FAQs on TDS Under Section 194T: A Comprehensive Guide
The Union Budget of 2024 introduced a new section under the Income Tax Act, 1961—Section 194T. This section imposes a Tax Deducted at Source (TDS) on specific payments made to partners of a firm. If you’re a tax professional, student, or even a partner in a firm, this guide will provide you with all the information you need about Section 194T, with examples and key data points.
What is Section 194T?
Section 194T mandates that any payment of salary, bonus, commission, interest, or remuneration to a partner of a firm is subject to TDS at a rate of 10%. This is applicable if the total payments in a financial year exceed Rs. 20,000. This provision is designed to ensure tax compliance and enhance transparency in financial transactions within partnership firms and LLPs.
Key Provisions of Section 194T
| Parameter | Details |
|---|---|
| Applicability | Payments to partners (salary, bonus, etc.) |
| Threshold Limit | Rs. 20,000 in a financial year |
| Rate of TDS | 10% |
| Timing of TDS Deduction | At the time of credit or payment, whichever is earlier |
| Effective Date | 1st April 2025 |
Examples Illustrating Section 194T
- Single Payment Example:
- Scenario: Dhairya is a partner in M/s ABD and Company. She receives a salary of Rs. 40,000 in April 2025.
- TDS Calculation: M/s ABD must deduct TDS at 10%, which amounts to Rs. 4,000, and deposit it accordingly.
- Outcome: TDS is deducted as the payment exceeds the threshold of Rs. 20,000.
- Multiple Payments Example:
- Scenario: Anjita, another partner, draws a monthly remuneration of Rs. 15,000 from her partnership firm.
- April Payment: Rs. 15,000 (No TDS since it’s below the threshold).
- May Payment: Rs. 15,000 (Total now Rs. 30,000 for FY, hence TDS on Rs. 10,000).
- TDS Calculation: TDS of Rs. 1,000 is deducted on the Rs. 10,000 exceeding the threshold.
- Outcome: TDS is deducted only on the amount exceeding the Rs. 20,000 threshold for the financial year.
FAQs on Section 194T
Q1: When does TDS under Section 194T need to be deducted?
- A1: TDS should be deducted at the earlier of either the time of credit to the partner’s account or the time of payment, in any form.
Q2: What payments are covered under Section 194T?
- A2: Payments covered include salary, bonus, commission, interest, or remuneration made to a partner of a firm.
Q3: Is Section 194T applicable to all types of firms?
- A3: Yes, it applies to all firms, including small firms, irrespective of their size.
Q4: What happens if the total payment to a partner is below Rs. 20,000 in a financial year?
- A4: If the total payment is below Rs. 20,000, no TDS is required to be deducted under Section 194T.
Q5: How does Section 194T differ from Section 192?
- A5: Section 192 deals with TDS on salaries, which applies to employer-employee relationships. Section 194T specifically applies to payments made to partners of a firm, which are not considered under the “Salaries” head for TDS purposes.
Q6: What should a firm do if it fails to deduct TDS under Section 194T?
- A6: If a firm fails to deduct TDS as required under Section 194T, it may face penalties and interest charges. The firm will also be held liable to pay the TDS amount from its own funds.
Q7: Can a partner claim a refund for the TDS deducted under Section 194T?
- A7: Yes, if the TDS deducted is more than the actual tax liability of the partner, they can claim a refund by filing their income tax return.
Q8: How should firms report TDS deductions under Section 194T?
- A8: Firms must report TDS deductions under Section 194T in their quarterly TDS returns, using Form 26Q. They also need to issue a TDS certificate (Form 16A) to the partners.
Q9: Is there any exemption from TDS under Section 194T for certain types of payments?
- A9: No specific exemptions are provided under Section 194T. All payments made to partners, such as salary, bonus, commission, interest, or remuneration, are subject to TDS if they exceed the threshold limit.
Q10: Does Section 194T apply to non-monetary compensation or benefits provided to partners?
- A10: Section 194T primarily applies to monetary payments. However, if non-monetary compensation can be valued in monetary terms, it may be subject to TDS under Section 194T, depending on the interpretation of the tax authorities.
Q11: How is the Rs. 20,000 threshold limit calculated if a partner receives payments from multiple firms?
- A11: The Rs. 20,000 threshold is calculated separately for each firm. If a partner receives payments from multiple firms, each firm must consider the threshold limit individually for payments made to that partner.
Q12: What happens if a firm deducts TDS under Section 194T at a rate higher than 10%?
- A12: If TDS is deducted at a higher rate, the partner can claim a refund of the excess TDS when filing their income tax return. However, the firm should ensure that the correct rate of 10% is applied to avoid complications.
Q13: Are there any lower deduction or no deduction certificates available under Section 194T?
- A13: Partners can apply to the Income Tax Department for a lower deduction or no deduction certificate under Section 197 of the Income Tax Act, if they believe their total income does not justify the standard 10% TDS deduction. The firm can then deduct TDS at the specified lower rate or skip deduction, based on the certificate.
Q14: What records should a firm maintain to comply with Section 194T?
- A14: Firms should maintain detailed records of all payments made to partners, including dates, amounts, and the TDS deducted. These records will be necessary for filing TDS returns and for any audits or inquiries by tax authorities.
Q15: Is Section 194T applicable to foreign partners of an Indian firm?
- A15: Yes, Section 194T applies to payments made to all partners of an Indian firm, including foreign partners. The TDS will be deducted, and the foreign partner can claim a credit for the TDS in their home country, subject to the tax treaty between India and the partner’s country.
Conclusion
Section 194T is a crucial amendment that aims to improve tax compliance and broaden the tax base. While it introduces additional compliance requirements for firms, particularly smaller ones, it also ensures that income is appropriately taxed at the source. Firms must prepare for this change by setting up robust systems and processes to ensure timely compliance from 1st April 2025 onwards.
By understanding and adhering to the provisions of Section 194T, firms can maintain financial discipline and contribute to the overall transparency of the tax system.
