This budget was a mixed bag when it comes to Taxation aspect of Firms in India. On one hand the elected government has introduced TDS on payment to partners and on the other hand, the limit for allowability of remuneration for working partners has been rekindled with.
Thus, the purpose of this writeup is to spread awareness of these less talked about provisions amongst the businesses and thus below is the analysis of these changes which we’ll discuss in-depth.
Contents:
1. Introduction of 194T: TDS on Payment to Partners
2. Remuneration to Working Partners
1. TDS u/s 194T-Payment to Partners
Do you ever deduct TDS on payments made to a partner of a firm?
If not, then brace yourselves to welcome another TDS provision namely “194T- Payment to partners”.
This Budget 24-25 introduced some of the tax aspects in Finance Bill 2024 which will directly impact those partners of a firm withdrawing any kind of payment in the name of remuneration/interest/salary/commission/bonus.
So, what does the provision say?
Excerpts from Finance Bill 2024 are given below for better understanding:
“194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.”
Explanation in Budget Memorandum 2024:
Presently there is no provision for deduction of tax at source (TDS) on payment of salary, remuneration, interest, bonus, or commission to partners by the partnership firm. Hence, it is proposed that a new TDS section 194T may be inserted to bring payments such as salary, remuneration, commission, bonus and interest to any account (including capital account) of the partner of the firm under the purview of TDS for aggregate amounts more than Rs 20,000 in the financial year. Applicable TDS rate will be 10%.
The provisions of section 194T of the Act will take effect from the 1st day of April, 2025.
Analysis:
Point to be noted here is that, from 1st April 2025 onwards, any firm, whether a partnership firm or an LLP (Limited liability partnership) making any payment (i.e either in the nature of salary, remuneration, commission, bonus or interest) to a partner (whether working or sleeping partner) of the firm, at any time during the financial year, is liable to deduct TDS at the rate of 10% on the aggregate amount if the sum exceeds Rs. 20,000/- in a financial year, at the time of payment or at the time of credit, whichever is earlier.
Now, evidently from the language of the act, this provision is like any other TDS provision where if a certain limit has exceeded, TDS rules are attracted and it becomes the liability of the firm to deduct TDS and follow suit.
For instance, if Firm A, an LLP makes a payment of Rs.24,00,000/- per annum remuneration to a Partner, then, TDS under Section 194T, is bound to be deducted on aggregate amount i.e 10% of 24,00,000 which is Rs. 2,40,000/- and compliance is to be completed by filing quarterly TDS Returns. Late fees & Interest provisions follow suit as it is.
Food for Thought: Does 194T override 194R enacted for taxing perquisites?
Well, as we all know Section 194R was enacted from 1.7.2022 to tax the benefits and perquisites given by any person exceeding Rs.20,000/- in a year, will it act as an overriding section if a partnership firm provides benefits/perquisites to partners exceeding Rs.20,000?
The answer is NO, as the Section 194T is only for making payments such as in the nature of salary, remuneration, commission, bonus or interest, whereas Section 194R taxes benefits given in the nature of perquisites. In case of all regular payments to partners, Section 194T will be applicable. Although, the rate of tax as well as the threshold of 20,000 is the same in both the sections, a clarification is required on this aspect for utmost clarity.
Though, this applicability would encourage majority of the firms registered in India to book remuneration not at the year-end but at the time of payment, in my view, this rate of 10% is excruciatingly high as the purpose of this inclusion is to trace the transaction and it can easily be traced with a minimal rate of TDS, which is evidently not the case here.
2. Remuneration to Working Partners
Excerpts from Finance Bill 2024:
Clause 14: In section 40 of the Income-tax Act, in clause (b), in subclause (v), in item (a), with effect from the 1st day of April, 2025, —
(a) for the letters and figures “Rs. 3,00,000”, the letters and figures “Rs. 6,00,000” shall be substituted;
(b) for the letters and figures “Rs. 1,50,000”, the letters and figures “Rs. 3,00,000” shall be substituted
Analysis:
Section 40 of the Act provides for amounts that shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-clause (v) of clause (b) of the said section provides for disallowance of any payment of remuneration to any partner who is working partner which is authorized by and is in accordance with the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all partners during the previous year exceeds the aggregate amount mentioned below.
Since this limit on allowability of remuneration to working partner was fixed in the year 2010-11 it was too less for any working partner and so to increase this limit the Finance Bill provides to make some changes in the slab compared below:
Old slab for allowability of remuneration
| A | on the first Rs. 3,00,000 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 |
New slab for allowability of remuneration
| 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 |
These amendments to sub-clause (v) of clause (b) of section 40 of the Act will take effect from the 1st day of April, 2025 and will, accordingly, apply in relation to Assessment year 2025-2026 and subsequent years.
Thus, if a partner in Firm A withdraws Rs 24,00,000/-, in the same example taken above and the book profits are Rs 10,00,000, then the partner would be first subject to Rs2,40,000/- TDS U/s 194T, then he’ll be allowed the below calculated remuneration in his Income Tax Return:
| On the first 6,00,000 book profit – Rs 3,00,000 or 90% of Rs 10,00,000 whichever is more | Rs. 9,00,000 /- |
| Balance book profit i.e Rs. 4,00,000/-
60% of Rs. 4,00,000 |
Rs. 2,40,000/- |
| Total allowable remuneration | Rs. 11,40,000/- |
Thus, at the time of filing ITR, his income would increase by Rs.11,40,000/- as the same will be disallowed and added back to his gross income.
Although the change in limits is a welcome provision given that some relief has been provided, still a simpler provision on the allowability would have given an easy way to calculate taxes by synchronizing it with the slab rates.
So, if we combine the reading of both the provisions, the crux is that at the time of making the payment to partners, TDS will be deducted and at the time of filing ITRs of the partners, disallowance of excess remuneration and credit of the TDS deducted will have to be kept in mind.
Also do let me know what you feel about the recent changes in the budget!
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The author is a practicing DISA Qualified Chartered Accountant & Partner in Naveen Jain & Co. She can be reached at [email protected] your queries.
DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.
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