Section 194T
Understanding Section 194T – TDS on Payments to Partners
In this post, we will discuss the newly introduced Section 194T of the Income Tax Act, which came into effect from April 1, 2025. This section brings TDS into the picture for certain payments made by firms to their partners. Read on to understand how it works, who it applies to, and what firms need to do to stay compliant.
Let’s look at each section in detail:
Introduction
From the start of April 1, 2025, a new rule under Budget 2024 brings changes to how firms handle payments to their partners. These specific payments will now attract TDS under the newly introduced Section 194T of the Income Tax Act. This post breaks down what Section 194T is about and what it means for you.
Scope and Applicability of Section 194T
Section 194T applies to any firm that makes payments to its partners. This includes regular partnership firms registered under the Indian Partnership Act of 1932 and Limited Liability Partnerships (LLPs) under the LLP Act of 2008. However, the section specifically applies to Indian LLPs.
The idea is to bring a wide range of partnership entities under this TDS rule. Payments made by a firm to its partners that fall under Section 194T include salary, remuneration, commission, bonus, and interest whether on capital or loans given by the partner.
In short, the section ensures that most types of payments or benefits a partner receives from the firm are treated the same with employee income for TDS purposes.
Rate of Deduction of TDS and Limit for Section 194T
TDS should be deducted at 10% if the total payment to a partner in a financial year is more than ₹20,000.
|
Condition |
TDS Rate |
When TDS Applies |
|
Payments to partners (interest, bonus, commission, or remuneration) |
10% |
When total payments in a financial year are more than ₹20,000 |
When to Deduct TDS under Section 194T?
TDS must be deducted on the earlier of the following two events:
- When the amount is credited to the partner’s account in the firm’s books, or
- When the payment is actually made to the partner.
Note: If the amount is credited to the partner’s capital account, it will still be treated as a credit to determine the TDS liability.
Compliance Requirements for Firms
Partnership firms and LLPs have to follow certain rules under Section 194T. First, if a firm deducts TDS, it must have a TAN (Tax Deduction and Collection Account Number). Without this, TDS cannot be reported or paid.
Next, firms need to check the payments made to their partners. If the total amount paid during the financial year goes over ₹20,000, they must deduct TDS at 10% of the full amount. This deducted TDS should be deposited with the government on time, usually every month or quarter.
Keeping proper records of all partner payments and TDS details is very important. These records are needed while filing quarterly TDS returns, like Form 26Q. Firms also need to give their partners a TDS certificate (Form 16A), which is proof of the tax deducted. Partners can then use this certificate while filing their income tax returns.
It also helps if firms take the time to explain these new TDS rules to their partners. This way, everyone will be on the same page, and confusion will be avoided.
Practical Implications
Introducing Section 194T brings some practical changes for partnership firms and LLPs. Firms will now have to track payments made to partners more closely and ensure tax is deducted at source (TDS) before making such payments. This means setting up systems for regular TDS deductions, timely deposit of the deducted tax, and filing of TDS returns. Firms that don’t already have a Tax Deduction and Collection Account Number (TAN) will need to apply for one to carry out these activities. Accounting systems may also need to be updated to handle these new requirements smoothly.
TDS will be deducted at 10% of the income credited or paid to partners. Although partners can claim credit for this tax when filing their individual returns, the deduction affects the actual amount they receive at the time of payment.
Another point to note is the timeline. Even if a firm finalises its accounts after the end of the financial year, TDS must still be deducted and deposited by April 30 for payments related to the year ending March 31. This may lead to quicker book closures to meet the deadline.
Overall, Section 194T will push firms to be more structured in handling partner payments and maintaining proper financial records.
Conclusion
Section 194T is an important change to the Income Tax Act, requiring partners in firms to plan their finances more carefully. TDS is now applicable, which may have an impact on cash flow and make tax compliance more important than earlier. Partners must review their financial strategies to understand how this may affect their income and stay on the right side of the law.
With that, we conclude this post. Please leave any questions or comments in the space provided below, and we are happy to answer them.
FAQs
Q. Is TDS charged on the repayment of capital account balance?
Ans: No, TDS does not apply to the repayment of the capital account balance.
Q. What is the effective date of the TDS under Section 194T?
Ans: The TDS will be applicable under Section 194T beginning April 1, 2025.
Q. At what rate will TDS be deducted for payments made to a partner?
Ans: If the payment exceeds Rs. 20,000 in a financial year, TDS will be deducted at a rate of 10%.
Q. Will the provision apply if the partner does not have a PAN?
Ans: • If the non-resident partner does not provide a PAN, TDS will be deducted in accordance with Section 195, which specifies the applicable rates.
- If the resident partner does not provide a PAN, the TDS rate will be 20%.
