The Union Budget 2024 introduces several amendments to income tax provisions, affecting various sectors and stakeholders. Among these changes are two notable updates relevant to partnership firms and Limited Liability Partnerships (LLPs) regarding remuneration to partners. These updates will take effect from April 1, 2025, for the Assessment Year 2025-26. Here’s a closer look at these changes and their potential impact.
1. Increased Allowable Remuneration Limits
Previous Provision: Under the existing Section 40(b), the remuneration to working partners in a firm, including LLPs, is disallowed if it exceeds the following thresholds:
- For the first INR 3 lakhs of book profit (or in case of loss): INR 1.5 lakhs or 90% of book profit, whichever is higher.
- On the balance of book profit: 60% of book profit.
New Provision: The budget increases these limits as follows:
- For the first INR 6 lakhs of book profit (or in case of loss): INR 3 lakhs or 90% of book profit, whichever is higher.
- On the balance of book profit: 60% of book profit.
This change permits firms to offer higher remuneration to their partners, which can be advantageous for both partners and firms. It is advisable to review their Partnership/LLP Deeds to determine if any amendments are necessary in light of this adjustment.
2. Introduction of Section 194T: Withholding Tax on Payments to Partners
A new provision under Section 194T requires firms to withhold tax on payments made to partners. The key points are:
- Firms must deduct tax at source (TDS) at a rate of 10% on any payment made to partners in the form of salary, remuneration, commission, bonus, or interest.
- TDS should be deducted at the time of credit or payment, whichever occurs first.
- No TDS is required if the aggregate amount paid or credited to a partner does not exceed INR 20,000 during the financial year.
- This provision does not apply to the share of profit credited or paid to a partner.
Impact on Firms:
- Firms must finalize their accounts and tax computations by April 30th – the due date for TDS payments for March – to accurately calculate the maximum allowable remuneration and ensure timely TDS deductions, avoiding late fees and interest.
- Small firms that previously had minimal or no TDS compliance obligations will now encounter heightened compliance requirements under this new provision. Correspondingly, partners of such firms, whose primary income comes from the firm, may need to claim a refund of the deducted TDS in their tax returns.
In short, the Union Budget 2024 introduces significant changes to the tax landscape for partnership firms and LLPs, with notable impact on partner remuneration and new TDS requirements. The increased limits on allowable remuneration offer greater flexibility in compensating partners, while the introduction of TDS on payments to partners adds a new layer of compliance complexity. Firms will need to carefully adjust their financial practices and documentation to align with these updated regulations, ensuring they meet all requirements and deadlines to avoid any financial penalties.