PAYMENT TO OVERSEAS PARTNER THROUGH OUTWARD REMITTANCE

Remitting salary or remuneration to an overseas partner from an Indian partnership firm involves navigating both Income Tax (TDS/Compliance) and Foreign Exchange (FEMA/RBI) regulations.

Since April 1, 2025, the tax landscape for such payments has changed significantly with the introduction of Section 194T. Below is a summary of the compliance requirements:

1. Income Tax Compliance (TDS)

• Section 194T: As of April 1, 2025, firms are required to deduct 10% TDS on salary, remuneration, bonus, commission, or interest paid or credited to any partner if the aggregate payment to that partner exceeds ₹20,000 in a financial year.

• Timing: TDS must be deducted at the time of credit to the partner's account (including capital account) or at the time of payment, whichever is earlier.

• Non-Resident Specifics: Since the partner is a non-resident, you must also consider provisions under Section 195. While Section 194T specifically addresses payments by firms to partners, payments to non-residents generally fall under the ambit of withholding tax to ensure tax is collected on income accruing to non-residents in India.

• Documentation: Ensure you have the partner’s PAN (mandatory for TDS compliance), their Tax Residency Certificate (TRC) from their home country, and their Tax Identification Number (TIN) to properly manage tax residency and potential DTAA (Double Taxation Avoidance Agreement) benefits.

2. FEMA and RBI Guidelines (Outward Remittance)

• Authorized Dealer (AD) Bank: All outward remittances must be routed through an Authorized Dealer (usually your commercial bank).

• Purpose Codes: When initiating the wire transfer, you must specify the correct RBI "Purpose Code" for the transaction. Your bank will guide you on the specific code suitable for "remuneration/salary to a partner."

• Form 15CA/15CB: For payments to non-residents that are chargeable to tax in India, you are generally required to furnish:

  • Form 15CB: A certificate from a Chartered Accountant (CA) certifying that the taxes have been deducted or that the payment is not taxable.

  • Form 15CA: An undertaking filed online by the firm on the Income Tax portal, which the bank requires before processing the remittance.

• Substance Over Form: RBI regulations emphasize that every remittance must have a clear, documented economic purpose. Ensure your Partnership Deed explicitly authorizes the remuneration/salary structure, as this will be a primary document requested by your AD bank.

3. Key Operational Steps

1. Review Partnership Deed: Ensure the salary/remuneration is strictly in accordance with the deed. If the deed is silent or lacks specific calculation methods, the payment may be disallowed as an expense under Section 40(b) of the Income Tax Act.

2. Verify Limits: Ensure the remuneration paid is within the permissible limits prescribed under Section 40(b) of the Income Tax Act, which governs the deductibility of such payments as business expenses.

3. Coordinate with your CA/Bank: Before the first remittance, discuss the specific "Purpose Code" and documentation requirements with your AD bank's Forex department. Since regulations for non-resident payments are strict, having your CA prepare the Form 15CB will streamline the process and prevent delays.

Summary: To pay an overseas partner, you must ensure the remuneration is authorized in your Partnership Deed and falls within Section 40(b) limits. You are required to deduct 10% TDS under Section 194T if the annual payment exceeds ₹20,000. For the actual outward remittance, you must file Forms 15CA/15CB through your bank and use the appropriate RBI purpose code to ensure compliance with FEMA regulations.