Section 194T: New TDS Rules on Payments to Partners! Are You Prepared?
Introduction
🔴 Attention all partnership firms and LLPs! A major tax compliance change is coming your way!
Starting April 1, 2025, Section 194T will make TDS deduction mandatory on payments like salary, remuneration, commission, bonus, and interest paid to partners. This means firms can no longer make these payments without deducting TDS if the total amount exceeds ₹20,000 in a financial year.
💡 What does this mean for you? If you’re a partner or run a firm, you need to start planning right now to avoid last-minute compliance hassles and cash flow disruptions.
👉 Read on to understand the new TDS rules, how they will impact you, and what steps you must take before April 1, 2025!
What Payments Are Covered Under Section 194T?
The following payments made by a firm to its partners will be subject to TDS under Section 194T:
- Salary – Payments to partners for rendering services to the firm.
- Remuneration – Compensation given for managing operations or handling specific roles.
- Commission – Fees paid for facilitating business transactions.
- Bonus – Additional payments based on the firm’s financial performance.
- Interest – Any interest credited to a partner’s capital or loan account with the firm.
Note: Share of profits distributed to partners is NOT subject to TDS under this section.
TDS Rate and Threshold Under Section 194T
The TDS deduction rate and applicable limit are as follows:
| Condition | TDS Rate | Threshold Limit |
|---|---|---|
| Aggregate payments (salary, remuneration, commission, bonus, or interest) to a partner exceed ₹20,000 in a financial year | 10% | ₹20,000 per financial year |
Example:
If a firm pays a partner ₹25,000 as remuneration, the firm must deduct TDS at 10% on the entire amount, which amounts to ₹2,500.
When to Deduct TDS Under Section 194T?
TDS must be deducted at the earlier of the following:
- When the amount is credited to the partner’s account (including capital accounts).
- When the payment is actually made to the partner.
Illustration
- A firm credits ₹15,000 to a partner’s account on May 1, 2025 and pays an additional ₹10,000 on June 1, 2025.
- Since the total credited amount exceeds ₹20,000, TDS must be deducted on May 1, 2025.
Applicability of Section 194T
- Applicable to all partnership firms and LLPs operating in India.
- TDS deduction is mandatory if the payments exceed ₹20,000 in a financial year.
- Profit-sharing remains exempt from TDS under this section.
Practical Implications of Section 194T
The introduction of Section 194T will impact partnership firms and their partners in the following ways:
1. Structured Withdrawals Required
- Partners must strategize their withdrawals to ensure optimum cash flow management after TDS deductions.
2. Early Book Closure May Be Necessary
- In cases where partner remuneration is linked to the firm’s profitability, firms may need to close their books earlier to determine the exact TDS liability.
3. Additional Compliance Burden on Firms
- Firms must deduct, deposit, and file TDS returns within prescribed deadlines to avoid penalties.
FAQs on Section 194T
Q1: Will TDS apply to partners withdrawing profits?
No. Profit withdrawals made by partners are not covered under Section 194T and remain TDS-free.
Q2: Does this provision apply to LLPs as well?
Yes. The provisions of Section 194T apply to both partnership firms and LLPs.
Q3: Is there any exemption for small firms?
No exemptions have been provided for small firms or LLPs. The TDS deduction applies irrespective of the firm’s size.
Q4: When should the deducted TDS be deposited with the government?
- TDS deducted in April to February must be deposited by the 7th of the next month.
- TDS deducted in March must be deposited by April 30th.
Q5: What happens if a firm does not deduct TDS under Section 194T?
- The firm may face penalties and interest liabilities for non-deduction or late deposit of TDS.
- Expenses claimed under non-compliant transactions may be disallowed under the Income Tax Act.
Conclusion
The introduction of Section 194T marks a significant shift in the taxation of partnership firms and LLPs. Partners and firms must carefully plan their financial transactions to comply with the new TDS provisions.
Firms should ensure timely deductions, deposits, and reporting to avoid penalties and maintain smooth operations.
