The Income Tax Act of 1961 includes section 194T, which deals with the tax deducted at source(TDS) on payments made by partnership firms to their partners. It is one of the crucial aspects of starting and running a successful business to fulfil tax obligations. Section 194T is a new provision in the Income Tax Act, of 1961 that allows partnership firms to deduct TDS on certain payments made to the partner. However, it is also said that introducing the TDS sections is a shift towards complicated tax compliance requirements.
The new TDS sections are all set to become effective from April 1, 2025. The traditional provisions of TDS were primarily focused on payment to employees within firms, leaving payment to partners such as remuneration interest, and commission of the TDS regulations. Before the provision of section 194T, payment made by any firm, whether a partnership firm or an LLP, is not subjected to TDS. TDS implications were only applicable in the case of payment made to an employee of a firm. But now, the scenario is a little different. Section 194T, an effective provision on the payments made to a partner by a firm shall be liable for TDS deduction.
Exploring the article, you’ll get to know the detailed implications of the new provision section 194T, highlighting the key changes and their insights.
In 2024, Finance Minister Nirmala Sitharaman introduced new tax implications, section 194T of the Income Tax Act, 1961. The new tax implication has required TDS on certain payments made to partners of a firm, including salary, bonus, commission, interest, or remuneration. The ultimate goal of introducing section 194T is to enhance tax compliance and transparency in financial transactions. The section highlights both partnership firms and limited liability partnerships (LLPs).
Section 194T is a new and effective framework in the Income Tax Act made for TDS on payments made by firms to their partner including partnership firms, and limited liability partnerships(LLPs). The provision is applicable for any payment including salary, bonus, commission, interest, or remuneration. Section 194T is subjected to a TDS rate of 10% if the total amount paid within a financial year exceeds Rs 20,000. The law universally applies to all firms, irrespective of their size, scope of TDS obligations, and compliance requirements for firms of all scales.
The total amount paid to partners by the partnership firms is covered under section 194T. Remuneration paid to the partners is determined by the partnership deed or mutual agreement between the partners. So, to ensure smooth tax transactions, it is necessary to maintain proper documentation including the calculation and payment of remuneration to partners.
Section 194T also applies to the interest payment to the partners on the capital contributed by the partners. Under the section 194T, TDS must be deducted from the interest payment. This includes the interest rate and the basis of calculation and it must be clearly defined in the partnership deed or through mutual agreement.
Partnership firms including limited liability partnerships(LLPs) may also pay commissions or bonuses to their partners based on the firm’s performance or the specific targets achieved. These payments are subject to TDS under section 194T. For the smooth inflow of tax transactions, firms should have a clear policy or agreement regarding the calculations and payment of commissions and bonuses to partners.
Certain payments made by the partnership firms are excluded from section 194T of the Income Tax Act, 1961. The exclusions are highlighted below.
• Repayment of Capital Account Balances: For any partner who wants to withdraw their capital contribution from the firms, the payment balance is not subject to TDS under section 194T.
• Reimbursement of Business Expenses: If any firm partner has done expenses on behalf of the firm, the reimbursed amount is not subject to TDS under section 194T.
Section 194T has brought significant changes in the TDS rate for partnership firms to handle payment to their partners. Understanding the TDS rate, process, and compliance requirements ensures a smooth flow of taxes while mitigating the impact on business operations. Initiating communication among the partners like proper record handling, and proactive planning is the key to minimising the challenges imposed by section 194T. You can consult CA Manoj K Pahwa, a tax professional with years of experience provide personalised advice to the people, compliance with new tax provisions, section 194T. By staying informed and in touch with Manoj K Pahwa, a top FEMA consultant in India, you can ensure a smooth transition in business firms.