Copyright © HT Digital Streams Limit all rights reserved. Money Gautam Nayak 3 min Read 03 Apr 2025, 11:20 am IT starts this financial year, payments or credits of more than £ 20,000 to partners of a partnership firm will attract TDS to 10%. Summary partnership firms face a new reality, as they are now expected to calculate TDs on payments to partners of more than £ 20,000. This can lead to tax complications and cash flow problems for very small businesses. In the trade union budget in July 2024, a new category was added to an already human list of payments that attract tax deduction at the source, or TDS: the payment of salary, remuneration, bonus, commission and interest by a partnership firm to his partners. It applies to payments or credits over £ 20,000 on or after April 1, 2025, and attracts TDs to 10%. This £ 20,000 is a joint limit for interest and compensation (including bonus, commission and salary). No TDS is required from the part of the profits credited or paid to a partner. In terms of general legislation, a partnership firm is not a legal entity that is separate from its partners – it is a group of partners. However, in terms of income tax laws, a partnership firm is a taxable entity taxed separately from its partners. However, the tax liability on the gains of the firm is divided into 2 parts: the interest and remuneration paid to partners are allowed as deductions for the firm while calculating the taxable profits, but is taxed in the hands of the receptionists. The firm pays tax on the balance profits, and the profit after tax is distributed tax-free to partners, as the firm has already carried the tax. There is a cap on the remuneration and interest payable to partners, which can be claimed as a deduction. The interest of more than 12% per year is not deductible, and the compensation that is permissible is a percentage of the firm’s book profits – 90% of the first £ 3 lakh, and 60% of the balance book gain. If the actual compensation and interest paid are higher than the permissible amount, the excess amount not allowed to the firm will be exempt from tax in the hands of the partners and thus avoid double taxes. Read also | Angel Investment in India: High Rewards, High Risks – How to navigate the landscape is an impossible task that most partnership firms provide in their partnership deeds for compensation to partners according to the formula for the maximum allowable compensation. Therefore, the actual amount of compensation is only known after the accounts are completed and the profits are determined at the end of the financial year. From time to time, partners draw funds from the firm, which are adapted to finalizing accounts at their remuneration and part of the profit. The problem that will arise now is that TDS applies to payment or credit, which is earlier. If the firm is made the actual payment, it is a payment on accounts for compensation and part of the profit-the bifuration is only known after the end of the year. Would it require tax to be deducted at the time of payment? How can the firm determine the compensation and deduct and subtract TDs? This is an impossible task. Or would TDS be expected to be done only at the end of the financial year when the compensation is determined and credited to the partner’s account? There is no clear answer to this, and unfortunately the tax authorities can be detrimental that TDS was not deducted at the time of the payment. Read also | Transforming Innovators Growth Platform: India’s path to escape the middle-income trap that navigates the new TDS in the absence of any elucidation by the Central Council of Direct Tax, firms can provide for a fixed quantity of compensation payable to partners, instead of calculating a variable compensation. Unfortunately, there is no provision to obtain a certificate for lower TDs from the tax authorities, as possible for other types of TDs. Given the low threshold of £ 20,000, partners with an annual income of up to around £ Lakh can see a higher TDS than their actual tax liability. They will have to submit for a tax refund after filing their tax return, which has clogged the funds. A further complication is that if the taxable compensation is lower than is actually paid as a result of lower profits, resulting in higher TDS, the partners can receive a notice asking why their income offered to tax is lower than reflected in their TDS submission (Form 26As). Partnerships should provide partnership firms about their partners, including PAN details, remuneration, interest and part of the profit, in their tax returns. It is therefore easy for the tax department to verify whether the partners have filed their tax returns and disclose the right income of the partnership firm in their returns. The introduction of TDS on such payments unnecessarily increased the compliance burden on small business partnerships without any real benefit for the tax department. Read also | Why you should protect bank deposits and how to do them, Gautam Nayak is a partner at CNK & Associates LLP. Views are personal. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Money #Taxes #TDS Mint Specials
New TDS Rules for Partnership Firms: What you need to know
