelated operating expense of the firm is disallowed, nor that a similar add-back under some other provision automatically has the same partner-side consequence.

Step-by-step review

1. Record the precise Section 325 non-compliance and the relevant year.

2. Reconcile the affected partner payments against the accounts and individual partner ledgers.

3. Remove the prohibited deduction from the firm’s business-income computation.

4. Match the same amounts in the partners’ Section 26(2)(g) computations and preserve the basis for the treatment.

Hypothetical example

Hypothetical illustration: assume Section 326 applies and the firm has deducted ₹2 lakh interest and ₹3 lakh remuneration paid to partners. The ₹5 lakh deduction is disallowed in the firm’s business-income computation, and those same payments are not chargeable to the partners under Section 26(2)(g). The illustration does not exempt the partners’ unrelated income or determine the treatment of other firm expenses.

Records to prepare

The relevant deed and revised deed, certified-copy records and the identified compliance failure.

Partner-wise payment schedules reconciled with bank records and ledgers.

Matching firm and partner computation schedules identifying the same amounts.

Official amended Act source

• Income-tax Act, 2025 as amended by Finance Act, 2026: Section 326 and related provisions

Step-by-step flow for applying Section 326

1. 1

   Is the person a firm, and which tax year is involved?

   Section 326 applies to a firm for a particular tax year. Identify the year being assessed.

2. 2

   Has the firm complied with Section 325 for that tax year?

   Section 325 requires, among other things, that the partnership is evidenced by an instrument specifying the individual shares of the partners, and that a certified copy accompanies the return when assessment as a firm is first sought (or when there is a change).

   • Yes, it has complied: Section 326 does not apply. Partner payments are dealt with under the other provisions of the Act.
   • No: Go to the next step.
3. 3

   List every payment by the firm to a partner

   Collect interest, salary, bonus, commission or remuneration paid to partners, whatever it is called. Other business expenses are not touched by Section 326.

4. 4

   Disallow those payments in the firm's business income

   Under Section 326(a), no deduction is allowed for these payments in computing the firm's income under the head "Profits and gains of business or profession". This applies irrespective of anything in any other provision of the Act.

5. 5

   Exclude the same payments from the partners' income under Section 26(2)(g)

   Under Section 326(b), these payments are not chargeable in the partners' hands under Section 26(2)(g), so the same amount is not taxed twice.

Practical checklist

Glossary

Corresponding partner treatment

The specific Section 26(2)(g) treatment of the same payments for which Section 326 denies the firm’s deduction.

Payment classification

Identifying the substance of a partner payment rather than relying only on its accounting label.

Frequently asked questions