The Finance Act 2024 has introduced significant amendments to Section 40(b) of the Income Tax Act, 1961, which governs the deductibility of remuneration paid to working partners in partnership firms and Limited Liability Partnerships (LLPs). These changes, effective from April 1, 2025, necessitate a thorough review and potential revision of existing partnership deeds or LLP agreements to ensure compliance and optimize tax benefits.
Key Amendments to Section 40(b)
1. Enhanced Limits for Deductible Remuneration
- Previous Limits
For the first ₹3,00,000 of book profit or in case of a loss, the deductible remuneration was capped at ₹1,50,000 or 90% of the book profit, whichever was higher. For the balance of the book profit, the deduction was limited to 60%.
- Revised Limits (Effective April 1, 2025)
The threshold has been increased, allowing deductible remuneration on the first ₹6,00,000 of book profit or in case of a loss, up to ₹3,00,000 or 90% of the book profit, whichever is higher. The deduction on the balance of the book profit remains at 60%.
2. Introduction of Section 194T – TDS on Partner Remuneration
A new provision, Section 194T, has been introduced, mandating a Tax Deducted at Source (TDS) of 10% on any sum paid to partners in the nature of salary, remuneration, commission, bonus, or interest, if the aggregate amount exceeds ₹20,000 in a financial year. This deduction is to be made at the time of crediting the amount to the partner’s account or at the time of payment, whichever is earlier.
Implications for Partnership Deeds and LLP Agreements
Given these legislative changes, it is imperative for partnership firms and LLPs to revisit and amend their governing documents to:
- Authorize Revised Remuneration Structures
Ensure that the partnership deed or LLP agreement explicitly authorizes the payment of remuneration in line with the updated limits. It is advisable to reproduce the calculation mechanism and limits prescribed in section 40(b) ( as mentioned above).
- Specify Conditions for TDS Compliance
Incorporate clauses that address the deduction of TDS as per Section 194T to avoid any legal or financial discrepancies.
Conclusion
The amendments to Section 40(b) and the introduction of Section 194T represent pivotal changes in the taxation of partnership firms and LLPs. Proactive steps, including the timely amendment of partnership deeds or LLP agreements, are essential to harness the benefits of these changes and maintain compliance with the Income Tax Act. Engaging with tax professionals or legal advisors is advisable to navigate these updates effectively and to tailor the governing documents to the firm’s specific needs.
