TDS Provisions on Partners of The Firm-A New Provision

Section 194T, introduced by the Finance (No. 2) Bill, 2024, is effective from April 1, 2025. This section mandates the deduction of TDS on payment of remuneration and interest paid to partners by a partnership firm.

Following is the provision regarding Section 194T written in the Income Tax Act 1961:

“Section 194T. Payments to partners of firms.

(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 the partner (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”

The introduction of Section 194T aims to enhance tax compliance, improve transparency in financial transactions between firms and their partners, and widen the tax net.

Applicability and Scope

Section 194T applies to any person (being a partnership firm or LLP) responsible for paying specified sums to a partner.

The term "firm" is defined under Section 2(23) of the Income Tax Act, which includes:

• A partnership firm as per the Indian Partnership Act, 1932.

• A Limited Liability Partnership (LLP) as per the Limited Liability Partnership Act, 2008.

The term "partner" includes:

• A working or non-working partner.

• A minor admitted to the benefits of the partnership.

• A partner of an LLP.

Threshold Limit: TDS is applicable only if the aggregate payments to a partner exceed ?20,000 in a financial year.

Rate of TDS: The rate is fixed at 10% for resident partners. For non-resident partners, an additional surcharge and health and education cess may apply. If the partner does not provide PAN/Aadhaar details, the rate increases to 20%.

Timing of Deduction— When to Deduct TDS? - Monthly or Annually

The deduction occurs at the earlier of:

1. The time of crediting the payment to the partner's account (including capital accounts), or

2. The time of actual payment.

This ensures that TDS is deducted promptly, aligning with the cash flow or accounting practices of the firm.

Accordingly, the deduction timeline depends on the nature of the payment. If the partnership deed stipulates a monthly salary or remuneration for partners, TDS must be deducted at the time of each monthly payment. However, for payments such as interest on capital, which is typically calculated on an annual basis, TDS should be deducted at the end of the financial year, usually in March.

Note: Unlike some other TDS provisions (e.g., Section 197 or Form 15G/15H for certain payments), partners cannot apply for a lower TDS certificate or claim exemptions from TDS under Section 194T. The 10% rate is mandatory when the threshold is exceeded.

Compliance Obligations— Firms are required to:

• Deduct TDS at the prescribed rate.

• Deposit the deducted tax with the Central Government.

• Issue TDS certificates (Form 16A) to partners.

• File quarterly TDS returns

Failure to comply with these obligations can result in penalties, interest charges, and disallowance of expenses under Section 40(a).

What if the Firm or LLP does not Deduct TDS under Section 194T? — Failure to comply with Section 194T can lead to below repercussions:

• Disallowance of Expense: 30% of the payment may be disallowed as a deduction under Section 40(a)(ia) if TDS is not deducted or deposited.

• Interest: 1% per month (or part thereof) on the unpaid TDS amount if not deducted. 1.5% per month (or part thereof) if deducted but not deposited.