Do you Run a Partnership Firm? Know the Key Income Tax Changes Effective from the 1st of April, 2025

Starting April 1, 2025, partnership firms, including Limited Liability Partnerships (LLPs), will have to comply with two significant income tax changes brought in by the Finance (No. 2) Act, 2024. These amendments focus on increased limits for partner remuneration and the introduction of Section 194T, which mandates Tax Deducted at Source (TDS) on payments to partners.

With the financial year 2024-25 coming to an end, it's crucial for firms and their partners to understand these changes and ensure compliance. Here’s a detailed look at the two major tax reforms impacting partnership firms from the next financial year.

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Increased Limits for Partner Remuneration

Until FY 2024-25 (Assessment Year 2025-26), the maximum remuneration a working partner can receive is:

1. On the first ₹3,00,000 of book profit (or in case of a loss): ₹1,50,000 or 90% of book profit, whichever is higher.
2. On the remaining book profit: 60% of the book profit.

Revised Limits from April 1, 2025 (AY 2026-27 Onwards)

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The Finance (No. 2) Act, 2024 has doubled the permissible limit for partner remuneration. The new structure is:

1. On the first ₹6,00,000 of book profit (or in case of a loss): ₹3,00,000 or 90% of book profit, whichever is higher.
2. On the remaining book profit: 60% of the book profit.

What This Means for Partnership Firms

The increased remuneration cap is beneficial for firms, allowing them to compensate partners more generously while still keeping these payments tax-deductible. However, firms must update their books and ensure they comply with the revised limits when calculating taxable income.

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Introduction of Section 194T – TDS on Payments to Partners

One of the most significant changes coming into effect from April 1, 2025, is the mandatory deduction of TDS on payments to partners under Section 194T.

Applicability of Section 194T:

Section 194T is applicable to all partnership firms and LLPs, regardless of their turnover. Under this provision, TDS will be deducted if the total payments to a partner exceed ₹20,000 in a financial year. Once this threshold is crossed, a 10% TDS will be applied to the entire payment amount, not just the portion exceeding ₹20,000.

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Payments Covered Under Section 194T:

TDS under Section 194T will apply to the following payments made to partners:

Payment Type	TDS Applicable?
Salary/ Remuneration	Yes
Commission	Yes
Bonus	Yes
Interest on Capital/ Loan	Yes
Drawings or Capital Repayment	No

This means that if a firm pays a partner a salary of ₹5,00,000, the entire amount (not just the amount exceeding ₹20,000) will be subject to 10% TDS, i.e., ₹50,000 will be deducted as TDS.

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Timing of TDS Deduction

TDS must be deducted at the time of crediting the amount in the partner’s account or at the time of payment—whichever is earlier.

What Happens If Firms Fail to Deduct TDS?

Failure to comply with Section 194T can lead to severe financial and legal consequences, including:

30% disallowance of the expense (Salary/Remuneration/Commission/Bonus/Interest on Capital).

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Interest Penalty:

1. 1% per month (or part of the month) for non-deduction of TDS.
2. 1.5% per month for non-payment of deducted TDS.

Late Filing Penalty: ₹200 per day for non-filing of TDS returns.

No Exemption or Lower TDS Rate Certificates Available

Under Section 194T, partners cannot submit Form 15G or 15H to claim an exemption from TDS on payments received from the partnership firm. Additionally, there is no provision for lower TDS deduction under Section 197 as of now. This means that firms must deduct the full 10% TDS on applicable payments without any exceptions or reductions.

How Will Section 194T Affect Partners’ Tax Liability?

Since TDS will be deducted at source under Section 194T, partners will have the credit available against their final income tax liability at the time of filing their Income Tax Return ( ITR ). If excess TDS has been deducted, it will be refunded after the ITR is processed. Additionally, TDS deducted under this section can be adjusted against the partner’s Advance Tax Liability, allowing for better tax planning and ensuring that partners do not face unnecessary tax burdens later in the financial year.

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Annual vs. Monthly TDS Deduction – How Should Firms Deduct TDS?

A common question that firms may have is whether TDS should be deducted monthly or annually. The deduction schedule depends on the type of payment. If the partnership deed specifies that partners receive a monthly salary, TDS should be deducted every month when the salary is credited. However, interest on capital is usually calculated annually, meaning TDS on interest should be deducted at the end of the financial year, typically in March. Firms should carefully review their payment structure and ensure compliance with the correct TDS deduction timeline to avoid penalties.

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Steps Firms Need to Take Before April 1, 2025

With these new changes coming into effect soon, partnership firms should take the following steps to ensure compliance:

1. Update Remuneration Agreements – Amend partnership agreements to align with the revised remuneration limits.
2. Obtain a TAN (Tax Deduction and Collection Account Number) – If your firm does not already have a TAN, apply for one before April 1, 2025 to avoid penalties.
3. Set Up TDS Deduction and Filing System – Ensure monthly deductions and timely filing of TDS returns to avoid penalties.
4. Communicate Changes to Partners – Partners should be informed that TDS will now be deducted from their payments, and they need to claim it while filing their ITR.
5. Consult a Tax Expert – If unsure about compliance, seek professional tax advice to avoid legal and financial complications.

The Finance (No. 2) Act, 2024, brings two major changes that will impact all partnership firms from April 1, 2025 – the increase in remuneration limits and mandatory TDS deduction under Section 194T. While the enhanced remuneration cap is a welcome move, firms must prepare for the strict TDS compliance that comes with the new rule.

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With penalties for non-compliance being significant, it is essential that firms act now to ensure seamless implementation of these changes. Partnership firms should take the necessary steps to update their financial and taxation practices before the new rules take effect to avoid disruptions and legal issues.

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