The default offers an election when its conditions are met
Section 37 of the Indian Partnership Act, 1932 addresses business continued with firm property after a partner dies or otherwise ceases to be a partner, without final settlement of accounts with the outgoing partner or estate. In the absence of a contrary contract, the outgoing partner or representatives may opt for the subsequent profits attributable to use of that property share or 6% annual interest on the amount of the share. Checked on 28 October 2026, this guide concerns ordinary partnerships under that Act, not an automatic rule for companies or LLPs. Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso.
Establish continued use and the unsettled share
Retain the cessation date, firm property and capital records, valuation evidence and settlement correspondence. A book capital balance may not by itself establish the amount of the person's share in firm property for this purpose. Equally, a delayed payment does not automatically prove every section 37 condition. Determine what property remained in the continuing business and whether accounts were finally settled before applying the default. The examples stipulate a legally established share and qualifying use period. Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso.
Read the contract before choosing the statutory default
Section 37 expressly accommodates a contract to the contrary. Its proviso addresses a contractual option for continuing partners to purchase the outgoing/deceased partner's interest: due exercise can remove the stated further-profit entitlement, while material non-compliance with the option terms leaves the relevant accounting liability under the section. A purchase-option notice is therefore not interchangeable with performance of the actual option terms. Preserve price, payment, timing and other material conditions and their fulfilment evidence. Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso.
Profit attribution is not simply the old profit-sharing percentage
The profit route concerns profits since cessation attributable to use of the outgoing share of property. Establish an attributable amount with supported accounts and an appropriate factual analysis; do not automatically multiply total later profits by the historic partnership ratio. The models stipulate any attribution input rather than claiming that a capital percentage is a universal legal formula. Separate post-exit work, new funding and unrelated activities where relevant to that analysis. Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso.
Compare alternative amounts on the same period
The interest route uses 6% per annum on the established share amount. The models use simple annual or monthly proportions with no compounding assumption. If an established share amount changes following a valid partial settlement, split the periods and supported balances. The two section 37 routes are alternatives on the qualifying facts, not automatically interest plus the attributed profit. Entitlement, election, tax treatment and the firm's accounting entries are distinct issues. Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso.
Document settlement and the selected route
Keep the contract analysis, valuation/share determination, attributable-profit working, interest comparison, election and settlement evidence together. An estimate does not itself settle the parties' accounts or establish a tax deduction. Contested rights, time limits and enforcement require their own legal review. A settlement agreement should specify the covered period and sums so a payment is not silently treated as settling every past and future claim without supporting terms. Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso.
Applicable primary references
Delhi Department of Industries: Indian Partnership Act, 1932, section 37 and proviso
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Annual interest alternative
Assume an established unsettled property share ₹10,00,000 is used for one full year and all default conditions are met. The 6% annual simple-interest alternative is ₹60,000, before separate tax or contractual issues.
Illustrative example 2: Six-month period
On a qualifying ₹10,00,000 share used for six months, the model interest amount is ₹10,00,000 × 6% × 6/12 = ₹30,000. The period assumption is explicit; no daily convention is prescribed here.
Illustrative example 3: Higher attributable profit
Assume one-year interest alternative ₹60,000 and legally supported attributable profits ₹90,000. Comparing the alternatives gives ₹90,000 versus ₹60,000, a ₹30,000 difference. The statutory default does not automatically produce their ₹1,50,000 sum.
Illustrative example 4: Lower attributable profit
Assume six-month interest alternative ₹30,000 and supported attributable profit ₹20,000. The difference is ₹10,000 in favour of the interest alternative, assuming that route is available and selected. It is not a second amount added to profit.
Illustrative example 5: A supported partial-settlement balance
Assume the legally determined outstanding share is ₹10,00,000 for six months and, after an effective partial settlement, ₹6,00,000 for the next six months. Model interest is ₹30,000 + ₹18,000 = ₹48,000. The balance change is stipulated, not inferred merely from an unexplained bank payment.
Illustrative example 6: Historic ratio is not an attribution finding
Assume subsequent profits ₹3,00,000 and an independently supported attribution to use of the outgoing property share of 25%. Attributed profit is ₹75,000. Applying a historic 40% ratio would produce ₹1,20,000, ₹45,000 higher, without proving that legal attribution premise.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Establish ordinary-partnership scope | Applicable Act and entity form |
| 2 | Fix cessation and relevant period | Retirement/death/other event evidence |
| 3 | Review contrary contractual terms | Deed, exit agreement and amendments |
| 4 | Analyse any purchase option | Material terms, due exercise and performance |
| 5 | Determine the property share | Valuation, accounts and settlement evidence |
| 6 | Prove continued business use | Relevant property and post-exit business records |
| 7 | Calculate attributable profits | Supported method and post-cessation accounts |
| 8 | Calculate the alternative interest | Established balances, periods and 6% annual model |
| 9 | Record the actual election | Available routes and authorised decision |
| 10 | Close the settlement evidence | Covered period, payments and independent tax/legal review |
Sixteen practitioner FAQs
1. Does section 37 automatically govern an LLP?
This guide concerns ordinary partnerships under the Partnership Act.
2. Can death or retirement be relevant?
The section covers death or otherwise ceasing to be a partner on its conditions.
3. Is a late payment alone enough?
Establish continued business use and the unsettled-account conditions.
4. Can the partnership contract alter the default?
The section expressly recognises a contract to the contrary.
5. Does a contractual purchase option matter?
Yes. Apply the proviso and its actual terms.
6. Is sending an option notice necessarily full compliance?
No. Examine material performance.
7. Is the capital ledger alone conclusive property-share valuation?
Do not assume that without supporting determination.
8. Does the old profit ratio automatically determine the claim?
No. Establish profits attributable to use of the property share.
9. Must the profit period follow cessation?
The section addresses subsequent profits on the stated basis.
10. What interest rate does the default state?
6% per annum.
11. Do these examples assume compound interest?
No. They use stated simple proportions.
12. Can a proven partial settlement change the working balance?
Use the legally established balances and periods.
13. Are profit and interest automatically cumulative?
No. The section provides the stated alternatives.
14. Does the model itself prove an income-tax deduction?
No. Tax treatment requires separate law and facts.
15. Does an estimate itself finally settle accounts?
No. Retain an effective settlement and payment record.
16. What supports a reliable comparison?
The contract, property share, attribution evidence, common period and election.
Conclusion
Establish continued use of an unsettled property share, inspect contrary contracts and purchase options, then compare the two alternative statutory routes on supported figures.