Partnership Firms and LLPs: What are the Significant Tax Changes from 1st April 2025?

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 an increase in the permissible limits for partner remuneration and the introduction of Section 194T, which mandates Tax Deducted at Source (TDS) on payments to partners. As the financial year 2024-25 concludes, 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. Effective from April 1, 2025 (Assessment Year 2026-27), the permissible limits for partner remuneration have been doubled, providing firms with greater flexibility in structuring compensation while maintaining tax benefits.

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.

Introduction of New Section 194T - TDS deduction for Partners

Effective from April 1, 2025, the Finance (No. 2) Act, 2024, introduces Section 194T, mandating Tax Deducted at Source (TDS) on payments made to partners. This provision applies to all partnership firms and LLPs, irrespective of their turnover. Under Section 194T, if the total payments to a partner exceed ₹20,000 in a financial year, a 10% TDS will be deducted on the entire amount, not just the portion exceeding the threshold. For example, if a firm pays a partner a remuneration of ₹3,00,000 in a financial year, the entire amount (not just the amount exceeding ₹20,000) will be subject to a 10% TDS deduction. This means ₹30,000 will be deducted as TDS.

Deduction of Payments under Section 194T

Under the newly introduced Section 194T, partnership firms and LLPs must deduct TDS on certain payments made to partners. 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:

When to Deduct TDS? - Monthly or Annually

A key concern for partnership firms and LLPs is whether TDS under Section 194T should be deducted monthly or annually. The deduction timeline depends on the nature of the payment. If the partnership deed stipulates a monthly salary or remuneration for partners, TDS must be deducted at the time of each monthly payment. However, for payments such as interest on capital, which is typically calculated on an annual basis, TDS should be deducted at the end of the financial year, usually in March.

What if the Firm or LLP does not Deduct TDS under Section 194T?

Failure to comply with Section 194T can lead to financial and legal consequences for partnership firms and LLPs. If TDS is not deducted or deposited as required, the firm may face penalties, interest charges, and additional liabilities.

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Is No Exemption or Lower TDS rates applicable for Partners?

No, partners cannot claim exemptions or lower TDS rates under Section 194T. Unlike other TDS provisions, partners cannot submit Form 15G or 15H to avoid tax deductions on payments received from the firm. Additionally, Section 197 does not provide an option for lower TDS deduction in this case. As a result, firms must deduct a full 10% TDS on applicable payments, with no exceptions or reductions.

Key Takeaways for Partnership Firms & LLPs

• Higher Partner Remuneration Limits: Remuneration limits are doubled, allowing firms to pay more while keeping expenses tax-deductible.
• Mandatory TDS under Section 194T: Firms must deduct 10% TDS on partner payments exceeding ₹20,000 annually, including salary, commission, bonus, and interest.
• Strict Penalties for Non-Compliance: Firms face 30% expense disallowance, 1%-1.5% monthly interest, and ₹200/day late filing penalties for TDS violations.
• Update Partnership Agreements: Firms must revise agreements to reflect increased remuneration limits.
• TAN Registration Required: Firms without a TAN must obtain one before April 1, 2025, to comply with TDS regulations.
• Inform Partners About Changes: Partners should account for deducted TDS while filing their ITR.
• Seek Professional Tax Advice: Consulting a tax expert can help firms ensure compliance and avoid legal issues.

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