From April 1, 2025, partnership firms and Limited Liability Partnerships (LLPs) will be impacted by significant income tax changes introduced through the Finance (No. 2) Act, 2024. Among the key amendments are an increase in the allowable limits for partner remuneration and the introduction of Section 194T, which mandates the deduction of tax at source (TDS) on payments made to partners. As the 2024–25 financial year comes to a close, it is essential for firms and their partners to familiarize themselves with these changes to ensure timely and accurate compliance. This article offers a comprehensive breakdown of the key tax updates set to affect partnership firms and LLPs in the upcoming financial year.
Enhanced Remuneration Limits for Partners
The Finance (No. 2) Act, 2024, has introduced a significant enhancement to the remuneration limits applicable to working partners of partnership firms and LLPs. Effective from April 1, 2025 (Assessment Year 2026–27), the allowable limits for partner remuneration have been doubled, offering firms greater flexibility in designing compensation structures while retaining tax deductibility.
Previous Limits (Applicable 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 higherOn the remaining book profit:
60% of the book profit
Revised Limits (Effective 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 higherOn the remaining book profit:
60% of the book profit
This revision empowers firms to offer higher remuneration to partners while ensuring such payments continue to qualify as tax-deductible expenses. However, it is essential for businesses to review their partnership agreements, update accounting systems, and align remuneration policies with the new limits to maintain compliance and optimize tax efficiency.
Introduction of Section 194T – TDS on Payments to Partners
Effective April 1, 2025, the Finance (No. 2) Act, 2024, introduces Section 194T, a new provision mandating Tax Deducted at Source (TDS) on specific payments made to partners by partnership firms and LLPs, regardless of their turnover.
Under this section, if the total payments to a partner exceed ₹20,000 in a financial year, a 10% TDS must be deducted on the entire amount, not just the portion exceeding the threshold.
Illustrative Example:
If a firm pays a partner remuneration of ₹3,00,000 in a financial year, the entire ₹3,00,000 is subject to 10% TDS, resulting in a ₹30,000 deduction—not just on the amount exceeding ₹20,000.
TDS Applicability Under Section 194T
Not all partner-related payments attract TDS. The following table outlines which payments are subject to TDS and which are exempt:
| Type of Payment | TDS Applicable? |
|---|---|
| Salary / Remuneration | Yes |
| Commission | Yes |
| Bonus | Yes |
| Interest on Capital / Loan | Yes |
| Drawings / Capital Repayment | No |
Timing of TDS Deduction – Monthly or Annually?
The timing of TDS deduction under Section 194T depends on the nature of the payment:
Monthly Salary/Remuneration:
TDS should be deducted at the time of each monthly payment, if the partnership deed specifies monthly payouts.Interest on Capital:
Since this is typically calculated annually, TDS should be deducted at the end of the financial year (usually in March).
Consequences of Non-Compliance with Section 194T
Failure to deduct or deposit TDS as required under Section 194T may attract penalties, interest, and additional liabilities:
| Type of Non-Compliance | Penalty/Consequence |
|---|---|
| Failure to Deduct TDS | 1% interest per month (or part thereof) |
| Failure to Deposit TDS | 1.5% interest per month (or part thereof) |
| Late Filing of TDS Returns | ₹200 per day (capped at the TDS amount) |
No Exemption or Lower TDS Rate Available for Partners
Under Section 194T, partners are not eligible for any exemptions or reduced TDS rates on payments received from the firm. Unlike other TDS provisions:
Form 15G or 15H cannot be submitted by partners to avoid TDS.
Section 197, which allows for application of lower or nil TDS rates, does not apply to Section 194T.
As a result, partnership firms and LLPs must deduct TDS at the full rate of 10% on all applicable payments exceeding ₹20,000 in a financial year—without exceptions.
Key Takeaways for Partnership Firms & LLPs
Increased Remuneration Limits:
Remuneration thresholds for working partners have been doubled, allowing higher payouts that remain tax-deductible.Mandatory TDS Under Section 194T:
A 10% TDS must be deducted on partner payments (e.g., salary, commission, bonus, interest) exceeding ₹20,000 annually.Strict Penalties for Non-Compliance:
Non-deduction or late payment of TDS can lead to:Disallowance of 30% of the related expense
Interest at 1%–1.5% per month
Late filing penalty of ₹200 per day (up to the TDS amount)
Update Partnership Agreements:
Existing agreements should be amended to reflect the revised remuneration limits and TDS obligations.TAN Registration Required:
Firms without a Tax Deduction Account Number (TAN) must obtain one before April 1, 2025 to comply with TDS rules.Inform Partners:
Partners should be notified about the TDS deductions, so they can account for them while filing their income tax returns.Consult a Tax Professional:
Seeking expert tax advice is recommended to ensure full compliance, avoid penalties, and optimize tax planning.
About the Author
Manisha
Manisha is a seasoned content writer specializing in business registration, tax regulations, trademark law, and company compliance. His well-researched articles provide clear, practical guidance, empowering businesses to confidently navigate complex legal and regulatory landscapes.
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