Recent Compliance Changes for Firms & LLPs under the Income Tax Act

The Indian Partnership Act, 1932, governs partnerships in India and similarly, The Limited Liability Partnership Act, 2008, governs LLPs in India. A valid partnership under both the Acts has been recognized by the Income Tax Act, 1961 and has also been granted a separate legal status in the Act.

A few updates with regard to the partnership firm as well as Indian LLPs, in the realm of compliance under the Income Tax Act, 1961, have been made effective from 01/04/2025 (i.e., Financial Year 2024-25 and not Assessment year 2024-25), and must be strictly adhered to.

1. Change in Section 40(b) of the Income tax Act, 1961.

Section 40(b)(v) of the Income Tax Act,1961 has been amended to enhance the threshold limit of partner remuneration eligible for deduction.

Important Points

To maximize the utilisation of the increased threshold, the clause stating remuneration in the partnership deeds must be revisited and revised, if required. It must be ensured that the deed shall either specify the amount of remuneration payable to each individual working partner or at least lay down the manner of quantifying such remuneration.

I am afraid that simply stating that the amount of remuneration payable to working partners shall be mutually agreed upon between the partners, might lead to disallowance of the deduction.
Having said that, one may refer to M/S Durga Dass Devki Nandas v. Income-tax Officer, Palampur by Hon’ble Himachal Pradesh High Court, in case number Income-tax Appeal No. 4 of 2005 decided on 11/03/2011, to defend the disallowance.

 2. Introduction of Section 194T

The Finance Act(No.2), 2024 introduced this new Section 194T, which lays down additional TDS compliance requirements on Firms.

Key Points

• • • Applicability: – The provisions of Section 194T shall be applicable to all partnership firms and Indian LLP irrespective of their turnover, number of partners, profit, nature of business or even applicability of Section 44AB.
    • Types of payments covered: – Payments made in the nature of interest, bonus, commission, remuneration and salary.
    • Exclusions: -Introduction or Withdrawals of Capital from a partner’s capital account shall be outside the scope of TDS.
    • Timing of deduction: – TDS shall be deducted at the time of credit or payment, whichever is earlier.
    • Threshold: – TDS is liable to be deducted if the aggregate of all payments exceeds Rs. 20,000/- in a given financial Year.
    • Rate of deduction: – TDS shall be deducted at the rate of 10%. However, if, for some reasons, PAN of the partner, is not furnished, TDS shall be deducted at 20% in accordance with Section 206AA.
    • Reporting: – The details of deduction made in every quarter must be reported in Form 26Q every quarter.

Important Points

• • • Higher TDS rate deduction in compliance with Section 206AB is not applicable for TDS under Section 194T.
    • The facility of obtaining a lower deduction certificate under Section 197 with respect to deductions made under Section 194T is not available with partners.
    • Deduction or non-deduction of TDS under Section 194T has no bearing on the admissibility of deduction under Section 40(b).

Example:

• • • A firm credits a salary of Rs. 18,000 and interest of Rs. 5,000 to a partner’s capital account on 05/11/2025, and the actual payment is made to the partner’s bank account on 10/11/2025. Separately, the partner withdraws Rs. 10,000 in cash from the partner’s capital account on 03/11/2025for personal use.
    • In such a scenario, TDS of Rs. 2,300 [i.e., 10% of Rs. 23,000 (Rs. 18,000 + Rs. 5000)], must be deducted on 05/11/2025, as this is the earlier date of credit or payment. Also, here, the transaction made on 03/11/2025 is not relevant for TDS compliance under Section 194T.

To summarise, Section 194T is already in force, as on date and this requires strict compliance. And the most important takeaway is that, this provision applies to ALL types of firms, regardless of turnover, profit status, or presumptive income etc.

In light of these changes, it is imperative that all firms obtain a valid TAN and ensure timely TDS compliance to avoid penal consequences.