Business - AGA Associates

Changes for Partnership Firms & LLPs from April 2025 (Sec 194T)

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.

Stay informed and plan ahead to keep your business tax-compliant!

Comprehensive Guide to Futures & Options Taxation

Comprehensive Guide to Futures & Options Taxation: Turnover Calculation, ITR Filing, Audit Requirements, Section 44AD, and Loss Treatment

Introduction to F&O Taxation

Futures and Options (F&O) are versatile derivatives in the Indian stock market that allow traders to hedge risks, speculate on price movements, and leverage their positions for higher returns. These instruments derive their value from an underlying asset, such as stocks, indices, commodities, or currencies, and are widely used by both individual and institutional investors. While F&O trading offers significant opportunities, it also involves a degree of complexity, especially in taxation.

This guide aims to simplify the tax implications of F&O trading by covering:

How F&O income is categorized under the Income Tax Act.
The correct Income Tax Return (ITR) form to file.
Detailed steps for calculating F&O turnover.
Tax audit applicability criteria.
Appropriate methods for handling losses arising from F&O transactions.

Speculative vs Non-Speculative Transactions in Income Tax

The Income Tax Act distinguishes between speculative transactions and non-speculative transactions (F&O):

Aspect	Speculative Transactions	Non-Speculative Transactions (F&O)
Delivery	No actual delivery (e.g., intraday)	No actual delivery, cash-settled
Tax Classification	Speculative business income	Non-speculative business income
Loss Adjustment	Only against speculative income	Against all business income
Loss Carry Forward	Up to 4 years	Up to 8 years

Which ITR to File for F&O Trading?

The appropriate ITR form depends on your income type and turnover:

1. ITR-3

Who Should File

Individuals and HUFs earn income from proprietary business or profession.
Includes non-speculative business activities, like F&O trading.

When to Use

If you maintain regular books of accounts for F&O trading.
If your income or turnover exceeds limits for presumptive taxation.

2. ITR-4 (Sugam)

Who Should File

Individuals, HUFs, and firms (excluding LLPs) opting for presumptive taxation under Section 44AD, 44ADA, or 44AE.

When to Use

If your turnover is below ₹3 crore and income is declared at 6% for non-cash transactions or 8% for cash transactions.

Business Code:

For F&O trading in ITR-3, use Business Code 13018:

Calculation of Turnover for F&O Transactions (As Per ICAI Guidance Notes)

The Institute of Chartered Accountants of India (ICAI) has updated its guidance on the calculation of turnover for Futures and Options (F&O) transactions in the 8th Edition of Guidance Notes (August 2022). These updates streamline the process, particularly for options traders. Here’s a detailed breakdown:

1. Futures Transactions

Transaction	Profit/Loss	Absolute Value
Trade 1	₹60,000	₹60,000
Trade 2	-₹40,000	₹40,000
Trade 3	₹30,000	₹30,000

Options Turnover:
₹25,000 + ₹15,000 + ₹20,000 = ₹60,000
Total Turnover: ₹1,30,000 (Futures) + ₹60,000 (Options) = ₹1,90,000

Profit, Expenses & Tax in F&O

1. Tax on F&O Profits

Taxed as business income under applicable slab rates (0%-30% for individuals or HUFs).

2. Claiming Expenses

Deduct eligible expenses like brokerage fees, audit fees, software subscriptions, and depreciation on assets used for trading.

3. Presumptive Taxation:

Under Section 44AD, no expenses can be claimed, and income is presumed at 6% or 8% of turnover.

Tax Audit Applicability for F&O

Turnover Up to ₹3 Crore
No audit if presumptive taxation is opted for under Section 44AD.

Turnover Between ₹3 Crore and ₹10 Crore
No audit if cash transactions ≤ 5% of total receipts and payments.

Turnover Exceeding ₹10 Crore
Tax audit mandatory

Turnover	Cash Transactions ≤ 5%	Tax Audit Required
Up to ₹3 crore	Yes	No
₹3 crore to ₹10 crore	Yes	No (if books maintained)
₹3 crore to ₹10 crore	No	Yes
Above ₹10 crore	Irrespective	Yes

Advance Tax Liability

Advance tax is applicable if the total liability exceeds ₹10,000 in a financial year.

Due Date	Percentage of Tax Payable	Cumulative Tax Payable
June 15th	15%	15%
September 15th	45%	60%
December 15th	75%	75%
March 15th	100%	100%

Key Points to Note

Applicability for Presumptive Taxation:
If you opt for the Presumptive Taxation Scheme (Section 44AD), you are only required to pay 100% of the advance tax by March 15th of the financial year.

Calculation of Tax Liability:

Include income from F&O trading, salary, house property, capital gains, and any other sources to determine your total taxable income.
Deduct eligible deductions under Section 80C to 80U and calculate the final tax liability to determine advance tax.

Case Study: How a Farmer's F&O Trading Led to a ₹68 Crore Tax Nightmare

What happens when you overlook the rules of reporting F&O trading in your tax filings? A Karnataka-based farmer learned this the hard way. His brief foray into Futures and Options (F&O) trading not only drained his finances but also put him in serious trouble with the Income Tax Department. Let’s dive into this eye-opening case and its key lessons for F&O traders.

The Story: From Trading to Trouble

The Beginning

⦁ The farmer traded in F&O during FY14, incurring a loss of ₹26 lakh.
⦁ Believing there was no need to report losses, he skipped declaring F&O transactions in his Income Tax Return (ITR).

The First Warning – IT Notices

⦁ In 2022, the Income Tax Department flagged his PAN for high-value transactions in F&O trading.
⦁ His total F&O turnover, including both sales and purchases, amounted to ₹69 crore—an amount that caught the department’s attention.
⦁ A reassessment case for FY14 was opened in 2021 to verify his undisclosed transactions.

The Turning Point – Ignoring Emails

⦁ The farmer failed to check emails or respond to IT notices.
⦁ With no response, the department passed an ex-parte order, treating the ₹69 crore turnover as taxable income instead of mere trading volume.

The Tax Shock

In May 2023, the IT Department issued a demand order of ₹68 crore, comprising:

⦁ Tax on ₹69 crore deemed income.
⦁ Interest from FY14 onwards.
⦁ Heavy penalties for non-compliance.

Frozen Assets

⦁ By December 2024, the IT Department froze the farmer’s bank account to recover the tax demand.
⦁ Unable to afford the 20% upfront deposit required for appealing, the farmer is now caught in a web of legal battles.

What F&O Traders Can Learn

This case highlights critical lessons for anyone trading in F&O:

1. Always Report F&O Transactions

Whether you make a profit or incur a loss, F&O trading must be reported under business income in your ITR.

2. Understand Turnover Calculations

Turnover in F&O includes the absolute sum of profits and losses.
Ignoring this can result in massive discrepancies during reassessments.

3. Respond to Notices Promptly

Never ignore emails or communications from the IT Department.
Prompt responses can prevent escalation and help clarify your case.

4. Seek Professional Help

Engaging a Chartered Accountant (CA) ensures proper tax planning and compliance with F&O trading rules.
Prompt responses can prevent escalation and help clarify your case.

Effective Accounting Practices for Small Businesses

Managing finances effectively is essential for the growth and sustainability of small businesses. Proper accounting practices not only ensure compliance with financial regulations but also aid in better decision-making. This article highlights key accounting practices that can help small businesses thrive.

1. Maintain Accurate and Timely Records
Keeping a detailed record of all transactions is fundamental. Ensure every income and expense is recorded systematically, using tools like accounting software or traditional ledgers. Accurate records simplify tax filing and help avoid potential discrepancies.

2. Separate Business and Personal Finances
One common mistake among small business owners is mixing personal and business finances. Open a dedicated business bank account to maintain clear boundaries. This separation ensures easier tracking of business expenses and simplifies audits.

3. Regularly Reconcile Bank Statements
Reconciling your bank statements with your accounting records helps identify errors, unauthorized transactions, or unrecorded entries. This practice ensures financial accuracy and minimizes risks of fraud.

4. Leverage Technology for Bookkeeping
Investing in accounting software tailored for small businesses can save time and reduce errors. Tools like QuickBooks, Tally, or Zoho Books allow real-time tracking of finances, automated invoicing, and generation of financial reports.

5. Understand Tax Obligations
Staying compliant with tax regulations is critical. Be aware of the tax deadlines, applicable deductions, and required documentation. Consulting a Chartered Accountant can help you optimize your tax strategies while ensuring compliance.

6. Create a Financial Plan
Budgeting is a key aspect of accounting. Develop a realistic budget that outlines your expected income, expenses, and savings. Periodically review and adjust the plan to reflect the current financial standing and business goals.

7. Monitor Cash Flow Regularly
Cash flow is the lifeblood of any business. Track your cash inflows and outflows regularly to avoid liquidity issues. Identifying potential cash shortages in advance can help you make necessary adjustments.

8. Seek Professional Assistance
While small business owners often manage accounting themselves, engaging a Chartered Accountant ensures compliance with statutory requirements and offers valuable financial insights. A CA can provide expertise in areas like GST filing, financial audits, and tax planning.

Adherence to ICAI Guidelines

It is essential for Chartered Accountants and firms to comply with the professional and ethical standards prescribed by the Institute of Chartered Accountants of India (ICAI). Any advice or services provided should be presented factually and without any form of solicitation or advertisement, in accordance with ICAI’s advisory guidelines (icai.org).

Implementing these accounting practices can help small businesses streamline operations, remain compliant, and make informed financial decisions, ultimately leading to sustained growth.