Major Tax Changes for Partnership Firms & LLPs from April 1, 2025: Higher Deductions & New TDS Rules!

StartBizz India: Partnership Firms & LLPs Brace for Big Tax Changes—What’s Coming in 2025?

StartBizz India: Big Tax Shake-Up! New Deductions & TDS Rules for Partnership Firms & LLPs from April 1, 2025

Effective April 1, 2025, significant income tax amendments will impact partnership firms and Limited Liability Partnerships (LLPs) in India. These changes, introduced under the Finance (No. 2) Act, 2024, focus on two primary areas:

1. Increased Limits for Partner Remuneration

2. Introduction of Section 194T – TDS on Payments to Partners

Understanding and adapting to these modifications is crucial for firms to ensure compliance and optimise tax benefits.

1. Increased Limits for Partner Remuneration

Prior to April 1, 2025, the Income Tax Act specified caps on the amount of remuneration (salary, bonus, commission, or other) payable to working partners that could be claimed as a deductible expense:

• For the first ₹3,00,000 of book profit (or in case of a loss): Deductible up to ₹1,50,000 or 90% of book profit, whichever is higher.

• For the balance of book profit: Deductible up to 60% of the remaining amount.

From April 1, 2025 (Assessment Year 2026-27 onwards), these thresholds have been revised to:

• For the first ₹6,00,000 of book profit (or in case of a loss): Deductible up to ₹3,00,000 or 90% of book profit, whichever is higher.

• For the balance of book profit: Deductible up to 60% of the remaining amount.

Implications for Partnership Firms:

• Enhanced Tax Deductibility: Firms can now allocate higher remuneration to working partners while maintaining tax-deductible status.

• Necessary Amendments to Partnership Deeds: To leverage these increased limits, firms should revise their partnership agreements to reflect the updated remuneration provisions.

• Accurate Financial Management: Proper accounting practices must be in place to ensure that remuneration aligns with the permissible deductions under the new limits.

2. Introduction of Section 194T – TDS on Payments to Partners

A notable addition to the tax framework is Section 194T, which mandates Tax Deducted at Source (TDS) on specific payments made by partnership firms to their partners.

Key Features of Section 194T:

• Applicability: All partnership firms and LLPs are required to comply, irrespective of their turnover.

• Threshold Limit: TDS is applicable if the total payments to a partner exceed ₹20,000 in a financial year.

• TDS Rate: 10% on the entire payment amount once the threshold is surpassed.

Payments Subject to TDS under Section 194T:

• Remuneration/Salary to Partners: Subject to TDS.

• Commission or Bonus: Subject to TDS.

• Interest on Capital or Loans: Subject to TDS.

• Profit Sharing: Not subject to TDS, as it is exempt under Section 10(2A).

• Drawings or Capital Repayment: Not subject to TDS.

Timing of TDS Deduction:

TDS must be deducted at the earlier of the following events:

• When the amount is credited to the partner’s account.

• When the payment is actually made.

Consequences of Non-Compliance:

• Disallowance of Expenses: 30% of the expense (such as remuneration or interest) may be disallowed for tax purposes.

• Interest Penalties: An interest charge of 1% per month for non-deduction and 1.5% per month for non-payment of deducted TDS.

• Late Filing Fees: A penalty of ₹200 per day for delays in filing TDS returns.

No Provisions for Exemption or Lower TDS Rate:

• Partners cannot submit Form 15G or 15H to avoid TDS under this section.

• There is no provision for applying for a lower TDS deduction rate under Section 197 for these payments.

Impact on Partners’ Tax Obligations:

• TDS Credits: The TDS deducted will be available as a credit against the partner’s tax liability when filing their Income Tax Return (ITR).

• Refunds: If the TDS exceeds the actual tax liability, partners can claim a refund.

• Advance Tax Planning: Partners should consider the TDS amounts when calculating their advance tax liabilities to avoid interest on shortfall.

Action Steps for Firms Before April 1, 2025

To ensure seamless compliance with these new provisions, partnership firms and LLPs should undertake the following actions:

1. Revise Partnership Agreements: Update the partnership deed to incorporate the revised remuneration limits, ensuring that the terms align with the new tax provisions.

2. Obtain a TAN: Firms without a Tax Deduction and Collection Account Number (TAN) must apply for one, as it is mandatory for TDS compliance.

3. Implement TDS Systems: Establish robust systems for timely TDS deduction and remittance, including setting up processes for accurate calculation, deduction, payment, and return filing.

4. Educate Partners: Inform all partners about the TDS provisions, how it affects their income, and the process for claiming TDS credits in their individual tax returns.

Conclusion

The amendments effective from April 1, 2025, signify a substantial shift in the taxation landscape for partnership firms and LLPs. While the increased remuneration limits offer opportunities for higher deductible payments to partners, the introduction of Section 194T imposes stricter compliance requirements concerning TDS on partner payments. Firms must proactively adjust their internal policies, update legal documents, and ensure that both administrative