TDS Under Section 194T-Payment to Partners of Firm

Overview on TDS U/s 194T- Payment to partners of firm

Introduction of Section 194T: Prior to this, Tax Deducted at Source was not applicable on payments like salary, remuneration, interest, or commission made to partners by the firm. However, TDS was applicable on payments to employees of the firm. Section 194T now mandates that Tax Deducted at Source be deducted on certain payments made by partnership firms or LLPs to their partners, effective from 1st April 2025. This is a comprehensive explanation of the newly introduced Section 194T under the Finance (No. 2) Bill, 2024, which expands the scope of Tax Deducted at Source to include payments made by firms to their partners. The key points can be summarized as follows:

• Scope of Applicability of section 194T: Tax Deducted at Source u/s 194T will apply to payments such as salary, remuneration, commission, bonus, and interest on accounts payable to partners. It does not apply to drawings or capital repayments to partners, but it does apply to interest on capital or loans from partners. Section 194T is a significant move towards modernizing tax law, ensuring greater transparency and compliance in the financial transactions between firms and their partners. This extension of Tax Deducted at Source obligations to partnership firms and LLPs marks a crucial shift in the regulatory landscape. The introduction of Section 194T in Budget 2024 represents a move towards greater transparency and tax compliance in partnership firms and Limited Liability Partnership. Effective Date: The provision is set to come into effect from 1st April 2025.

Tax Deducted at Source Rate and Threshold u/s 194T:

The rate of Tax Deducted at Source is set at 10% if the aggregate payment (including capital) new section 194 to a partner exceeds ₹20,000 in a FY. If the threshold is exceeded, TDS will be applicable on the entire amount. TDS is applicable only if the aggregate amount paid to a partner in a financial year exceeds INR 20,000. 10%. The section covers various forms of payments to partners, including:

• • Salary
  • Remuneration
  • Commission
  • Bonus
  • Interest on Capital
• When to Deduct Tax Deducted at Source u/s 194T: Tax Deducted at Source is to be deducted at the earliest of two events: either when the amount is credited to the partner’s account in the firm’s books (including the capital account) or when the payment is made to the partner.
• Applicability u/s 194T to Limited Liability Partnership’s : Section 194T applies to both partnership firms & Limited Liability Partnership’ This is because the definition of “firm” & “partner” in the Income Tax Act, 1961, includes Limited Liability Partnership’s as per the Limited Liability Partnership Act, 2008.
• Exclusion of Tax Deducted at Source u/s 192: Section 192, which pertains to Tax Deducted at Source on salaries, does not apply to partner’s remuneration or salary. This is because such payments are not considered “salary” under Section 15 of the I Tax, 1961, and thus were exempt from Tax Deducted at Source under Section 192. So The salary paid to a partner under this section is not considered “salary” for the purposes of Section 192, which deals with TDS on salary. Hence, TDS under Section 192 will not apply in this case.

Challenges on applicability of Section 194T:

Section 194T also brings with it significant challenges in terms of complexity, compliance, and potential liquidity issues for both firms and partners. Firms will need to start preparing well in advance of the April 2025 implementation date to ensure a smooth transition and avoid any penalties for non-compliance.

• Preparation and Implementation: Firms will need to implement effective systems and processes to track payments, calculate Tax Deducted at Source, & ensure timely compliance. This may involve adjustments to accounting systems and procedures. Obtaining a Tax Deduction and Collection Account Number and managing the additional compliance workload may increase operational costs for firms, particularly smaller partnerships or LLPs.
• Complexity in Remuneration Calculations in Fixed vs. Variable Remuneration: For fixed remuneration, the calculation and TDS deduction are straightforward. However, where remuneration is determined based on profitability at the end of the FY, calculating the exact TDS amount can be complex. Firms will need to estimate and track payments throughout year to ensure compliance.
• Liquidity Issues: Partners may face liquidity challenges due to the upfront deduction of TDS, especially in cases where the final remuneration or interest is determined later in FY.
• Increased Compliance and Liquidity Challenges: Additional Compliance: The new provision introduces additional compliance requirements, such as obtaining a Tax Deduction and Collection Account Number, timely Tax Deducted at Source deduction, deposit, & filing of Tax Deducted at Source returns.

CBDT Clarification on Revised Remuneration Limits for Working Partners:

Changes to Remuneration Caps: Alongside introduction of Tax Deducted at Source, Finance Bill 2024 also proposes changes to remuneration limits for working partners. These revised limits remuneration limits for working partners are designed to cap maximum amount of remuneration based on firm’s book profit profitability. Partner’s remuneration limit as provided in Sec 40(b) amend limit on partner’s remuneration as per below table

Computed Book Profit	Remuneration Caps Limit
On 1st INR 6,00,000 of Computed book profit or Firm loss	INR 3 Lakhs or 90% of Computed book profit, whichever is More
On NEXT balance of Computed book-profit	60% of Computed book-profit

AY 2025-26: New limits will come into effect from the AY 2025-26, & partnership firms must ensure their remuneration payments align with these revised Remuneration Limits for Working Partners caps

Payment of a partner’s remuneration in cash is permissible and allowable provided it meets Section 40(b) conditions.

Facts : Assessee: Partnership firm running a hospital. A.Y. 2019–20 return missed; reassessment u/s 148. AO disallowed expenses of ₹55.05 lakh (remuneration to partners, staff salary, rent). CIT(A) upheld the disallowance. (Case: Sonone Surgical and Ophthalmic Hospital v. ITO, Ward 14(5), Pune  ITA No. 896/PUN/2025 | Order dated 03.09.2025) 

ITAT Findings

1. Remuneration to Partners – ₹18.00 lakh (paid in cash) : Paid as per partnership deed, within limits of Section 40(b)(v). No bar under Income-tax Act on paying partner’s remuneration in cash. Genuineness of payment not disputed. Held: Disallowance deleted.

2. Salary to Employees – ₹35.88 lakh (paid in cash) : Employees’ details and payroll register submitted. AO did not show any single payment > ₹10,000 to attract Section 40A(3). Hospital requires staff; books not rejected; receipts undisputed. Held: Disallowance deleted

Allowability of Remuneration to Partner in Cash – Key Principle

• Partner’s remuneration paid in cash is allowable as deduction, if  Authorized by partnership deed. Within limits of Section 40(b)(v). &  Genuineness not in dispute. The Act does not impose a mode restriction (cash vs. banking channel) on such remuneration, unlike salary/wages to employees which may attract Section 40A(3) if paid beyond prescribed limits in cash.