New TDS rules for partnership firms: What you need to know

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 its partners.

This applies to payments or credits exceeding ₹20,000 on or after 1 April 2025, attracting TDS at 10%. This ₹20,000 is a combined limit for both interest and remuneration (including 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 from its partners. 

However, the tax liability on the profits of the firm is split into 2 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.

There is a cap on the remuneration and interest payable to partners, which can be claimed as a deduction. Interest in excess of 12% per annum is not deductible, and the remuneration allowable as deduction is a percentage of the book profits of the firm—90% of the first ₹3 lakh, and 60% of the balance book profits. 

If the actual remuneration and interest paid are higher than the allowable amount, the excess amount disallowed to the firm will be exempt from tax in the hands of the partners, thereby avoiding double taxation.

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