This article explains Section 194T of the Income-tax Act, 1961, focusing on the TDS requirements for partnership firms making payments to their partners. Learn about the tax deduction process, rate of TDS, exceptions, and the implications for both firms and partners.
Section 194T: TDS on Partner Salary & Payments Explained | Income Tax Compliance for Firms
A new provision Section 194T becomes effective from April 1, 2025, as introduced by the Finance (No. 2) Act, 2024. This simplified guide explains its practical implications clearly.
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What is Section 194T?
Section 194T is a new provision inserted into the Income-tax Act, 1961, concerning the tax deduction on payments made by partnership firms to their partners. Specifically, it addresses payments such as:
- Salary
- Remuneration
- Commission
- Bonus
- Interest
When is Tax Deducted?
Under Section 194T, a partnership firm making payments to its partners must deduct tax at the time of:
- Crediting the amount into the partner’s account (including the capital account), or
- Actually paying the amount to the partner,
whichever happens earlier.
Rate of TDS
The firm must deduct tax @10% on the sum payable to the partner. This means if a partner is to receive a payment of ₹100,000, the firm will deduct ₹10,000 as income tax and pay ₹90,000 to the partner.
Exceptions to Section Section 194T:
There is an exception although:
- Threshold Limit: If the total amount paid or payable to a partner during a financial year does not exceed ₹20,000, then the firm is not required to deduct any tax under Section 194T.
This provision ensures smaller payments are not burdened by additional compliance requirements, keeping in mind ease of doing business, especially for smaller partnerships.
Practical Examples
Scenario A:
- ABC & Co. (a partnership firm) has to pay ₹15,000 as interest to Partner X during the entire financial year.
- Since the total payment (₹15,000) is below the ₹20,000 threshold, ABC & Co. does not need to deduct any tax.
Scenario B:
- XYZ & Co. (another partnership firm) pays Partner Y ₹30,000 as a salary during the year.
- Here, XYZ & Co. must deduct 10%, i.e., ₹3,000, and pay the net amount of ₹27,000 to Partner Y.
Implications and Importance of Section 194T:
- Improving Tax Compliance: This section ensures transparency and helps in early collection of tax revenue, making tax collection efficient.
- Simplifies Accounting: Having clear deduction guidelines helps partnership firms maintain simplified records and manage their tax obligations better.
- Reduces Disputes: Clear provisions help reduce litigation and disputes related to tax compliance, creating a more stable business environment.
Key Takeaways for Partners and Firms:
- Firms should track payments to each partner throughout the financial year carefully.
- Firms must adjust their payment systems and financial management practices to ensure they comply from April 1, 2025.
- Partners should be aware of these tax deductions to avoid confusion when receiving their payments.
Applicability on LLPs
the moot question is whether Section 194T is applicable on Limited Liability Partnerships also, the answer is yes because Section 2(23) of the Income-tax Act, 1961 clearly states that all provisions referring to a "firm" inherently include Limited Liability Partnerships (LLPs). Thus, Section 194T unquestionably applies to LLPs as well.
Final Thoughts
Section 194T represents the government’s continued efforts towards transparency and organized taxation practices. While it may initially seem complex, understanding these provisions can significantly simplify compliance for businesses and partners alike. Preparing early for this change will help ensure smooth, hassle-free financial management.