Section 194T: TDS on Payments by Partnership Firms to Partners

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Section 194T: TDS on Payments by Partnership Firms to Partners

The Finance Act 2024 introduced a pivotal change in the taxation framework by inserting Section 194T in the Income Tax Act. This provision imposes a Tax Deducted at Source (TDS) obligation on certain payments made by a partnership firm or LLP to its partners.

Previously, payments like remuneration, interest, commission, or bonus made by a firm to its partners were not subject to TDS. However, with the introduction of Section 194T, this scenario is set to change.

Key Features of Section 194T

1. Payments Covered

The following payments made by a firm to its partners are subject to TDS under Section 194T:

• Salary
• Remuneration
• Commission
• Bonus
• Interest (on loan accounts or capital accounts)

2. Rate of TDS and Threshold Limit

• Rate of TDS: 10%
• Threshold: TDS will apply if the total payments to a partner exceed ?20,000 in a financial year.

3. Timing of TDS Deduction

TDS under Section 194T is to be deducted at the earlier of the following:

1. Credit of the amount to the partner's account in the books of the firm (including credit to the partner's capital account).
2. Actual payment made to the partner.

4. Applicability Date

The provisions of Section 194T will be applicable from April 1, 2025 as per the Finance Act, 2024.

Practical Implications of Section 194T

1. Structured Withdrawal Process

• Traditionally, many family-owned or closely held firms allow partners to withdraw funds on an ad hoc basis.
• With TDS provisions in place, firms will need to plan and structure withdrawals to minimize TDS impact.

2. Need for Timely Financial Closures

• Partner remuneration is often finalized based on the firm's profitability, which is determined after closing the books of accounts.
• To meet the TDS deposit deadline for the March quarter (April 30), firms may need to finalize accounts earlier than usual.

3. Increased Compliance Burden

• Firms must ensure accurate tracking of payments made to partners and timely deduction and deposit of TDS.
• Errors in compliance can result in penalties and interest charges under TDS provisions.

Conclusion

The introduction of Section 194T marks a significant shift in how payments to partners are taxed. While it ensures greater transparency and tax compliance, it also necessitates firms to adopt a more systematic approach to managing partner withdrawals.

For firms and partners, this means a greater emphasis on planning, compliance, and accounting practices to align with the new regulatory requirements effective from April 1, 2025.