As the new financial year begins, significant changes in tax compliance for partnership firms and LLPs will take effect from April 1, 2025. These updates impact:
- Section 40(b) – Increased limits on partner remuneration
- Section 194T – New TDS requirements on payments to partners
These changes will affect tax planning, compliance obligations, and the way firms compensate their partners. To ensure your firm remains compliant and benefits from the revised provisions, it is essential to understand these updates and take the necessary steps before the deadline.
1. Increased Remuneration Limits for Partners – Section 40(b) Update
The government has revised the maximum tax-deductible remuneration that a partnership firm or LLP can pay its partners. These changes allow firms to compensate partners more effectively while maintaining tax efficiency.
Revised Limits Effective April 1, 2025:
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For the first ₹6,00,000 of book profit (or in case of a loss):
- The firm can pay ₹3,00,000 or 90% of book profit, whichever is higher.
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For the remaining book profit:
- The firm can pay 60% of the book profit as remuneration.
Example Calculation:
Suppose a firm has a book profit of ₹10,00,000.
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On the first ₹6,00,000:
- 90% of ₹6,00,000 = ₹5,40,000
- Since ₹5,40,000 is greater than ₹3,00,000, the permissible amount is ₹5,40,000.
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On the remaining ₹4,00,000:
- 60% of ₹4,00,000 = ₹2,40,000.
- Total permissible remuneration: ₹5,40,000 + ₹2,40,000 = ₹7,80,000.
Comparison with FY 2024-25:
Under the previous limits, the maximum allowable remuneration would have been ₹6,90,000. This means that after April 1, 2025, firms can claim an additional ₹90,000 as a tax deduction by updating their Partnership Deed.
Action Required:
- Review and update the Partnership Deed or LLP Agreement before April 1, 2025.
- Ensure that the revised remuneration structure aligns with the new tax limits.
- Maintain proper documentation to support tax claims under Section 40(b).
2. Introduction of Section 194T – TDS on Payments to Partners
A new Tax Deducted at Source (TDS) provision, Section 194T, will come into effect from April 1, 2025. This provision requires partnership firms and LLPs to deduct TDS at 10% on certain payments made to partners if the total payments exceed ₹20,000 in a financial year.
Key Provisions of Section 194T:
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Applicable Payments:
- Salary, remuneration, commission, bonus, and interest on capital.
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Exemptions:
- Drawings and capital withdrawals are NOT subject to TDS.
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Threshold:
- TDS applies only if the total payments to a partner exceed ₹20,000 in a financial year.
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Timing of Deduction:
- TDS must be deducted at the time of crediting the partner’s account (including capital account) or at the time of actual payment, whichever is earlier.
Example Calculation:
If a firm pays a partner a monthly salary of ₹25,000, totaling ₹3,00,000 per year:
- Since ₹3,00,000 exceeds the ₹20,000 threshold, TDS applies to the entire amount.
- TDS Calculation: 10% of ₹3,00,000 = ₹30,000 (Annual TDS).
- Monthly TDS deduction: ₹30,000 ÷ 12 = ₹2,500 per month.
Thus, the partner will receive a net salary of ₹22,500 per month, while the firm will deposit ₹2,500 TDS per month with the government.
Action Required:
- Obtain a TAN (Tax Deduction and Collection Account Number) if not already available.
- Deduct TDS at the applicable rate before making payments to partners.
- Deposit the deducted TDS on time to avoid penalties.
- File quarterly TDS returns using Form 26Q to ensure compliance.
Final Checklist for Partnership Firms – What Needs to Be Done Before April 1, 2025?
✔ Update the Partnership Deed/LLP Agreement to reflect the new Section 40(b) remuneration limits.
✔ Implement TDS compliance under Section 194T for payments to partners exceeding ₹20,000 annually.
✔ Apply for a TAN (if not already obtained) to deduct and deposit TDS.
✔ Ensure timely TDS deposits and return filings to avoid penalties.
Conclusion – Stay Ahead of Compliance in FY 2025-26
These tax changes present both opportunities and compliance challenges for partnership firms and LLPs. By updating your remuneration policies and implementing TDS compliance measures, you can optimize tax planning while ensuring full regulatory compliance.
To navigate these updates effectively, consult a Chartered Accountant or a tax professional for tailored advice.