The Finance Act, 2024 has inserted a new section, 194T, for TDS deduction by partnership firms/Limited Liability Partnerships (LLPs). Section 194T takes effect from 1st April, 2025 (AY 2026-27), to bring payments such as salary, remuneration, commission, bonus and interest (whether on capital or on loan) by a partnership firm/LLP to its partners under the purview of TDS. As such, the following payments by a partnership firm/LLP to its partners get covered by Section 194T:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on Capital
- Interest on Loan
The following is the text of Section 194T (Bare Law)
"194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of thepartner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.".
Rate of TDS Deduction
The rate of TDS deduction under Section 194T is 10%. The same will be increased to 20% in case PAN of the partner is not provided/available.
Threshold Limit
No deduction is to be made under section 194T, from any payment made or amount credited to a partner, if the aggregate amount does not exceed Rs 20,000/- (twenty thousand rupees) in a financial year.
Amounts Not Covered By Section 194T
The following amounts paid to partners are not covered for TDS deduction under Section 194T:
- Withdrawal of capital (drawings) by the partners.
- Amount paid/credited to the partners as profits of the partnership firm/LLP.
- Amounts paid/credited before 01.04.2025 whether as salary, remuneration, bonus, commission or interest.
Impact of Section 194T
Increase in Compliance Burden
Section 194T puts a great burden of compliance on partnership firms/LLPs, especially the smaller ones. The firms/LLPs need to obtain a Tax Deduction and Collection Account Number (TAN) and follow the statutory requirements of deducting TDS, depositing the same, filing the relevant TDS returns and issuing TDS certificates in relevant forms to the deductees.
Cash Flow Issues for Partners
The TDS deduction under section 194T creates cash flow crunch scenarios for the partners, especially those of small firms/LLPs. The rate of TDS @ 10% seems to be quite high, considering incomes up to Rs. 12 lakh are not taxable under the New Regime of the Income Tax Act. As such, partners of small firms earning up to Rs. 12 lakh will have to claim a refund of the TDS deducted only after filing the Income Tax Return for the relevant year. This could block significant funds of the partners.
Books of Account
Since many a time, remuneration to partners depends on the profitability of the partnership firm/LLP, it becomes important that the books of account of the partnership firm/LLP are closed before April, 30 of the next financial year to avoid interest, late fee etc, since due date of TDS deposit for the month of March is April 30 of the following year.
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