Understanding Section 194T: New TDS Obligations for Partnership Firms and LLPs.
Starting April 1, 2025, Partnership Firms and LLPs must deduct 10% TDS on payments to partners exceeding ₹20,000 under Section 194T.
Learn about compliance, exemptions, and penalties.
Effective from April 1, 2025, the Finance Act 2024 has introduced Section 194T, mandating that partnership firms and Limited Liability Partnerships (LLPs) deduct Tax Deducted at Source (TDS) on specific payments made to their partners. This move is designed to broaden the tax base and ensure real-time reporting of partner income.
The Core Mandate
Under the new provisions, any “specified person” (the firm) responsible for paying a partner any sum in the nature of salary, bonus, commission, remuneration, or interest must deduct tax if the aggregate of such sums exceeds the prescribed threshold.
Key Compliance Highlights
- Applicable TDS Rate: A flat rate of 10% must be deducted.
- Threshold Limit: The deduction is mandatory if the aggregate payments to a partner exceed ₹20,000 within a single financial year.
- Point of Deduction: Tax must be deducted at the earlier of two events:
- The time of credit of such sum to the account of the partner.
- The time of actual payment (cash, cheque, or draft).
- Administrative Requirement: Firms that do not already possess a Tax Deduction Account Number (TAN) must apply for one immediately to facilitate these deposits.
Scope of Payments
Included (Taxable at 10%) | Excluded (Exempt) |
|---|---|
Salary & Remuneration: For working partners. | Share of Profit: Exempt under Section 10(2A). |
Interest: On capital contributions or partner loans. | Capital Repayment: Return of the partner’s original investment. |
Bonuses & Commissions: Any performance-based payouts. | Drawings: Purely against capital/profits (not as remuneration). |
The Cost of Non-Compliance
Failure to adhere to Section 194T carries significant fiscal consequences:
- Expense Disallowance: Under Section 40(a)(ia), 30% of the expenditure (salary, interest, etc.) will be disallowed as a business deduction, leading to a higher tax liability for the firm.
- Interest Penalties: Interest at 1% per month for delayed deduction and 1.5% per month for delayed deposit.
- Late Filing Fees: A penalty of ₹200 per day under Section 234E for late filing of quarterly TDS returns (Form 26Q).
Strategic Considerations for Firms
The introduction of Section 194T may impact the cash flow and liquidity of individual partners, particularly those whose total income might fall below the taxable slab. Partners in such positions may need to apply for a Lower Deduction Certificate under Section 197 to mitigate unnecessary tax outflows.
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