Taxation of Partnership Firm - Latest Changes In Remuneration Allowability

A partnership firm (including LLP) is taxable at 30%.

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(a) Surcharge : The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

(b) Health and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

Alternate Minimum Tax (AMT)

A partnership firm is liable to pay Alternative Minimum Tax where tax payable by it, on total income computed as per normal provisions of the Act, is less than 18.5% of 'adjusted total income'. In such a case the 'adjusted total income' is taken as the income of the firm and it shall be liable to pay tax at the rate of 18.5% of such 'adjusted total income'.

However, AMT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of an assessee other than a company, being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange.

Filing of Return- Every person, being a partnership firm (including Limited Liability Partnership), has to file its return of income compulsorily, irrespective of its income being profit or loss. In other words, it is mandatory for every partnership firm to file the return of income irrespective of its income or loss.

Allowability of Remuneration to Partners - Under Section 40(b) of the Income Tax Act, 1961, remuneration paid to partners is allowed as a deduction only if:

• It is authorized by the partnership deed.

• The amount does not exceed prescribed limits.

• It is paid to a working partner (actively involved in business).

Increase in limit of remuneration to working partners of a firm allowed as deduction

Section 40 of the Act provides for amounts that shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession”.

Sub-clause (v) of clause (b) of the said section provides for disallowance of any payment of remuneration to any partner who is 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 partners during the previous year exceeds the aggregate amount computed as hereunder:

This limit was put in place on the statute w.e.f AY 2010-11. The limit of remuneration to working partners in a partnership firm, which is allowed as deduction is now amended via Finance Act 2024. It is proposed on the first Rs 6,00,000 of the book-profit or in case of a loss, the limit of remuneration is increased to Rs 3,00,000 or at the rate of 90 per cent of the book-profit, whichever is more as follows:

The amendments to sub-clause (v) of clause (b) of section 40 of the Act will take effect from the 1st day of April, 2025 and will, accordingly, apply in relation to assessment year 2025-2026 and subsequent years.

The rest of the conditions remain similar. Thus, now additional amount of remuneration shall be allowed as deduction while computing its taxable income under the head PGBP.

TDS on payment of salary, remuneration, interest, bonus or commission by partnership firm to partners

Presently there is no provision for deduction of tax at source (TDS) on payment of salary, remuneration, interest, bonus, or commission to partners by the partnership firm.

Hence, a new TDS section 194T inserted to bring payments such as salary, remuneration, commission, bonus and interest to any account (including capital account) of the partner of the firm under the purview of TDS for aggregate amounts more than Rs 20,000 in the financial year. Applicable TDS rate will be 10%.

The provisions of section 194T of the Act will take effect from the 1st day of April, 2025.

The increase in the allowable limit of remuneration is definitely a positive move for the partnership firms considering the increase in the levels of profits. Also, TDS on the same would make it more transparent and traceable.