Starting April 1, 2025, significant amendments in the Finance (No. 2) Act, 2024 will impact Partnership Firms and LLPs in India. These changes primarily focus on:
- Higher tax-deductible partner remuneration limits.
- New TDS provisions under Section 194T for payments to partners.
This article covers everything you need to know about these updates, how they affect your firm, and the compliance measures you must take.
1. Increased Limits for Partner Remuneration
To allow firms to compensate their partners better, the government has revised the tax-deductible remuneration limits as follows:
- For the first ₹6,00,000 of book profit (or in case of a loss): The higher of ₹3,00,000 or 90% of book profit.
- For the remaining book profit: 60% of the excess amount.
Example:
If a partnership firm earns a book profit of ₹10,00,000, the permissible remuneration will be:
- First ₹6,00,000: 90% of ₹6,00,000 = ₹5,40,000
- Remaining ₹4,00,000: 60% of ₹4,00,000 = ₹2,40,000
- Total permissible remuneration: ₹7,80,000
✅ Action Required: Partnership agreements should be updated to reflect these new limits to claim full tax deductions.
2. New TDS Provisions – Section 194T
A significant introduction is Section 194T, which mandates Tax Deducted at Source (TDS) on payments to partners.
Key Highlights of Section 194T:
✔️ Who is affected? – All partnership firms and LLPs, irrespective of turnover.
✔️ What payments are covered? – Interest, salary, bonus, commission, or other forms of partner remuneration.
✔️ Threshold limit? – If total payments exceed ₹20,000 in a financial year, TDS applies.
✔️ TDS rate? – 10% on the entire amount once the threshold is crossed.
✔️ When is TDS deducted? – At the time of crediting the partner’s account or during payment, whichever comes first.
Example:
If a partner receives ₹25,000 as interest on capital, the firm must deduct:
- 10% of ₹25,000 = ₹2,500 as TDS.
- Net payable amount = ₹22,500 after TDS deduction.
✅ Action Required: Firms must set up TDS tracking and ensure timely deductions to avoid penalties.
3. Key Implications & Compliance Requirements
- 🔹 Review and update partnership agreements to reflect new remuneration limits for tax benefits.
- 🔹 Ensure TDS compliance under Section 194T by keeping track of partner payments.
- 🔹 Maintain proper records of remuneration and TDS deductions to avoid scrutiny.
- 🔹 File revised tax returns as per updated limits to prevent penalties and maximize deductions.
4. Penalties for Non-Compliance
Failing to comply with these new tax provisions can result in severe penalties:
❌ Non-deduction of TDS under Section 194T → Interest @ 1% per month on unpaid TDS + Penalty up to the unpaid amount.
❌ Delayed TDS deposit → Interest @ 1.5% per month + Late fees of ₹200 per day.
❌ Incorrect or missing partnership agreement update → Disallowance of remuneration as business expense = Higher tax liability.
✅ Action Required: Timely filing and compliance ensure tax savings and avoid unnecessary penalties.
5. Conclusion – What Firms & LLPs Should Do Next?
These tax reforms from April 1, 2025, significantly affect how Partnership Firms and LLPs handle partner payments and taxation. The increased remuneration limits are a welcome move, but the new TDS rule (Section 194T) requires careful tracking and compliance.
🔹 Recommended Action Plan:
✔️ Revise partnership agreements to align with the new remuneration structure.
✔️ Implement TDS compliance systems to deduct and deposit tax on partner payments.
✔️ Consult a tax expert or Chartered Accountant to ensure smooth compliance.
By staying updated and proactive, businesses can optimize their tax efficiency, avoid penalties, and ensure hassle-free compliance.
