Overview on TDS Deduction U/s 194T : Payment by Firm-to-Partner

Overview on TDS Deduction U/s 194T : Payment by Firm-to-Partner

A significant reform for partnership firms is the Finance Bill, 2024, which proposes to add a new TDS section 194T to the Income Tax Act, 1961. The goal of the same action is to include all payments made to partners under TDS’s authority, including salary, compensation, commission, bonuses, and interest. There isn't currently a TDS provision on these payments. This amendment mandates the deduction of Tax Deducted at Source on payments made by firms to their partners, including salary, remuneration, commission, bonus, and interest, which was previously not required.

Partnership firms are required by the proposed section 194T of the Income Tax Act to deduct Tax Deducted at Source at a rate of 10% on total payments exceeding INR 20,000 within a FY. This includes credits to the partner's capital account as well as any other account. The clause would take effect on April 1, 2025, and it would be applicable to the AY 2025–2026 and thereafter. Here are the key insights and implications of this new section:

Provision TDS under Section 194T Changes in Budget 2024

• Applies to payments made by partnership firms to their partners. Section 194T of the Income Tax Act covers the following payments made by a firm to its partners Includes salary, remuneration, commission, bonus, and Interest (on any account, including loan accounts and capital accounts). The provisions of Section 194T will be applicable from April 1, 2025, for the AY 2025-26 onwards.
• Tax Deducted at Source at a rate of 10% on aggregate payments exceeding Rs. 20,000 in a FY. Applies to the aggregate of all payments to a partner, including credits to the partner's capital account or any other account.

• Tax Deducted at Source u/s 194T must be deducted at the earlier of:

1. Credit of the Sum/Payment: When the sum/payment is credited to the partner's account in the firm's books.
2. Actual Payment: When the payment is made to the partner.

Note: Credit to the partner’s capital account is also considered for determining the timing of Tax Deducted at Source deduction.

• Partnership firm should revisit partnership agreements to incorporate clauses related to TDS deductions and compliance responsibilities.

• In India, a partnership firm is not required to deduct Tax Deducted at Source (TDS) on the salary, remuneration, or interest paid or credited to its partners. This is because the income from the partnership firm (including salary, remuneration, and interest) is taxed directly in the hands of the partners as their share of profit from the firm.

  Specifically:

  1. Salary/Remuneration to Partners: Section 192 of the Income Tax Act, 1961, mandates TDS on salary payments. However, the salary/remuneration received by a partner from the partnership firm is not subject to TDS under this section, as it is considered the partner's share of profits, which is taxable in their hands as business income.

  2. Interest on Capital: Interest paid by the partnership firm to its partners on their capital contribution is also not subject to TDS under Section 194A of the Income Tax Act, as this interest is part of the partner's business income.

  Practical Implications

  1. Changes to the remuneration limits for working partners, based on firm profitability, will affect how much can be paid as remuneration. Firms need to reassess their compensation structures for working partners in light of these new limits.
  2. Ad-hoc Withdrawals: Currently, many family-owned firms allow partners to withdraw remuneration based on cash flow needs and tax implications. With the introduction of Section 194T, these withdrawals must now be structured to account for Tax Deducted at Source.
  3. Year-End Profit Determination: Partners' remuneration often depends on the firm's profitability, typically determined at the financial year's end. Firms may need to close their books earlier to ensure timely TDS deposition for the March quarter, which is due by April 30th. This necessitates completing year-end accounting processes swiftly to comply with Tax Deducted at Source requirements.
  4. Impact on Partners: Partners receiving payments will now have Tax Deducted at Source deducted, affecting their cash flows. Proper documentation and reconciliation will be crucial for partners to claim Tax Deducted at Source credits.
  5. The increased limit on allowable deductions from salaries paid to working partners only partially met Income taxpayers' expectations; the budget evaluates do not offer relief to partnership firms.
  6. This change objective to bring Firm payments made to existing partners, via mode of remuneration, commission, salary, bonus, & interest, under TDS purview. Currently, there is no provision for Tax Deducted at Source on such payment.

FAQs on TDS on Payment by Firm-to-Partner

1. At what rate is Tax Deducted at Source to be deducted for payments made to a partner?

• TDS is to be deducted at a rate of 10% if the payment exceeds INR 20,000 in a FY .

3. Is Tax Deducted at Source applicable on the repayment of the capital account balance?

• No, Tax Deducted at Source is not applicable on the repayment of the capital account balance.

5. Will Tax Deducted at Source be applicable on interest payments made to partners?

• Yes, Tax Deducted at Source will be applicable on interest payments made to partners.

6.  What is Differences Between Section 192 and Section 194T? 

• Section 192 deals with Tax Deducted at Source on salaries for employees, excluding partners of a firm, and requires Tax Deducted at Source calculation based on individual tax slabs and exemptions. Section 194T specifically targets payments made by a firm to its partners, filling the gap left by Section 192, and mandates a flat 10% Tax Deducted at Source on aggregate payments exceeding INR 20,000 in a FY 

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