Changes in allowed partnership remuneration and TDS on payment to Partners in case of Partnership firms

In the Finance Bill (No.2) 2024, the amendments have been made for the taxation of the Partnership firms. In the first instance, the provisions of section 40(b) of the Income tax act have been amended to increase the partner’s remuneration in the case of partners and in the second instance, a new section 194T has been inserted to deduct TDS @ 10% on the payment of remuneration, interest and commission to the partners.

Let’s discuss the amendments for the partnership firms :-

1. Amendment in the Section 40(b) of the Income tax act

The amendment has been proposed in the section 40(b) to amend the limit of the partnership remuneration that can be allowed in the case of Partnership firms and LLPs.

Earlier, the section states that the Partnership remuneration debited to the Profit & Loss account shall be add back to the Net Profit / Loss for the period and remuneration shall be calculated in the following method :-

Now, in order to commensurate with the increasing tax slabs and giving the partnership firms a more competitive edge against the fellow type of entities in terms of tax planning. The Government has decided to increase the allowed range of Partnership remuneration as follows :-

Let us understand with the help of examples in both the cases :-

Earlier scenario

Partnership firm – XYZ co.

Profit after debiting Remuneration to Partners – Rs. 350000/-

Remuneration debited to Profit & Loss account – Rs. 300000/-

Now the allowed remuneration shall be calculated as follows :-

Book profit = Rs. 350000 + Rs. 300000 = Rs. 650000

First Rs. 300000 = 150000 or 90% of the book profit whichever is more, I.e. 90% of Rs. 300000 = Rs. 270000

Next Rs. 350000 = Rs. 210000 being 60% of Rs. 350000

Allowed partnership remuneration = Rs. 270000 + Rs. 210000 = Rs. 480000

Now, the taxability for the Partnership firm is as follows :-

New scenario

Partnership firm – XYZ co.

Profit after debiting Remuneration to Partners – Rs. 350000/-

Remuneration debited to Profit & Loss account – Rs. 300000/-

Now the allowed remuneration shall be calculated as follows :-

Book profit = Rs. 350000 + Rs. 300000 = Rs. 650000

First Rs. 600000 =  300000 or 90% of the book profit, whichever is higher = 90% of Rs. 600000 = Rs. 540000

On the balance = 60% of Rs. 50000/- = Rs. 30000/-

Now the taxability of the Partnership firm can be calculated as follows :-

While comparing both the scenarios, the taxability in the case of new scenario is far less than the taxability in the case of old scenario. Hence, it will boost the confidence of the Taxpayers in forming the Partnership firms for new ventures keeping in view the taxation point in their minds.

The said amendment shall be effective with effect from Assessment Year 2025-26.

2. Introduction of Section 194T regarding TDS on payment of salary, remuneration, interest, bonus or commission by Partnership firms to Partners

As of now, there is no TDS provisions on the payment to Partners in the Parternship firms being in any form like salary, remuneration, interest, bonus or commission. Now, in the Finance Bill (No.2) 2024, a new section 194T has been inserted which states that any payment to a partner in the Partnership firm being in the form of remuneration, commission, bonus or interest, etc. Shall be liable to TDS at the rate of 10% if the amount exceeds Rs. 20,000/- in the Financial Year.

This provision will make a drastic change in the taxation of the Partnership firms. Likewise, in the Companies, where the Director salary is liable to TDS under section 192. Now, with this section being inserted, the Parternship remuneration shall be subject to TDS under section 194T and in the Form 26AS, a new entry under section 194T will be visible.

The said amendment shall be effective from 1^st April 2025 onwards.