Staying updated with tax rules is crucial for businesses in India, especially for partnership firms and LLPs. While the Income Tax Act, 1961 provides the core framework, the Union Budget 2024 introduced a significant change: the new Section 194T. This provision mandates Tax Deducted at Source (TDS) on certain payments firms make to their partners and will be effective from April 1, 2025. Understanding this upcoming TDS requirement is essential for ensuring compliance.

Overview of Section 194T

Section 194T is a key addition to the Income Tax Act, 1961, effective from April 1, 2025. It mandates that partnership firms and Limited Liability Partnerships (LLPs) must deduct Tax Deducted at Source (TDS) before making certain payments like remuneration or interest to their partners. The main goal of this new TDS section 194T is to improve tax compliance and transparency for these types of business structures.

Payments Subject to TDS under Section 194T

1. Remuneration to Partners

   • This includes any payment termed as salary, remuneration, or similar compensation paid to a partner. TDS on salary to partners applies if the payment is authorized by the partnership deed or a mutual agreement.
   • Firms need clear documentation showing how this remuneration is calculated and paid.

2. Interest Payments

   • Interest paid to partners, whether on their capital contributions or on loans provided by them to the firm, falls under this rule. Applying TDS on interest paid to partners is mandatory.
   • Crucially, the partnership deed (or a separate agreement) must clearly state the applicable interest rate and calculation method for these payments to be valid.

3. Commission and Bonuses

   • If partners receive commissions or bonuses, perhaps linked to firm performance or specific targets achieved, these payments are also subject to TDS.
   • A structured policy or agreement should govern the calculation and disbursement of such payments.

Exclusions from TDS under Section 194T

It’s important to note that not all payments from a firm to its partners trigger TDS under Section 194T. The following are specifically excluded:

1. Repayment of Capital Account Balances: Withdrawal of capital contributions by partners does not constitute taxable remuneration and, therefore, is exempt from TDS under Section 194T.
2. Reimbursements for Business Expenses: When a firm repays a partner for actual business-related expenses they incurred on behalf of the firm, this reimbursement is not income and is exempt from Section 194T TDS.Important Note: Ensure you maintain proper bills and documentation for these expenses to clearly justify them as reimbursements, not disguised payments.
3. Distribution of Profits:: The actual sharing or distribution of the firm’s profits among partners (distinct from salary, bonus, etc.) is not covered by Section 194T.

Rate of TDS and Threshold Limit

• The applicable 194t tds rate is a flat 10%.
• TDS deduction is triggered only if the aggregate payments (covered types like salary, interest, bonus, commission) made to a partner during a financial year exceed ₹20,000.
• Example: If a firm pays a partner a total of ₹35,000 (as remuneration and interest combined) in a financial year, the ₹20,000 threshold is crossed. Therefore, the firm must deduct TDS of ₹3,500 (which is 10% of the entire ₹35,000).
• Important Clarification: If the total payments do exceed ₹20,000 in the financial year, TDS at 10% must be calculated on the entire aggregate amount paid or credited, not just on the amount above the threshold.

Applicability of Section 194T

• As per the Finance Bill, Section 194T will be effective from 1st April 2025.

Timing of TDS Deduction under Section 194T

The timing of TDS deduction under Section 194T is crucial for compliance. Firms must deduct the tax at the earlier of these two events:

1. Credit to Account: When the payment (like salary, interest, etc.) is credited to the partner’s account in the firm’s books.Includes Capital Account: Importantly, crediting the amount to the partner’s capital account also triggers the TDS requirement at the time of credit.
2. Actual Payment: When the payment is actually made to the partner (e.g., via bank transfer, cheque, or other modes).

Note: Credit to the partner’s capital account will also be considered as the date of credit for determining TDS deduction.

Frequently Asked Questions (FAQs):

What is the main purpose of Section 194T?

Section 194T was introduced to improve tax compliance and transparency. It brings certain payments made by partnership firms (including LLPs) to their partners under the scope of Tax Deducted at Source (TDS).

Which businesses need to comply with Section 194T?

All partnership firms registered under the Indian Partnership Act, 1932, and Limited Liability Partnerships (LLPs) defined under the LLP Act, 2008, must comply with Section 194T.

Does Section 194T apply to salary payments to partners?

Yes, payments defined as salary or remuneration in the partnership deed are subject to TDS on salary to partners under this section.

Is TDS deducted on partner capital withdrawals or profit distributions?

No. Section 194T TDS does not apply to the repayment of a partner’s capital contribution or the distribution of the firm’s profits.

What if a firm fails to deduct or deposit TDS under Section 194T?

Non-compliance can lead to consequences like interest on the unpaid TDS amount, late filing fees, penalties, and potential disallowance of the corresponding expense for the firm under the Income Tax Act, 1961.

How can partners claim credit for the TDS deducted?

Partners can claim the TDS amount deducted by the firm as a tax credit when filing their individual income tax returns (ITRs). The deduction details should reflect in their Form 26AS/AIS.

Are reimbursements for business expenses subject to Section 194T TDS?

No, genuine reimbursements for actual business expenses incurred by a partner on behalf of the firm are not considered income and are exempt from TDS under this section. Proper documentation is key.

What is the due date for depositing TDS under Section 194T?

Generally, TDS deducted must be deposited by the 7th day of the following month. However, for TDS deducted in March, the due date is April 30th of the next financial year. (Your original answer only mentioned the March exception).

Can a partner apply for a lower TDS rate under Section 194T?

No. Currently, partners cannot apply for a lower or nil TDS certificate under Section 197, nor can they submit Forms 15G/15H to prevent TDS deduction under Section 194T. The 194T TDS rate of 10% (if applicable) is mandatory.

What is the TDS certificate issued for Section 194T?

Firms (deductors) are required to issue Form 16A (not Form 16, which is for salary TDS under Section 192) to partners (deductees) quarterly, detailing the TDS deducted under Section 194T. (This addresses the tds form 16 keyword by providing the correct form).

Do firms need a TAN for Section 194T compliance?

Yes, firms responsible for deducting TDS under Section 194T must have a valid Tax Deduction and Collection Account Number (TAN) to deposit the tax and file TDS returns.

How should firms ensure overall compliance?

Firms should maintain accurate records of all payments to partners, potentially update partnership deeds for clarity on payment structures, obtain a TAN if needed, and ensure timely deduction, deposit, and reporting (Form 26Q) of TDS.

For more assistance on TDS Compliance, contact us at ApkiReturn.com at 7665156000 or email us at info@apkireturn.com. We’re here to help with all your TDS needs, ensuring your business remains compliant and efficient.