NEW TDS RULE ON PARTNER PAYMENTS RAISES SIGNIFICANT COMPLIANCE CONCERNS

Partners may face excess TDS deductions, leading to blocked funds & refund claims

- GAUTAM NAYAK

In the July 2024 Union budget, a new category was added to an already humongous list of payments that attract tax deduction at source, or TDS: the payment of salary, remuneration, bonus, commission and interest by a partnership firm to partners.

It applies to payments or credits exceeding ₹20,000 on or after 1 April 2025, attracting TDS at 10%. This is the limit for both interest and remunerations (bonus, commission and salary). No TDS is required from the share of profits credited or paid to a partner.

Under general law, a partnership firm is not a legal entity separate from its partners—it is a group of partners. However, under income tax laws, a partnership firm is a taxable entity, taxed separately. The tax liability on profits of the firm is split into two parts: the interest and remuneration paid to partners are allowed as deductions to the firm while computing its taxable profits, but are taxed in the hands of the recipient partners. The firm pays tax on the balance profits, and the post-tax profits are distributed tax-free to partners, since the firm has already borne the tax.