Do you run a partnership firm? Discover the essential income tax changes that will take effect on April 1, 2025.

Below is a comprehensive overview of the two key tax reforms that will affect partnership firms in the upcoming financial year.

Beginning April 1, 2025, partnership firms, including Limited Liability Partnerships (LLPs), will need to adhere to two important income tax modifications introduced by the Finance (No. 2) Act, 2024. As the financial year 2024-25 draws to a close, it is essential for firms and their partners to grasp these changes and ensure they are compliant.

These changes involve higher limits for partner remuneration and the establishment of Section 194T, which requires Tax Deducted at Source (TDS) on payments made to partners.

For the financial year 2024-25 (Assessment Year 2025-26), the maximum remuneration that a working partner can earn is as follows: For the initial ₹3,00,000 of book profit (or in the event of a loss), the amount is ₹1,50,000 or 90% of the book profit, whichever is greater. For any book profit exceeding this amount, the remuneration is capped at 60% of the total book profit.

Updated limits effective from April 1, 2025, for the assessment year 2025-26 and beyond.

The Finance (No. 2) Act, 2024 has increased the allowable limit for partner compensation. The updated framework is as follows:

For the initial ₹6,00,000 of book profit (or in the event of a loss): the greater amount between ₹3,00,000 or 90% of the book profit will apply. For any book profit exceeding this amount, 60% of the remaining book profit will be applicable.

Implications for Partnership Firms

The raised remuneration cap presents advantages for firms, enabling them to offer more substantial compensation to partners while maintaining the tax-deductibility of these payments. Nevertheless, firms are required to revise their financial records and ensure adherence to the updated limits when determining taxable income.

Payments Subject to Section 194T:

TDS under Section 194T is applicable to the following types of 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

For instance, if a firm disburses a salary of ₹5,00,000 to a partner, the full amount will incur a 10% TDS, resulting in a deduction of ₹50,000 as TDS, rather than just the portion exceeding ₹20,000.

Timing of TDS Deduction

TDS should be deducted either when the amount is credited to the partner’s account or at the time of payment, depending on which occurs first.

Interest Penalty

A penalty of 1% per month (or any part of a month) applies for failure to deduct TDS. For failure to pay the deducted TDS, the penalty is 1.5% per month. Additionally, there is a late filing penalty of ₹200 per day for not submitting TDS returns.

No Exemption or Lower TDS Rate Certificates Available

According to Section 194T, partners are not permitted to use Form 15G or 15H to request an exemption from TDS on payments received from the partnership firm. Furthermore, there is currently no provision under Section 197 for a reduced TDS rate. Consequently, firms are required to deduct the full 10% TDS on relevant payments without any exceptions or reductions.

How Will Section 194T Impact Partners’ Tax Obligations?

Under Section 194T, TDS will be deducted at the source, allowing partners to claim this credit against their total income tax liability when they file their Income Tax Return (ITR). In cases where excess TDS has been withheld, a refund will be issued once the ITR is processed. Furthermore, TDS deducted under this section can be offset against the partner’s Advance Tax Liability, facilitating improved tax planning and helping partners avoid unnecessary tax burdens later in the fiscal year.

Annual vs. Monthly TDS Deduction – What Approach Should Firms Take?

Firms often wonder whether to deduct TDS on a monthly or annual basis. The timing of the deduction is contingent upon the nature of the payment. If the partnership agreement indicates that partners receive a monthly salary, TDS should be deducted each month when the salary is disbursed. Conversely, interest on capital is typically calculated on an annual basis, so TDS for interest should be deducted at the end of the financial year, usually in March. Firms must thoroughly assess their payment arrangements to ensure adherence to the appropriate TDS regulations.

Actions Required by Firms Before April 1, 2025

As new regulations approach, partnership firms should undertake the following actions to ensure they remain compliant:

Revise Remuneration Agreements – Update partnership agreements to reflect the new remuneration limits.

Acquire a TAN (Tax Deduction and Collection Account Number) – If your firm does not possess a TAN, apply for one before April 1, 2025, to prevent incurring penalties.

Establish a TDS Deduction and Filing System – Implement a system for monthly TDS deductions and ensure timely filing of TDS returns to avoid penalties.

Inform Partners of Changes – Notify partners that TDS will be deducted from their payments, and remind them to claim it when filing their Income Tax Returns (ITR).

Seek Guidance from a Tax Professional – If there are uncertainties regarding compliance, consult a tax expert to mitigate potential legal and financial issues.

The Finance (No. 2) Act, 2024 introduces two significant changes that will affect all partnership firms starting April 1, 2025: an increase in remuneration limits and the requirement for TDS deduction under Section 194T. While the raised remuneration cap is beneficial, firms must be ready for the stringent TDS compliance that accompanies this new regulation.