Summary: The Finance (No. 2) Act, 2024 introduced Section 194T, effective from April 1, 2025, requiring firms to deduct 10% TDS on salary, remuneration, commission, bonus, or interest paid to partners. However, no TDS is required if the total payment to a partner does not exceed ₹20,000 in a financial year. Additionally, Section 40(b), which governs the allowable remuneration for partners, has been revised. The new limits, applicable from April 1, 2025, differentiate between professional and non-professional firms. For professional firms, the maximum deductible remuneration is 90% of the first ₹6,00,000 of book profit or ₹3,00,000 in case of loss, whichever is higher. Beyond this threshold, the deduction is 60% of the remaining book profit. Previously, these limits were ₹3,00,000 and 90% of book profit, respectively. The amendments raise concerns among firms regarding whether existing partnership deeds should be revised to reflect these changes. Typically, partnership deeds specify an interest rate of 12%, but many do not mention the exact remuneration ratio. Since profit calculations are done at the end of the year, any partner withdrawals during the year are debited to their capital account, raising the question of whether TDS must be deducted at that stage. These changes necessitate a review of partnership agreements to ensure compliance with the updated provisions.
TDS ON REMUNERATION AND INTEREST TO PARTNERS BY FIRM
Under the Finance (No2) Act, 2024 new Section 194T was inserted as under:
Payments to partners of firms
(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.
This section is effective from 1st April, 2025.
Another change so far partnership firm is concern is about the amount of remuneration.
Section 40(b), provides that,
Any payment of remuneration to any partner who is a 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 the partners during previous year exceeds the aggregate computed as hereunder:-
There are different working for firms carrying on a professional referred to in section 44AA and other firms.
| Professional Firms: | |
| On the first Rs. 1,00,000 of | Rs. 50,000 or at the rate of |
| the book profit or in case of a loss | 90%of the book profit, whichever is more; |
| On the next Rs.1,00,000 of The book profit | at the rate of 60%; |
| On the balance of the book Profit | at the rate of 40%; |
| Any other Firms: | |
| On the first Rs.75,000 of the of | Rs. 50,000 or at the rate |
| Book profit or in case of loss | 90% of the book profit,
Whichever is more; |
| On the next Rs. 75,000 of the Book profit | at the rate of 60%; |
| On the balance of the book | at the rate of 40%; |
As per amended by Finance (No 2) Act, 2009, i.e. from 1st April, 2010
For any partnership firm either professional of any other. there is no difference.
On the first Rs. 3,00,000 or at the rate of 90% of the book profit, whichever is more;
On balance of the book profit at the rate of 60%
By the Finance (No. 2) Act, 2024 i.e. from 1st April, 2025
On the first ₹6,00,000 of the book profit or in case of a loss, ₹3,00,000 or 90% of the book profit, whichever is higher;
On the balance of the book profit, at the rate of 60%.
The question arises in the mind of the assessee whether a new partnership deed should be prepared or the existing one should continue.
Normally, in the partnership deed, we mention the rate of interest at 12%, but the ratio of remuneration is not specified.
Profit is usually calculated at the end of the year. Any amount withdrawn by the partners will be debited to their capital account. Is TDS required to be deducted?
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