Does a Partnership Firm/LLP Need to Deduct TDS on Partner Payments?: A 194T Guide
Budget 2024 inserted a new provision in the Act i.e. Section 194T, effective from 1st April 2025. Prior to the implementation of Section 194T of the Income Tax Act, Payment to partners were exempt from tax. Subsequently, the government introduced mandatory Tax Deducted at Source (TDS) on payments to employees, while maintaining the exemption for partner payments. However, with the introduction of Section 194T, firms and Limited Liability Partnerships (LLP) are now required to deduct TDS on payments to partners exceeding a prescribed threshold.
Following is the provision regarding Section 194T written in the Income Tax Act 1961:
"194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year."
Types of transactions covered by section 194T:
Following types of Payments on which TDS liable to deduct.
1.Salary
2.Remuneration,
3.Commission,
4.Bonus,
5.Any interest (on capital or loan Account).
Limit:
Aggregate payments to partner such as interest, bonus, commission or remuneration exceed Rs.20000 in a financial year.
Rate:
If aggregate payments to partners exceeding specifying threshold limit then, TDS shall be deducted @ 10%.
When TDS shall be deducted?
The TDS is to be deducted at earlier of the following dates.
1.Credit of sum/payment to the account of partner in the books of the firm
Or
2.Payment to the partner
Relevant points to be noted:
Q1. Whether payee partner can obtain certificate u/s 197(where TDS on taxpayers income may higher than their actual tax liability) for no TDS or TDS at a lower rate?
Ans. No, partner cannot obtain certification u/s 197 for No TDS or TDS at a lower rate
Q2. Whether the payee partner can avail the facility of nil TDS deduction by submitting self-declaration in Form 15G/Form 15H
Ans. No, partner cannot avail the facility of Nil TDS.
Q3. Does Section 194T apply to the repayment of a partners capital account balance?
Ans. No, TDS under section 194T does not apply to the repayment of the capital Account balances.
Q4. Whether TDS certificate should be issued?
Ans. Yes. TDS certificate to be issued by deductor (firm/LLP) to deductee (partner) in form 16A
Q5. TDS shall be deducted on reimbursement by Firm/LLP to its partners?
Ans. No, Provision of TDS shall not be deducted on reimbursement by Firm/LLP to its partners.
With the introduction of Section 194T, partnership firms and LLPs must now ensure proper TDS deduction on partner payments to stay compliant and avoid penalties. Failure to deduct or deposit TDS can lead to disallowances, interest, and penalties under the Income Tax Act. Understanding the timing, threshold, and documentation is crucial for seamless compliance. Are you ready for this change starting April 1, 2025? Stay ahead by reviewing your firm’s financial transactions and ensuring smooth tax compliance.
Want to check TDS applicability under other sections?
Click https://www.aagamshahca.com/news-detail/TDS-Rates-Thresholds-FY-2025-26-Complete to read our previous article covering various TDS provisions and compliance requirements!
Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.
