Understanding Section 194T: TDS On Payments Made To Partners
Introduction
Traditionally, payments made by firms to their partners, such as remuneration, interest, and commission, were not subjected to Tax Deducted at Source (TDS). In contrast, TDS was applicable to payments made to employees. However, a significant shift has been introduced through Clause 62 of the Finance (No. 2) Bill, 2024, which introduces a new Section 194T, expanding the scope of TDS to include various payments made by firms to their partners.
Applicability of TDS u/s 194T
Effective from April 1, 2025, Section 194T mandates TDS deduction on payments made by partnership firms or Limited Liability Partnerships (LLPs) to their partners. These payments include:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on any account
TDS Rate and Threshold Limit
| Section | TDS Rate | Threshold Limit |
|---|---|---|
| 194T: Payments to partners by firm (Partnership firm or LLP) | 10% | Rs. 20,000 per financial year |
Firms are required to deduct TDS at a rate of 10% on payments made to partners if the aggregate amount exceeds Rs. 20,000 in a financial year. TDS will be applicable on the entire amount if the aggregate exceeds the threshold limit.
Example: If a partnership firm/LLP pays Rs. 5,00,000 to a partner as remuneration in a financial year, the TDS under Section 194T would amount to Rs. 50,000 (i.e., 10% of Rs. 5,00,000).
When to Deduct TDS u/s 194T?
The TDS is to be deducted at the earliest of the following dates:
- Credit to the account (including capital account) of the partner in the books of the firm, or
- Payment to the partner
Applicability of TDS u/s 194T on LLPs
Yes, Section 194T is applicable to both partnership firms and LLPs. According to Section 2(23)(i) of the Income Tax Act, 1961, the term “firm” includes limited liability partnerships as defined in the Limited Liability Partnership Act, 2008. Similarly, Section 2(23)(ii) states that the term “partner” includes partners of LLPs as defined in the LLP Act, 2008.
Why TDS u/s 192 is not Applicable on Partners’ Salary or Remuneration?
As per Explanation 2 of Section 15 of the Income Tax Act for Salaries: “Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as ‘salary’ for the purposes of this section.”
Hence, no TDS liability was there on partners’ salary or remuneration under Section 192.
Conclusion
The introduction of Section 194T represents a significant step in modernizing India’s tax laws, enhancing transparency, and ensuring greater accountability in financial transactions between firms and their partners. This new provision marks a departure from previous norms where TDS was not applicable on partner payments, extending the tax deduction to both partnership firms and LLPs.
By implementing Section 194T, the government aims to streamline tax collection and ensure that partners’ earnings are accurately reported and taxed, fostering a more transparent and compliant financial environment.
