Picture a small firm in Surat — two partners, a steady textile-trading business, and books that finally show a healthy profit this year. For years their chartered accountant had to cap how much salary the firm could pay the partners and still claim it as a deduction. From the financial year that began on 1 April 2025, that cap got a lot more generous. And at the same time, a brand-new TDS rule landed that a surprising number of firms simply didn't see coming. If you're a partner in a firm or an LLP, both of these hit your take-home pay and your compliance calendar directly.

Let's break down what changed under Section 40(b) and the new Section 194T, in language you can actually use.

Why partner remuneration has a limit at all

When a firm pays its working partners remuneration, that payment is a deductible expense — it reduces the firm's taxable profit. But the Income Tax Act won't let firms deduct an unlimited amount; if it did, every firm would just pay out its entire profit as salary and pay no tax. Section 40(b) sets the ceiling. Pay within it and the firm gets the deduction. Pay above it, and the excess is disallowed — meaning the firm ends up taxed on money it has already handed to its partners. Painful, and avoidable.

The new, higher limits from April 2025

Here's the part worth celebrating. The Finance Act 2024 raised the slabs with effect from 1 April 2025 (so, assessment year 2026-27). The new structure works like this: on the first Rs 6,00,000 of book profit — or in the case of a loss — the firm can deduct Rs 3,00,000 or 90% of book profit, whichever is higher. On the balance of book profit, it can deduct 60%.

Compare that with the old rule, which capped the first slab at Rs 3,00,000 of book profit with a Rs 1,50,000 floor. In plain terms, the threshold has doubled. A firm that earlier ran into the ceiling fairly quickly can now route a much larger chunk of profit to partners as deductible remuneration.

A quick example

Say your firm's book profit before partner salary is Rs 20,00,000. Under the new limits, on the first Rs 6,00,000 you can deduct 90% — that's Rs 5,40,000. On the remaining Rs 14,00,000 you deduct 60% — that's Rs 8,40,000. Total allowable remuneration: Rs 13,80,000. Under the old slabs you'd have landed well below that. Same profit, more money out to working partners, deduction intact. Just remember two conditions: the partners must be working partners, and the partnership deed must actually authorise the remuneration. No clause in the deed, no deduction — it's that strict.

Section 194T — the TDS nobody warned you about

Now the catch. Alongside the higher limits, a new Section 194T kicked in on 1 April 2025. For the first time ever, firms must deduct TDS on payments to their own partners — salary, remuneration, commission, bonus and interest on capital all count. The trigger is low: once total such payments to a partner cross Rs 20,000 in a financial year, TDS at 10% applies (assuming a valid PAN).

This is a genuine change of habit. Earlier, money moving from a firm to its own partners never attracted TDS at all. Now it does. And the deduction is triggered at the time of credit to the partner's account or actual payment, whichever is earlier — even if part of that remuneration later turns out to be disallowed under Section 40(b). So you can't wait for the year-end computation; you deduct as you pay.

What firms get wrong — and what to fix

The mistake we're already seeing: firms happily using the bigger 40(b) limit but forgetting to deduct 194T TDS through the year, then panicking in March. Sort out your TAN if you don't have one, set up quarterly TDS returns, and track partner drawings against the Rs 20,000 threshold from early in the year. The second fix: dig out your partnership deed. If it doesn't clearly spell out how remuneration is worked out, update it now — the higher limits are useless if the deed doesn't authorise the payment. A short supplementary deed usually does the trick.

How Gadhia Associate Can Help

The April 2025 changes are genuinely good news for partnership firms — more deductible remuneration in your partners' pockets — but only if your deed and your TDS are in order. At Gadhia Associate, we redraft partnership deeds to capture the new 40(b) limits, set up Section 194T compliance so nothing catches you out in March, and run the numbers so your firm claims every rupee of deduction it's entitled to. If you run a firm or LLP in Gujarat and aren't certain your remuneration structure is optimised for FY 2025-26, let's have a conversation — a quick review now can save a hefty disallowance later.