How firms are taxed, the 40(b) deduction for partner pay, and the new 194T withholding
A partnership firm and an LLP are taxed the same way for income tax: at a flat 30% (plus surcharge and 4% cess), not at slab rates. The firm can deduct remuneration and interest paid to partners within the Section 40(b) limits, and those amounts are then taxable in the partners' own hands, which avoids double taxation. From 1 April 2025 a new rule, Section 194T, requires the firm to deduct 10% TDS on partner remuneration, interest, commission or bonus over Rs 20,000 a year. The key practical difference between the two is liability: an LLP limits partners' liability, a general partnership does not.
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How the firm and the partners are taxed
The firm computes its profit and pays tax at a flat 30% (plus 12% surcharge if income exceeds Rs 1 crore, plus 4% cess). Before that, it can deduct remuneration and interest paid to working partners within the Section 40(b) limits, and partners are taxed on those amounts in their own returns. The partners' share of the remaining profit (the profit already taxed in the firm) is exempt in their hands under Section 10(2A), so the same profit is not taxed twice. A firm cannot use Section 44AD if it is an LLP; a general partnership firm can.
The Section 40(b) remuneration limits
The deduction the firm can take for working-partner remuneration is capped by book profit. The Finance Act 2024 raised these limits from AY 2025-26.
Section 40(b) deductible remuneration (from AY 2025-26)
Book profit
Maximum deductible remuneration
On the first Rs 6 lakh (or in case of loss)
Rs 3 lakh or 90% of book profit, whichever is higher
On the balance of book profit
60% of the balance
warningFrom 1 April 2025, Section 194T requires the firm to deduct 10% TDS on partner remuneration, interest, commission or bonus once it exceeds Rs 20,000 in the year. This is new, many firms that never deducted on partner pay now must.
Partnership vs LLP: the real difference
Income tax treats a general partnership and an LLP almost identically (both flat 30%, both 40(b), both 194T). The difference is legal: an LLP is a separate legal person with limited liability and perpetual succession, so a partner's personal assets are protected from business debts, while in a general partnership the partners are personally and jointly liable. The cost of the LLP is registration and annual ROC and LLP filings. One tax nuance: an LLP cannot use presumptive 44AD, but a general partnership firm can.
tipChoose a general partnership for simplicity and the 44AD option; choose an LLP when limited liability matters more than the compliance saving. The income-tax rate is the same either way.
Income-tax Act 1961 s.40(b) (partner remuneration limits; raised by FA2024 from AY 2025-26)
Income-tax Act 1961 s.194T (10% TDS on partner payments, from 1 April 2025) (TDS consolidated into the Income-tax Act 2025 s.393)
Income-tax Act 1961 s.10(2A) (exempt share of firm profit)
Frequently asked questions
How is a partnership firm or LLP taxed?+
At a flat 30% (plus 12% surcharge if income exceeds Rs 1 crore, plus 4% cess), not at slab rates. The firm deducts partner remuneration and interest within the Section 40(b) limits, those amounts are taxed in the partners' hands, and the partners' share of the already-taxed profit is exempt under Section 10(2A) so it is not taxed twice.
What is Section 194T and does it affect partner pay?+
Yes. Section 194T, effective 1 April 2025, requires a partnership firm or LLP to deduct 10% TDS on remuneration, interest, commission or bonus paid to a partner once it exceeds Rs 20,000 in the year. It is new, firms that historically paid partners without any withholding now have to deduct, deposit and report this TDS.
What is the difference between a partnership and an LLP?+
For income tax, very little, both are taxed at a flat 30% with the same 40(b) and 194T rules. The difference is legal: an LLP is a separate legal person with limited liability, protecting partners' personal assets, while a general partnership leaves partners personally liable. The LLP costs more in registration and annual filings.
Can a firm use presumptive taxation under 44AD?+
A general partnership firm can use Section 44AD if it runs an eligible business within the turnover limit. An LLP cannot, 44AD is not available to LLPs or companies. So if the 44AD simplification matters to you and liability protection does not, a general partnership keeps that option open.