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

Section 194T of the Income Tax Act has been introduced to regulate tax deduction on payments made by firms or LLPs to their partners. It covers various forms of partner income, including salary, interest, commission, bonus, and remuneration. This provision aims to ensure better compliance and bring greater transparency in partnership taxation.

Key Highlights

• Threshold limit: No TDS if aggregate payment to a partner does not exceed Rs.20,000 in a financial year.
• Timing of deduction: TDS is deducted at the earliest of credit to the partner’s account or actual payment.
• Withdrawals from a partner’s capital account are not subject to TDS
   

What is Section 194T of Income Tax Act?

Section 194T, introduced in Budget 2024, marks a significant shift in partnership taxation. Effective from 1st April 2025, payments such as salary, remuneration, interest, commission, or bonus made by firms and LLPs to their partners will be subject to TDS. Earlier, such payments were outside the scope of TDS, which applied only to employee salaries.

Under this provision, firms and LLPs must deduct TDS at 10% if the total payment to a partner exceeds Rs.20,000 in a financial year. 

No TDS is required when the aggregate payment during the year does not cross this threshold.

Applicability of Section 194T of Income Tax Act

The following payments by a firm to a partner are covered in Section 194T:

• 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. 

Practical Implications Due to Insertion of Section 194T

Withdrawals from Capital Account Balance

• Any payment to partner in nature of salary, interest, bonus, commission, or remuneration which is credited to partner's capital account, is also subject to TDS u/s 194T.
• But withdrawals from capital account of the partner is not subject to TDS u/s 194T.

Closure of Books of Accounts

• There can be a situation where the remuneration of the partner depends on the profitability of the firm.
• In such cases, profits are determined once the books of the firm are closed for the financial year. 
• Since the due date for TDS payment for the month of March is April 30th, the firm may need to close its books of accounts before this date. 
• The applicable TDS on remuneration should be recorded in the books and deposited with the government within the prescribed timeline.

Conclusion

The introduction of Section 194T will now require partners to plan their finances as the applicability of TDS will impact their cashflows. This brings a significant amendment to the Income Tax Act by increasing tax compliance for firms and partners.