Key Income Tax Changes for Partnership Firms Effective April 1, 2025

Key Income Tax Changes for Partnership Firms Effective April 1, 2025

As the new financial year approaches, partnership firms and LLPs need to be aware of significant changes in income tax regulations that will come into effect from April 1, 2025. These changes, introduced under the Finance (No. 2) Act, 2024, aim to streamline tax compliance and provide clarity on partner remuneration and TDS deductions. Here’s a detailed look at the key changes:

1. Increased Limits for Partner Remuneration

One of the most notable changes is the increase in the permissible limits for partner remuneration. This adjustment allows for higher payouts to partners, which can be beneficial for both the partners and the firm. The new structure is as follows:

• On the first ₹6,00,000 of book profit (or in case of a loss): The permissible limit is now ₹3,00,000 or 90% of the book profit, whichever is higher.
• On the remaining book profit: The permissible limit is 60% of the book profit.

This change effectively doubles the previous limits, providing more flexibility and potential financial benefits for partners.

2. Introduction of Section 194T – TDS on Payments to Partners

Another significant change is the introduction of Section 194T, which mandates the deduction of TDS on payments to partners. This new provision aims to ensure better tax compliance and transparency in financial transactions within partnership firms. The key points of this provision are:

• Threshold for TDS Deduction: TDS must be deducted if the total payments to a partner exceed ₹20,000 in a financial year.
• Rate of TDS: A 10% TDS will be applied to the entire payment amount once the threshold is crossed.

This means that partnership firms need to be diligent in tracking payments to partners and ensuring that TDS is deducted and deposited as required.

Compliance and Preparation

With these changes coming into effect, it is crucial for partnership firms and LLPs to update their accounting practices and ensure compliance with the new regulations. Here are some steps to consider:

• Review and Adjust Partner Remuneration: Ensure that the remuneration structure aligns with the new permissible limits.
• Implement TDS Tracking Systems: Set up systems to track payments to partners and ensure timely TDS deductions and deposits.
• Consult with Tax Professionals: Seek advice from tax professionals to understand the implications of these changes and ensure full compliance.

Conclusion

The upcoming changes in income tax regulations for partnership firms are significant and require careful attention. By understanding and implementing these changes, firms can ensure compliance and potentially benefit from the increased remuneration limits. Stay informed and prepared to navigate the new financial landscape effectively.