• By ADMIN
• Posted 24 Jul, 2024
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New Provisions for Partnership Firms: What You Need to Know

A. Increase in Deduction Limits for Working Partners' Remuneration

Starting from the Assessment Year 2025-26, there is good news for partnership firms regarding the remuneration limits for working partners. Previously, the limits for allowable deductions were quite restrictive. Now, these limits have been increased, allowing for more significant deductions from the firm's income.

Current vs. New Limits

Current Limits:
- On the first Rs. 300,000 of book profit or in case of a loss: Rs. 1,50,000 or 90% of the book profit, whichever is higher.
- On the balance of the book profit: 60%.

New Limits (Effective April 1, 2025):
- On the first Rs. 600,000 of book profit or in case of a loss: Rs. 3,00,000 or 90% of the book profit, whichever is higher.
- On the balance of the book profit: 60%.

This change means that partnership firms can now claim higher deductions for the remuneration paid to their working partners, thereby reducing their taxable income.

B. TDS on Payments to Partners

Another significant change proposed in the Finance Bill, 2024, is the introduction of a new TDS (Tax Deducted at Source) section, 194T. This section will affect how partnership firms handle payments to their partners.

Key Points of Section 194T

- What is covered? Payments such as salary, remuneration, commission, bonus, or interest to a partner.
- When to deduct TDS? At the time of crediting these amounts to the partner's account or making the payment, whichever comes first.
- TDS Rate: 10%.
- Threshold: No TDS if the total payments to a partner do not exceed Rs. 20,000 in a financial year.

C. Practical Implications

For Partnership Firms:
- You need to track all payments made to partners, including salaries, commissions, bonuses, and interest.
- If the total of these payments exceeds Rs. 20,000 in a financial year, you must deduct TDS at 10%.
- This new rule ensures that tax is collected upfront on significant payments, improving tax compliance.

For Partners:
- Be aware that your partnership firm will deduct TDS from your payments if they exceed the threshold.
- This deduction will reflect in your tax filings, possibly reducing the tax you need to pay at the end of the year.

Summary

These changes aim to bring more fairness and structure to the taxation of partnership firms and their partners. By increasing the deduction limits for working partners' remuneration, firms can benefit from higher allowable deductions. The introduction of TDS on partner payments ensures better tax compliance and timely tax collection.

These amendments will take effect from April 1, 2025, giving firms ample time to adjust their financial practices and comply with the new regulations.