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

In the Union Budget 2024, a significant change was introduced under Section 194T, which mandates the deduction of TDS (Tax Deducted at Source) on specific payments made by a partnership firm or LLP (Limited Liability Partnership) to its partners. Earlier, such payments were exempt from TDS, but this new provision ensures that certain payments are now subjected to tax deduction. Let’s break it down in simple terms.

What Payments Are Covered Under Section 194T?

Section 194T applies to the following types of payments made by a firm to its partners:

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

TDS Rate and Threshold for Deduction

The rate of TDS under Section 194T is 10%. However, TDS will only be deducted if the total payments exceed ₹20,000 in a financial year. This ensures small transactions are exempt from TDS requirements.

When is TDS Deducted?

The TDS will be deducted at the earlier of the following events:

1. When the amount is credited to the partner’s account in the firm’s books (including credit to the partner's capital account).
2. When the payment is actually made to the partner.

Applicability of Section 194T

• The provisions of Section 194T will come into effect from 1st April 2025.
• It applies to all partnership firms and LLPs making payments to their partners under the specified categories.

Practical Implications of Section 194T

1. Compliance Burden:
   Firms will now have to ensure TDS compliance while making payments like salary, commission, or interest to partners. This adds an additional layer of tax reporting for firms.

2. Impact on Partners:
   Partners receiving these payments will need to reconcile their income, as TDS deducted will reflect in their tax records.

3. Capital Account Inclusion:
   Even if payments are credited to a partner’s capital account and not withdrawn, they will still attract TDS.

Key Takeaways

• Section 194T ensures transparency and better tax compliance in partnership firms.
• Firms must deduct TDS at 10% if payments exceed ₹20,000 annually.
• Partners must plan their finances accordingly, considering TDS deductions starting April 2025.

This provision aligns the taxation of partners with other income categories, ensuring fair tax collection while setting a reasonable threshold. Firms and partners should prepare to implement this change effectively for seamless compliance!