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Key Income Tax Changes for Partnership Firms from April 1, 2025

Numerous changes are being introduced on the liabilities of Partnership Firms and LLPs that are to be effective from April 1, 2025

Starting April 1, 2025, partnership firms, including Limited Liability Partnerships (LLPs), will have to comply with two significant income tax changes brought in by the Finance (No. 2) Act, 2024. These amendments focus on increased limits for partner remuneration and the introduction of Section 194T, which mandates Tax Deducted at Source (TDS) on payments to partners.

With the financial year 2024-25 coming to an end, it’s crucial for firms and their partners to understand these changes and ensure compliance. Here’s a detailed look at the two major tax reforms impacting partnership firms from the next financial year.

 

Increased Limits for Partner Remuneration

Until FY 2024-25 (Assessment Year 2025-26), the maximum remuneration a working partner can receive is:

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 (AY 2026-27 Onwards)

The Finance (No. 2) Act, 2024 has doubled the permissible limit for partner remuneration. The new structure is:

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.

 

What This Means for Partnership Firms

The increased remuneration cap is beneficial for firms, allowing them to compensate partners more generously while still keeping these payments tax-deductible. However, firms must update their books and ensure they comply with the revised limits when calculating taxable income.

 Introduction of Section 194T – TDS on Payments to Partners

One of the most significant changes coming into effect from April 1, 2025, is the mandatory deduction of TDS on payments to partners under Section 194T.

 Applicability of Section 194T:

Section 194T is applicable to all partnership firms and LLPs, regardless of their turnover. Under this provision, TDS will be deducted if the total payments to a partner exceed ₹20,000 in a financial year. Once this threshold is crossed, a 10% TDS will be applied to the entire payment amount, not just the portion exceeding ₹20,000.

 Payments Covered Under Section 194T:

TDS under Section 194T will apply to the following payments made to partners: 

Payment Type

TDS Applicable?

Salary/ Remuneration

Yes

Commission

Yes

Bonus

Yes

Interest on Capital/ Loan

Yes

Drawings or Capital Repayment

No

 

This means that if a firm pays a partner a salary of ₹5,00,000, the entire amount (not just the amount exceeding ₹20,000) will be subject to 10% TDS, i.e., ₹50,000 will be deducted as TDS.

 

What Happens If Firms Fail to Deduct TDS?

Failure to comply with Section 194T can lead to severe financial and legal consequences, including:

 30% disallowance of the expense (Salary/Remuneration/Commission/Bonus/Interest on Capital).

 Steps Firms Need to Take Before April 1, 2025

With these new changes coming into effect soon, partnership firms should take the following steps to ensure compliance:

 Update Remuneration Agreements – Amend partnership agreements to align with the revised remuneration limits.

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