[Opinion] Partner’s Remuneration and Section 194T Compliance

CA Lokeswar Nagella – [2025] 177 taxmann.com 724 (Article)

1. Abstract

The Finance (No. 2) Act, 2024 has brought a paradigm shift in the taxation of partnership firms/LLPs by amending Section 40(b)(v) and introducing Section 194T with effect from 1st April 2025. While the amendment to Section 40(b)(v) enhances the ceiling on allowable partner remuneration, Section 194T simultaneously mandates TDS at 10% on remuneration, salary, bonus, commission, or interest credited/paid to partners. This article analyses the practical application of these provisions with a working example, explores the interaction between deductibility and TDS, and highlights accounting treatment, compliance calendar, and key takeaways for firms and partners.

2. Introduction

Until FY 2024-25, remuneration and interest paid by a partnership firm to its partners were taxable as “business income” in the hands of partners. The firm could claim deduction within the limits prescribed under Section 40(b), but no TDS was applicable on such payments, creating a mismatch in compliance.

From 1st April 2025 (AY 2026-27), two parallel changes apply:

1. Sec. 40(b)(v) amendment – raising the ceiling of permissible remuneration on book profits/losses.
2. Insertion of Sec. 194T – mandating firms/LLPs to deduct TDS at 10% on remuneration, salary, bonus, commission, or interest credited/paid to partners, subject to a threshold of Rs. 20,000 per year.

These changes will require both firms and partners to realign their tax computations, accounting, and documentation.

3. Analysis with Example

Step 1 – Book Profit

Profit before remuneration = Rs.27,161

Step 2 – Maximum Allowable Remuneration (Sec. 40(b)(v))

As amended from 1-4-2025:

• On first Rs. 6,00,000 of book profit (or in case of loss): 90% of book profit or Rs.3,00,000, whichever is higher.
? 90% of 27,161 = Rs. 24,445 < Rs. 3,00,000 ? allowable = Rs.3,00,000
• Balance book profit above Rs. 6,00,000: Nil

Total allowable remuneration = Rs.3,00,000

Step 3 – Actual Payment

Remuneration paid to Partner A = Rs.3,80,000

Step 4 – Deduction Allowed vs Disallowed

• Deductible under Sec. 40(b) = Rs. 3,00,000
• Disallowed (added back) = Rs. 80,000

Step 5 – Firm’s Taxable Income

Book profit before remuneration Rs. 27,161

Less: Allowable remuneration Rs. 3,00,000 = Business Loss = (Rs.2,72,839)

Step 6 – TDS under Section 194T

• Threshold: Rs. 20,000 (exceeded) ? TDS applicable
• TDS rate (resident partner): 10% (20% if no PAN)
• On Rs.3,80,000 (gross amount credited/paid)
? TDS = Rs.38,000
? Net credit to Partner A = Rs.3,42,000

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