Partnership firms are an essential part of India’s economy, ranging from small startups to well-established businesses. These firms are subject to specific income tax slabs and regulations that impact their overall tax liabilities. For any partnership firm, understanding these tax slabs is crucial for managing finances and ensuring compliance with the law.
In this article, we will break down the income tax slab for partnership firms in India, highlight key tax provisions, and provide helpful tips for managing taxes.
What is a partnership firm?
A partnership firm is a business structure where two or more individuals share ownership and profits of a business. Under the Indian Partnership Act of 1932, a partnership firm is a popular option due to its flexibility and lower setup costs.
While the firm is not taxed as an entity (like corporations), the individual partners must report and pay taxes on the firm’s income based on the income tax slab for partnership firms.
Partnership Firm Tax Rate for FY 2024-25
Unlike individual taxpayers, the tax rate for partnership firms is relatively straightforward. The income tax for a partnership firm is calculated based on the total taxable income of the firm, without any exemptions or deductions that individuals typically benefit from.
1. Tax rates for partnership firms: For the financial year 2024-25, the tax rate for partnership firms is as follows:
- Total income up to Rs. 1 crore: Tax rate of 30% on the total income.
- Income above Rs. 1 crore: A surcharge of 12% is levied on the income exceeding Rs. 1 crore. The tax rate remains at 30%.
2. Surcharge, health, and education cess: A surcharge of 12% is applied on income above Rs. 1 crore, and a health and education cess of 4% is added to the total tax payable. This makes it crucial for partnership firms to maintain accurate records of income and expenditures to determine the correct taxable amount.
Key Income Tax Changes for a Partnership Firm Effective from the 1st of April, 2025
The Finance (No. 2) Act, 2024, has introduced significant income tax changes for partnership firms, including Limited Liability Partnerships (LLPs). These changes are effective from April 1, 2025.
Primarily, these changes are focused on the:
- Increased limits for partner remuneration
and - Implementation of Section 194T (which mandates Tax Deducted at Source (TDS) on payments to partners).
Let’s understand these income tax changes in detail:
1. Increased Limits for Partner Remuneration
Until the financial year 2024-25 (Assessment Year 2025-26), the remuneration paid to a working partner in a partnership firm was capped based on the book profit. The permissible remuneration limits were:
- On the first Rs. 3,00,000 of book profit (or in the case of a loss): Rs. 1,50,000 or 90% of the book profit, whichever is higher.
- On the remaining book profit: 60% of the book profit.
Now, these limits have been increased in the Finance (No. 2) Act, 2024.
2. Revised Limits from April 1, 2025 (AY 2026-27 Onwards)
From April 1, 2025, the remuneration limits have been doubled. The new structure is as follows:
- On the first Rs. 6,00,000 of book profit (or in the case of a loss): Rs. 3,00,000 or 90% of the book profit, whichever is higher.
- On the remaining book profit: 60% of the book profit.
This increase allows firms to compensate partners more generously. At the same time, they can keep these payments tax-deductible. However, firms must update their financial records to comply with the revised limits when calculating taxable income.
3. Introduction of Section 194T – TDS on Payments to Partners
Section 194T is a new provision under the Income Tax Act, 1961. It is applicable from April 1, 2025. This provision mandates the deduction of TDS on payments made to partners by partnership firms and LLPs.
Through this section, the Finance (No. 2) Act, 2024, brings uniformity in the tax treatment of payments to partners.
4. Applicability of Section 194T
Section 194T applies to all partnership firms and LLPs (irrespective of their turnover). The provision specifies that TDS must be deducted if the total payments to a partner exceed Rs. 20,000 in a financial year.
Once this threshold is crossed, a TDS of 10% will apply to the entire payment amount.
5. Payments Covered Under Section 194T
Under Section 194T, TDS applies to the following payments made to partners:
- Salary/ Remuneration
- Commission
- Bonus
- Interest on capital/ loan
Drawings or capital repayment are not subject to TDS under Section 194T.
6. Timing of TDS Deduction
TDS under Section 194T must be deducted at the time of crediting the payment to the partner’s account or at the time of actual payment, whichever is earlier. This requirement ensures that the TDS deduction is not deferred or avoided.
7. What Happens If Firms Fail to Deduct TDS?
Failure to deduct TDS under Section 194T can lead to significant consequences, such as:
- Disallowance of 30% of the expenditure related to:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on Capital
- Interest penalty and late filing fees
8. Interest Penalty
If TDS is not deducted or not paid after deduction, interest will be charged as follows:
- 1% per month for non-deduction of TDS
and - 1.5% per month for non-payment of deducted TDS.
9. No Exemption or Lower TDS Rate Certificates Available
Under Section 194T, partners cannot claim exemption from TDS by submitting Form 15G or 15H. Additionally, there is no provision for applying for a lower TDS rate through Form 13 or Section 197.
10. How Will Section 194T Affect Partners’ Tax Liability?
Since TDS will be deducted at source under Section 194T, the deducted amount will be credited against the partner’s final tax liability at the time of filing the Income Tax Return (ITR).
If the TDS amount exceeds the actual tax liability, the excess amount will be refunded after the ITR is processed.
11. Annual vs. Monthly TDS Deduction – How Should Firms Deduct TDS?
The frequency of TDS deduction under Section 194T depends on the type of payment. Let’s see how:
- For monthly payments like salaries, TDS must be deducted each month when the payment is credited.
- For interest on capital, TDS must be deducted annually when the interest is calculated at the end of the financial year.
12. Steps Firms Need to Take Before April 1, 2025
To comply with the new provisions, partnership firms should undertake the following steps:
- Update remuneration agreements to align with the revised limits.
- Apply for a TAN (Tax Deduction and Collection Account Number) if not already obtained.
- Implement a system for TDS deduction and filing to remain compliant.
- Inform partners about the new TDS deduction requirement.
- Consult with a tax professional to address any uncertainties.
Key provisions for partnership firms
- Tax filing requirement: A partnership firm must file its Income Tax Return under ITR-5 on the Income Tax Department’s portal. The firm is required to maintain books of accounts and report its financial status regularly.
- No deductions for individual partners: Unlike individuals, partners cannot claim deductions such as those under Section 80C or 80D. However, they can reduce their taxable income by deducting business-related expenses.
- Business expense deductions: Partnership firms are allowed to deduct expenses directly related to business operations, including rent, salaries, interest on business loans, and other operational costs.
Tax planning for partnership firms
For a partnership firm, effective tax planning can significantly reduce the overall tax liability. By understanding the income tax slab for partnership firms, businesses can make informed decisions on:
- Claiming business-related expenses: Deductions like office rent, salaries, and utility bills can lower taxable income.
- Loan interests: Interest paid on business loans is also deductible, which helps reduce the taxable income of the firm.
Planning investments in ways that maximise tax savings is a key part of the firm’s long-term financial strategy.
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Key deductions for partnership firms
While partnership firms are not eligible for personal deductions, they can claim certain business deductions that help reduce their tax liability. These include:
- Interest on loans: If the firm takes a loan for business purposes, interest paid on that loan is deductible under Section 37.
- Depreciation: The firm can claim depreciation on assets like buildings, machinery, and office equipment, reducing taxable income.
- Employee salaries and benefits: Salaries and benefits paid to employees are also deductible.
- Business expenses: All business-related expenses, such as rent and office supplies, are deductible.
These deductions help the firm lower its tax burden, enabling it to reinvest in its operations and growth.
How to file income tax for partnership firms
Filing taxes for a partnership firm is simple but requires attention to detail. Here is how to do it:
- Obtain a PAN number: Ensure that the firm has a valid Permanent Account Number (PAN).
- Maintain books of accounts: Keep detailed financial records, including income, expenses, and balance sheets.
- File ITR-5 online: Log in to the Income Tax Department’s e-filing portal, select Form ITR-5, and provide the required details.
- Pay tax liability: Calculate the total tax payable and complete the payment process promptly.
- Verify the return: Use a Digital Signature Certificate (DSC) or Aadhaar OTP to verify the filed return.
Tax planning tips for partnership firms
Effective tax planning is crucial to minimise liabilities and maximise profits. Here are some strategies:
- Maximise business expense deductions: Document and claim all eligible business-related expenses to reduce taxable income.
- Plan for depreciation: Invest in equipment or infrastructure to benefit from depreciation deductions over time.
- Review financial statements regularly: Analysing your firm’s finances helps in identifying potential tax-saving opportunities.
- Consider expert advice: Consult a tax professional for advanced planning and compliance guidance.
Understanding the income tax slab for partnership firms is essential for smooth financial management and legal compliance. By maintaining accurate records, utilising available deductions, and following proper filing procedures, partnership firms can effectively manage their tax obligations.
With thorough planning and attention to detail, partnership firms can optimise their financial strategies, reinvest in their operations, and focus on long-term growth.
Conclusion
If you are running or are a part of a partnership firm, you must be aware of the latest income tax regulations. The Finance (No. 2) Act, 2024 has introduced significant changes, such as:
- Increased limits for partner remuneration
- Mandatory TDS under Section 194T if payments to a partner exceed Rs. 20,000 in a financial year.
- Partners cannot submit Form 15G or 15H to claim TDS exemption under Section 194T.
- Interest penalty for TDS non-compliance of 1% per month for non-deduction and 1.5% per month for non-payment of TDS.
- Partnership firms must file ITR-5 and provide complete details related to income, expenses, and balance sheet data.
- Firms must obtain a TAN for TDS compliance.
All these changes are effective from April 1, 2025. Additionally, you must understand the applicable tax slabs, deductions, and filing procedures. This lets you minimise tax liability and avoid penalties.
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