Section 194T: TDS on Payment by Partnership Firm to Partners

At present, the payments made by a firm (partnership firm or an LLP) to a partner are not subjected to TDS. Currently, the TDS is applicable only in the case where the payments are made to an employee of a firm. However, if you draw remuneration from firm as a partner or if you are taking payments in the form of interest, bonus or commission then the TDS provisions were not applicable on the said payments.

Introduction 

Budget 2024 inserted a new provision in the Act stating that certain payments made to a partner by a firm shall be liable for TDS deduction in accordance with the provisions of Section 194T.

What are the Payments Covered in Section 194T?

Payments by a firm to a partner that are covered in Section 194T are as under:

• Salary
• Remuneration
• Commission
• Bonus or
• Interest on any account (It can be on a loan account or on a capital account)

Rate of Deduction of TDS and Limit for Section 194T

The rate at which TDS is to be deducted is 10%. The TDS is to be deducted only in the cases where the aggregate payments to a partner exceeds Rs. 20,000 in a financial year.

When to Deduct TDS under Section 194T?

The TDS is to be deducted at earlier of the following dates:

1. Credit of sum/payment to the account of partner in the books of the firm or
2. Payment to the partner

Note: Credit to the partner’s capital account will also be considered for determining the date in (1) above. 

Applicability of the Provisions of Section 194T

As mentioned in the Finance Bill, the provisions of Section 194T shall be made applicable from 1st April, 2025.

Practical Implications Due to Insertion of Section 194T

Practically, at present, in family-owned firms, a partner's remuneration withdrawal from a firm depends on various factors such as cashflow requirements, tax implications, etc. In many cases, the withdrawal is on an ad hoc basis rather than structured. Due to the insertion of the above provisions, the partners may need to rationalize their withdrawal from firms as the withdrawal will entail a TDS deduction at the rate of 10%.

Further, there can be a situation where the remuneration of the partner depends on the profitability of the firm, which in case is practically determined once the books of the firm are closed for the financial year. So, there can be a situation where firm’s might need to close simultaneously from the financial year end considering the due date for deposition of TDS of March Quarter is the 30th of April. So, to deduct the TDS on partner remuneration for the year ended on 31st March, the books of accounts of the firm may need to be closed before the said period.