Section 167A: Charge of Tax in the Case of a Firm
Section 167A of the Income-tax Act, 1961 governed the rate of income tax on a firm assessable as a firm. From 1 April 2026, the corresponding provision is Section 324 of the Income-tax Act, 2025. The central principle is that a qualifying firm's total income is taxed at the rate prescribed by the applicable Central tax legislation, rather than automatically at the maximum marginal rate.
Meaning and scope of Section 167A
The statutory text states: In the case of a firm which is assessable as a firm, tax shall be charged on its total income at the rate as specified in the Finance Act of the relevant year.
A firm is a partnership arrangement recognised for income-tax purposes; under the 1961 Act, the definition of firm, partner and partnership in Section 2(23) also extends to a limited liability partnership and its partners. The words assessable as a firm matter: the entity must satisfy the conditions for assessment in that status, including those relevant under Section 184 of the 1961 Act.
Corresponding provision: Section 324 of the Income-tax Act, 2025
Section 324, titled Charge of tax in case of a firm, carries forward the same core charging principle in simplified language. It refers to the rate specified in a Central Act for the relevant tax year. The new numbering should not be confused with Section 167B, which addresses certain associations of persons and bodies of individuals.
How the tax rate is determined
Section 167A is a charging and rate-reference provision; it does not itself fix a permanent numerical rate. For a particular year, consult the applicable Finance Act, surcharge provisions, health and education cess, and any other applicable special provisions. For recent years under the 1961 Act, firms generally have a base income-tax rate of 30%, subject to applicable surcharge and cess; this is not a substitute for checking the legislation governing the year concerned.
Illustrative calculation
Suppose an eligible firm's taxable total income is Rs. 10,00,000 and the applicable base rate is 30%. The base tax is Rs. 3,00,000. At a 4% health and education cess, the total would be Rs. 3,12,000, assuming no surcharge, rebate, special-rate income or other adjustment applies. This is an illustration, not a tax computation for a specific year.
Assessment as a firm and related provisions
Under the 1961 Act, Section 184 addresses assessment as a firm, including the requirement that the partnership be evidenced by an instrument and the individual shares of partners be specified, subject to the detailed statutory requirements. Section 185 deals with consequences where the prescribed conditions are not fulfilled. Other relevant provisions include Section 40(b), concerning specified payments to partners, and Section 10(2A), concerning a partner's share in the total income of a separately assessed firm.
The taxation of the firm and taxation of its partners must be distinguished. A partner's exempt share of profit and any separately taxable interest or remuneration are governed by their respective provisions; Section 167A does not independently determine those outcomes.
Legislative history
The provision in its current 1961 Act form was introduced through the Finance Act, 1992, effective 1 April 1993. The Finance Act, 1997 substituted the reference to the rate specified in the Finance Act of the relevant year for the earlier maximum marginal rate language, effective 1 April 1998. Historical versions of Section 167A should not be applied without regard to their effective dates.
Official legal references
- Income Tax Department: Section 167A of the Income-tax Act, 1961
- Income Tax Department: Income-tax Act, 1961 as amended by Finance Act, 2025 (PDF)
- Income Tax Department: Section correspondence navigator (1961 to 2025)
- Income Tax Department e-Filing Portal
Frequently asked questions
Does Section 167A impose the maximum marginal rate on every firm?
No. The later version of Section 167A directs that an assessable firm's total income be taxed at the rate specified in the Finance Act for the relevant year.
What replaced Section 167A from April 2026?
Section 324 of the Income-tax Act, 2025 is the corresponding provision.
Is the tax rate written into Section 167A itself?
No. The section points to the rate prescribed by the relevant year's legislation.