Starting April 1, 2025, partnership firms and Limited Liability Partnerships (LLPs) will be subject to significant income tax changes brought in by the Finance (No. 2) Act, 2024.
The key amendments include:
- Increase in the permissible limits for partner remuneration and the introduction of Section 194T.
- Tax Deducted at Source (TDS) on payments to partners.
It is crucial for firms and partners to understand these reforms to ensure compliance.
In this article, we provide a detailed breakdown of these significant tax updates impacting partnership firms and LLPs from the next financial year.
- Increased Remuneration Limit for Partners:
The Finance (No. 2) Act, 2024, has introduced a significant revision in the remuneration limits for working partners of partnership firms and LLPs.
Previous Limits (Until FY 2024-25)
- 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.
- On the remaining book profit: 60% of the book profit.
Revised Limits (From April 1, 2025)
- 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.
- On the remaining book profit: 60% of the book profit.
This increase allows firms to reward partners more while ensuring these payments remain tax-deductible.
However, businesses must update their accounting records and align their remuneration policies with the revised limits to ensure compliance and optimise tax planning.
2. The introduction of Section 194T in the Income Tax Act, 1961
Till FY 2024-25, the payments made by a firm (partnership firm or an LLP) to a partner are not subjected to TDS. Currently, the TDS is applicable only in the case where the payments are made to an employee of a firm.
Budget 2024 inserted a new provision in the Act stating that, effective from April 1, 2025, certain payments made to a partner by a firm shall be liable for TDS deduction in accordance with the provisions of Section 194T.
However, not all payments to partners are subject to TDS under this section.
The table below provides a clear distinction between payments where TDS is applicable and those that are exempt:
| Payment | TDS Applicability |
| Salary/ Remuneration | Yes |
| Commission | Yes |
| Bonus | Yes |
| Interest on Capital/ Loan | Yes |
| Drawings or Capital Repayment | No |
Rate of Deduction of TDS and Limit for Section 194T
| Condition | TDS Rate | TDS Threshold |
| Aggregate payments to partners such as interest, bonus, commission or remuneration | 10% | > Rs. 20,000 in a financial year |
In What Way 194T Vary from Section 192 i.e. TDS on Salary to an Employee?
Section 192 of the Income Tax Act deals with TDS on salaries, which applies solely to income levied under the head “Salaries.” It does not include payments made to partners of a firm, since these are not regarded under the “Salaries” head.
Proviso mentions that salary, bonus, commission, or remuneration to partners of a firm are not included in the income head “Salaries.” Thus, these payments were not obligated for TDS under section 192.
Through drawing these payments under the TDS, section 194T bridges this gap ensuring that the income of the partners from the firms is within the tax deduction at source.
Impact and Compliance
- Firms must update records, obtain TAN, deduct and deposit TDS, and file returns.
- Partners will receive payments post-TDS and can claim credit while filing ITRs.