Partnership firms and Limited Liability Partnerships (LLPs) are popular business structures in India. While partnerships operate under the Indian Partnership Act, of 1932, LLPs provide the added benefit of limited liability to partners. Both structures enjoy tax benefits but must also follow specific tax regulations.
From April 1, 2025, new tax rules will affect partnership firms and LLPs, mainly impacting partner remuneration and TDS applicability. Here’s a breakdown of these changes in simple terms:
1. New Limits on Remuneration to Partners
The government has revised the limits on how much firms can pay their partners as remuneration while claiming tax deductions:
- For the first ₹6,00,000 of book profit: Firms can pay 90% of the book profit or ₹3,00,000, whichever is higher.
- In case of a loss: The maximum amount allowed is ₹3,00,000.
- For the remaining book profit: Firms can pay 60% of the remaining book profit.
These changes ensure fair compensation while keeping tax benefits in check.
Conditions for Deductibility:
- Authorization by Partnership Deed: The remuneration must be authorized by the partnership deed and should be paid to working partners actively engaged in the firm’s business.
- Compliance with Limits: The remuneration should not exceed the specified limits to qualify as a deductible expense.
2. Introduction of TDS on Partner’s Salary & Interest (Section 194T)
A new TDS (Tax Deducted at Source) rule has been introduced under Section 194T, affecting payments made to partners. Here are the key points:
- Effective Date: April 1, 2025.
- TDS Rate: 10%.
- When to Deduct TDS: At the time of crediting the amount to the partner’s account or making the payment, whichever comes first.
- Exemption Limit: If the total salary, remuneration, bonus, or interest paid to a partner does not exceed ₹20,000 in a financial year, no TDS is required.
- If the threshold is crossed: TDS will apply to the entire amount, not just the excess over ₹20,000.
Challenges & Compliance Burden
While these changes aim to improve tax efficiency, they pose challenges for firms and partners:
1. Aggregate TDS Deduction Burden
The new provisions will apply from AY 2025-26 (FY 2024-25). However, since the Finance Bill 2024 is still pending approval, firms may face a sudden financial burden when the law is implemented. A 10% deduction on payments made over five months could significantly impact cash flow.
2. Need for Partnership Deed Revision
Since all payments to partners must align with the Partnership Deed, firms may need to amend their deed. If the deed lacks provisions for statutory obligations under the new law, the firm must revise it promptly to remain compliant.
3. Additional Compliance for Firms
Firms must file ITR-5, detailing partner payments (remuneration, interest, commissions, bonuses, and profit shares) along with partner PAN details.
With the introduction of TDS under Section 194T, firms will now have to compute and file TDS returns, adding to their compliance burden.
4. Risk of Penal Action for Non-Compliance
TDS Return Deadline: The due date for filing TDS returns for Q4 (March 2025) is May 31, 2025.
TDS Deduction Deadline: TDS must be deducted by April 30, 2025.
ITR Filing Deadline:
Non-audit firms: July 31, 2025
Audit firms: October 31, 2025
Firms finalizing their books just before filing ITR may miss the TDS deduction deadlines, resulting in:
Late fees and interest on TDS.
Additional financial burden due to penalties.
What These Changes Mean for Partnership Firms & LLPs
- Firms need to adjust their remuneration policies to align with the new limits.
- TDS compliance is now required on partner payments above ₹20,000 per year.
- Non-compliance could lead to penalties or disallowance of deductions.
Final Thoughts
The new tax regulations are designed to bring more transparency and compliance to partnership firms and LLPs. Business owners should ensure they follow these new rules to avoid any tax issues. Consulting a tax expert can help firms implement these changes smoothly.