Key Income Tax Changes for Partnership Firms Starting April 1, 2025

The Finance (No. 2) Act, 2024, will bring two major income tax changes for partnership firms, including Limited Liability Partnerships (LLPs), from April 1, 2025. One of the key amendments increases the limits on partner remuneration, while the other introduces Section 194T, which requires Tax Deducted at Source (TDS) on payments made to partners.

As the current financial year is about to end, understanding these changes becomes important for the partnership firms to ensure compliance. Here are the key changes for partnership firms effective from April 1, 2025.

Limits Increased for Partner Remuneration

As per the current Assessment year (AY), 2024-25, the maximum remuneration a working partner can get is as follows:

• For the first Rs. 3,00,000 of book profit (or in case of a loss), the remuneration will be the higher of Rs. 1,50,000 or 90% of the book profit.
• For any remaining book profit, the remuneration is 60% of the book profit.

Under AY 2025-26, the limits have been revised as follows:

• For the first Rs. 6,00,000 of book profit (or in case of a loss), the remuneration will be the higher of Rs. 3,00,000 or 90% of the book profit.
• For any remaining book profit, the remuneration is 60% of the book profit.

Benefit of Revised Limits for Remuneration

The increased remuneration limit will allow the firms to pay partners more while keeping these payments tax-deductible. However, the firms are required to update their books and make sure that they comply with the updated limits when calculating taxable income.

Introduction of Section 194T – TDS on Payments to Partners

One of the most important changes that are taking place from April 1, 2025, is the mandatory deduction of TDS on payments to partners under Section 194T. Section 194T is applied to all partnership firms and LLPs, irrespective of their turnover. Under this Section, TDS will be deducted if the total payments to a partner are above Rs. 20,000 in a financial year. If the limit exceeds Rs. 20,000, a 10% TDS will apply to the total payment amount and not just the portion exceeding Rs. 20,000.

Payments Included Under Section 194T

If a partner receives a salary of Rs. 5,00,000, the entire amount will be deducted at 10% TDS, i.e., Rs. 50,000 will be deducted as TDS.

How will Section 194T impact the tax liability of partners?

As TDS is deducted at the source under section 194T, the partners will have the credit against their final income tax liability at the time of ITR filing. If the TDS deducted is more than what the partner owes, the extra deducted amount will be refunded after the ITR is processed. The TDS deducted under this section can also be used to cover the partner’s Advance Tax payments. This helps the partner plan better throughout the year so they don’t end up with huge tax burdens.

When will the TDS be deducted?

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

What if the Firm fails to deduct the TDS?

If a firm fails to deduct TDS, it could result in financial and legal consequences, such as:

1) 30% disallowance of the expenses, including salary, remuneration, commission, bonus, and interest on capital.

2) Interest penalty:

•  Interest penalty of 1% per month or part of the month for non-deduction of TDS.
•  If you do not pay the deducted TDS on time, a penalty of 1.5% per month will be charged.
• For late filing, a penalty of Rs. 200 per day for non-filing of TDS returns.

How should the TDS be deducted- Annually or monthly?

The annual or monthly deduction depends on the type of payment. If the partnership agreement mentions that partners receive a monthly salary, then the TDS should be deducted monthly when the salary is credited. The interest on capital is often calculated annually. Therefore, TDS on interest should be deducted at the end of the financial year. To avoid penalties, firms need to carefully check their payment schedule and ensure they are deducting TDS at the right time for each type of payment.

Are there any Exemptions available under Section 194T?

Under Section 194T, partners cannot use Form 15G or 15H to claim an exemption from TDS on payments they receive from the partnership firm. Also, there’s no option to get a lower TDS rate under Section 197 at the moment. This means that the firm must deduct the full 10% TDS on payments, with no exceptions or reductions.

Actions Firms must take before 1st April  2025 to ensure Compliance

As the new changes are taking place, firms must take the following steps to avoid any legal consequences:

1. Inform the Partners about the changes: Let your partners know that TDS will now be deducted from their payments. They will need to claim it when they file their income tax returns (ITR).

2. Get a TAN Number: If your business doesn’t have a Tax Deduction and Collection Account Number (TAN), apply for one before April 1, 2025. Without it, you could face penalties.

3. Update remuneration contracts: Make sure your partnership agreement matches the new rules for how much partners can be paid. If changes are needed, update it.

4. Set Up a System for TDS Deduction and Filing: Make sure you’re deducting TDS from payments every month and filing TDS returns on time to avoid fines.

5. Consult a Tax Expert: If you’re not sure about the rules or how to stay compliant, talk to a tax professional to avoid any penalties.