Changes for Partnership Firms/LLP in Budget 2024| TDS u/s 194T

The Finance (No.2) Bill, 2024, introduces a wide range of amendments to the existing provisions of the Income-tax Act, 1961, covering sections 2 to 285. Among the various proposals, the Government has also introduced the Direct Tax Vivad Se Vishwas Scheme, 2024, aimed at reducing the backlog of pending disputes by facilitating the settlement of tax arrears.

Major Amendments Impacting Partnership Firms

One of the longstanding expectations of non-corporate taxpayers, particularly partnership firms and Limited Liability Partnerships (LLPs), pertains to the rate of tax applicable to them. While the Budget 2024 did not offer any relief to partnership firms, it did reduce the tax rate for foreign companies from 40% to 35%. However, there are two significant amendments concerning partnership firms that have garnered mixed reactions:

change in Deduction for Working Partner’s Salary (Section 40(b))

Section 40 of the Act provides for amounts that shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (v) of clause (b) of the said section provides for disallowance of any payment of remuneration to any partner who is working partner which is authorized by and is in accordance with the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all partners during the previous year exceeds the aggregate amount computed as hereunder:

Previous Limits:

(a) on the first Rs. 3,00,000 of the book profit or in case of a loss

Rs. 1,50,000 or at the rate of 90% of the book profit, whichever is more;

(b) on the balance of the book-profit at the rate of 60 per cent

This limit was put in place on the statute w.e.f AY 2010-11, so amend the limit of remuneration to working partners in a partnership firm, which is allowed as deduction that on the first Rs 6,00,000 of the book-profit or in case of a loss, the limit of remuneration is increased to Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more as follows:

New Limits (Effective from AY 2025-26):

(a) on the first Rs. 6,00,000 of the book profit or in case of a loss

Rs. 3,00,000 or at the rate of 90% of the book profit, whichever is more;

(b) on the balance of the book-profit at the rate of 60 per cent

Introduction of Section 194T: TDS on Payments to Partners effective form 1 April 2025

The second significant amendment involves the introduction of Section 194T, which mandates Tax Deducted at Source (TDS) on payments made by partnership firms to their partners. This section stipulates the following:

1. Applicability: The section applies to payments in the nature of salary, remuneration, commission, bonus, or interest to a partner.
2. TDS Rate: Income-tax must be deducted at the rate of 10%.
3. Timing of TDS: TDS is to be deducted either at the time of crediting the amount to the partner’s account (including capital account) or at the time of payment, whichever is earlier.
4. Threshold Limit: The TDS provision applies if the aggregate amount credited or paid exceeds Rs. 20,000.

Summary Table:

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