Partnership Firms and LLPs: Enhanced Deductions with New TDS Obligations
In recent years, the Government has introduced concessional tax regimes for various entities, including domestic companies, resident cooperative societies, new manufacturing cooperative societies, individuals & HUF through sections 115BA, 115BAA, 115BAC, 115BAD, and 115BAE of the Income Tax Act, 1961. However, similar relief has not been extended to partnership firms and LLPs, which continue to be taxed at 30%. While the 2024 Budget did not lower tax rates for these entities, it did introduce a significant change—an increased deduction for partner salaries and remuneration. Yet, this benefit comes with an additional compliance requirement: TDS on payments to partners. Let’s explore these changes in detail.
Benefit of Higher Deduction towards Salary & Remuneration to the Partners:
Section 40(b) sets a limit for deduction towards the salary & remuneration paid / payable to the partners by the firm. To qualify for deductions, following conditions must be satisfied by the firm:
(a) The payment is done to the working partner;
(b) It is authorized & in accordance with the terms of the partnership deed; and
(c) It relates to any period falling after the date of such partnership deed.
Till FY 2023-24, the deduction permissible U/s 40(b) was as under:
| (a) | on the first Rs. 3,00,000 of the book- profit or in case of a loss | Rs. 1,50,000 or @ 90% of the book- profit, whichever is more; |
| (b) | on the balance of the book-profit | @ 60% |
Above limit was put in place on the statute from FY 2009-10. Now, above limit has been revised by the FA (No. 2)-2024 as under:
| (a) | on the first Rs. 6,00,000 of the book- profit or in case of a loss | Rs. 3,00,000 or @ 90% of the book- profit, whichever is more; |
| (b) | on the balance of the book-profit | @ 60% |
Above amendments shall be applicable from FY 2024-25 and onwards.
TDS on payment of salary, remuneration, interest, bonus or commission by partnership firm to partners:
The benefit of higher deduction towards salary & remuneration has come with additional compliance burden by way of TDS on payment of interest, salary, remuneration, commission, etc to the partners.
Till FY 2023-24, there was no provision for deduction of tax at source (TDS) on such payment to the partners. The Finance (No.2) Act -2024 has added section 194T in the Income Tax Act – 1961 which mandates for TDS in respect of payment to partners in the nature of salary, remuneration, commission, bonus or interest, etc. TDS @ 10% is required at the time of credit of such amount to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier. Further, the TDS is applicable only if the aggregate of the amounts credited or paid or likely to be credited or paid exceeds Rs.20,000/-.
Applicability to LLP:
Under the Income Tax Act-1961, firms include a limited liability partnership (LLP) and so TDS would be applicable on all above payments done by LLP to the partners.
These payments liable for TDS U/s 194T shall include the following:
1. Salary
2. Remuneration
3.Commission
4.Bonus and
5. Interest on any account.
It may be noted that no TDS is applicable on the drawings or capital repayment or on share of profit to the partner of the firm.
Challenges in complying with the TDS provision U/s 194T:
1. Feasibility Issue:
Whereas the enhancement of the limit of deduction U/s 40(b) is appreciable, the additional burden of TDS on payment to partners poses a practical challenge & without considering the ground reality of the business. The liability to do TDS in most of the cases would arise on the last day of the financial year as the relevant entry has to be passed in the books on or before 31st March. It is often done by making a back dated entry as computation of remuneration is dependent on “Book Profit” which may not be finalized until the time of filing the ITR. It can be worked out after verifying expenses including deduction u/s 43B, 40(a)(ia) disallowance, etc. Due to such expenses, the amount of remuneration in majority of the cases gets crystallized only at the time of filing the ITR. In short, computation of exact amount of remuneration may not be feasible as on 31st March even by strong efforts.
2.Deduction on entire amount paid or credited & not on allowable amount:
Section 194T provides for TDS on the actual amount paid or credited to the partners account and not on the remuneration/interest deductible in the hands of the firm. It may happen that the entire amount credited to the partner capital account may not be deductible U/s 40(b). For example, deduction U/s 40(b) towards interest is admissible at the rate not exceeding 12% even if the firm is paying interest @15%. Strict interpretation of section 194T would require TDS on the entire interest calculated @15% whereas the amount deductible in the hands of the firms and thereafter taxable in the hands of the partner shall be @ 12% only. In view of poor drafting of section 194T, the litigation and compliance burden would increase further.
Conclusion:
A well-crafted law is one that stands the test of time, requiring minimal amendments or revisions over the years. It should emanate after thorough deliberation and discussion with all relevant stakeholders so that diverse perspectives & ground realities are considered before implementing it. Section 194T is drafted in such a way that it will add to another round of litigation and complexity in the near future. One of the purposes of TDS is to ensure the income trail which was already there in the case of firms / LLP as they are otherwise also required to report the payment to the partners in their ITR. As such, imposing additional compliance burden of TDS on such payment would not result in additional tax benefit to the revenue & is very much against the concept of ease of business. There are various micro entities in the form of partnership firms, prescribing TDS compliance in respect of payment to partners seems to be a rigid measure. The threshold limit of Rs. 20,000/- is too low. TDS @ 10% is going to result in the blockage of additional funds of the partner & the firms.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
The copy of the order is as under:
