A Partnership Firm is a popular form of business structure where two or more individuals come together to operate and share profits as per an agreed ratio. In India, partnership firms are governed by the Indian Partnership Act, 1932, and are classified into registered and unregistered firms. A variation of this structure is the Limited Liability Partnership (LLP), which offers partners limited liability protection while retaining the flexibility of a partnership. These firms enjoy certain tax benefits but are also subject to specific tax regulations.
With the evolving taxation landscape, new changes have been introduced for Partnership Firms and LLPs effective from FY 2025-26 onwards. These changes mainly affect partner remuneration and TDS applicability. Let’s delve into the key modifications:
1. Remuneration to Partners (FY 2025-26 Onwards)
The revised tax norms have specified limits on the remuneration that can be paid to partners.
- For the first ₹6,00,000 of Book Profits (BP):
- 90% of BP or ₹3,00,000, whichever is higher.
- In case of loss, the maximum permissible amount is ₹3,00,000.
- For the remaining balance of Book Profits:
- 60% of the balance BP can be given as remuneration.
These changes define the structured approach for compensating partners while keeping tax deductions in check.
2. TDS on Partner’s Salary/Interest (Section 194T)
A new TDS provision has been introduced under Section 194T for payments made to partners. The key aspects are:
- Applicability: Effective 1st April 2025.
- TDS Rate: 10%
- Deduction Timing: TDS must be deducted at the time of payment or credit, whichever happens earlier.
- Exemption Limit: ₹20,000
- Threshold Breach: If the threshold of ₹20,000 is crossed, TDS is applicable on the entire amount.
The new tax regulations significantly impact how partnership firms and LLPs manage partner compensation and tax deductions. Business owners must align their financial structures accordingly to remain compliant and avoid penalties.
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