The Union Budget 2024 introduced a significant change in the tax landscape for partnership firms. Effective from April 1, 2025, partnership firms are now required to deduct Tax Deducted at Source (TDS) on payments made to their partners. This change is designed to enhance tax compliance and ensure timely tax collection.

Key Points to Remember:

• Threshold Limit: TDS is applicable only if the total amount paid to a partner in a financial year exceeds Rs. 20,000. This means that if the total payments to a partner, including salary, remuneration, commission, bonus, and interest, are less than Rs. 20,000, TDS is not required.
• TDS Rate: The standard TDS rate is 10%. However, the rate may vary depending on certain factors like the partner’s tax residency status and the nature of the payment.
• Time of Deduction: TDS must be deducted at the time of payment or credit to the partner, whichever is earlier. This ensures that the tax is collected promptly.
• Applicable Payments: TDS is applicable on various types of payments made to partners, including salary, remuneration, commission, bonus, and interest.

Important Considerations:

• Cash Payments: While TDS is mandatory on payments to partners, the Partnership Act does not impose any restrictions on making cash payments to partners. This means that partnership firms can still pay their partners in cash, subject to other legal and regulatory requirements.
• Tax Compliance: It is crucial for partnership firms to maintain accurate records of payments made to partners, including the TDS deducted and deposited with the tax authorities. Proper documentation is essential for compliance purposes and to avoid potential penalties.