I. Increase in the allowable deduction limit for remuneration paid to working partners of a firm
Effective from the Assessment Year 2010-11, Sub-clause (v) of clause (b) of section 40 of the Income Tax Act, 1961 (“the Act”) established a cap on the allowable deductions for remuneration to working partners of a partnership firm, subject to certain conditions. In recent years, various entities—including domestic companies, individuals, Hindu Undivided Families (HUFs), resident co-operative societies, and new manufacturing co-operative societies—have benefited from lower tax rates under provisions such as sections 115BA, 115BAA, 115BAC, 115BAD, and 115BAE. In pre-budget memorandums and expectations for the Union Budget 2024, taxpayers sought a similar benefit for partnership firms.
While the budget does not directly provide the relief for these firms, it does increase the allowable deduction limit for remuneration to working partners, thus partially addressing the expectation.
Presently, the limits are as under:
| (a) | On the first Rs. 300000 of the book profit or in case of a loss | Rs. 1,50,000 or at the rate of 90 per cent of the book profit, whichever is more. |
| (b) ` | On the balance of the book profit | at the rate of 60 per cent. |
The above limits are proposed to be increased as under:
| (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 per cent of the book profit, whichever is more. |
| (b) ` | On the balance of the book profit | at the rate of 60 per cent. |
The above proposed amendment will be effective from 1st April, 2025 (i.e. from Assessment Year 2025-26 and onwards).
II. TDS on payments made by a partnership firm to its partners, including salary, remuneration, interest, bonus, or commission
New TDS Requirements for Partnership Firms: What You Need to Know
Currently, partnership firms are not required to deduct tax at source (TDS) on payments made to their partners, including salary, remuneration, interest, bonus, or commission. However, the Finance Bill, 2024 introduces a new section, 194T, which will change this. Now, partnership firms will need to deduct TDS on payments such as salary, remuneration, commission, bonus, and interest if they are credited to any account (including capital accounts) of a partner. There is an exception – no TDS will be required if the total payments to a partner do not exceed Rs 20,000 in a financial year. TDS Rate – 10%
IMPORTANT NOTE: Payment to a partner may consist of any one or more of the salary, remuneration, commission, bonus or interest. Individually such payments may be less than twenty thousand rupees. But for the purposes of TDS, all such payments will have to be aggregated.
Note : The proposed amendment will take effect from April 1, 2025, which corresponds to the Assessment Year 2025-26 and subsequent years. This differs from several other proposed changes to TDS provisions, which are set to be effective from October 1, 2024.
