The Income Tax Act has introduced a
brand-new section – Section 194T – that changes how partnership firms
and LLPs deal with payments to their partners. This section becomes applicable from
1st April 2025, and if you run a partnership firm or LLP, this new rule
directly affects your TDS (Tax Deducted at Source) responsibilities.
Let’s break this down in simple
terms, so you know what this section is, why it matters, and how
to comply with it.
๐งพ
What is Section 194T?
Section 194T mandates that any partnership firm or LLP must deduct
TDS at 10% on certain payments made to its partners, such as:
- Remuneration / Salary
- Commission
- Bonus
- Interest (on capital or otherwise)
It applies at the time of credit
to the partner’s account (including the capital account) or at the time
of payment, whichever is earlier.
However, TDS is not required if
the total of such payments to a partner in the entire financial year is ₹20,000
or less.
๐ In simple words: If you’re paying your partner more than
₹20,000 in the form of remuneration, interest, or bonus, you need to deduct
10% TDS before paying them.
⚠️
Why Was This Section Introduced?
Traditionally, partners are taxed on
their individual share of income from the firm under the "Business or
Profession" head. However, payments like interest and remuneration to
partners often escaped proper TDS tracking. The government has introduced Section
194T to plug this gap, improve tax compliance, and increase visibility on
partner-level incomes.
๐ธ What Kind of Payments Are Covered?
The section specifically applies to
payments made by a firm to its own partners, such as:
- Salary / Remuneration:
Fixed amounts paid to working partners.
- Commission / Bonus:
Paid as a performance incentive or per terms of partnership.
- Interest:
Interest on capital contributions or loans from partners.
Even if these amounts are credited
to the partner’s capital account instead of being paid in cash, TDS still
applies.
๐ซ What Is Not Covered Under Section 194T?
You do not need to deduct TDS
under Section 194T on:
- Share of profit
paid to partners
- This is already exempt under Section 10(2A) of
the Income Tax Act.
- Each partner’s share of profit is not taxed in their
hands, and hence no TDS applies.
- Capital withdrawals
made by partners
- When a partner takes money from their capital account,
it’s not income and hence not taxable.
- Expense reimbursements
- Payments made to partners for reimbursing business
expenses (like travel or purchases) are not income and not subject to
TDS.
๐ข Example to Understand Section 194T
Let’s say your firm pays Partner A
the following during the FY 2025-26:
- ₹15,000 as remuneration
- ₹10,000 as interest on capital
๐ Total: ₹25,000
Since the total exceeds ₹20,000, the
firm must deduct TDS at 10% on the entire ₹25,000 (i.e., ₹2,500).
If the total was only ₹19,000, then no
TDS would be required.
๐ When to Deduct TDS?
TDS must be deducted at the
earlier of:
- When the amount is credited to the partner’s
account (even if credited to capital account), or
- When the amount is actually paid to the partner.
This means you cannot delay TDS
until actual payment — crediting the amount in your books triggers TDS
liability.
๐ Higher TDS If PAN Is Not Provided
If
a partner fails to furnish their PAN, TDS must be deducted at a higher
rate of 20% under Section 206AA of the Income Tax Act.
๐ So instead of 10%, the firm must deduct 20% TDS if the
partner hasn’t submitted a valid PAN.
This
can significantly reduce the amount the partner actually receives and cause
cash flow disruptions.
✅
What Do Firms Need to Do?
Here’s a quick checklist to ensure
your firm is compliant with Section 194T:
- Get a TAN (Tax Deduction Account Number) if you don’t already have one.
- Maintain detailed records of payments to each partner.
- Track the ₹20,000 limit for each partner annually.
- Deduct 10% TDS
on all covered payments exceeding ₹20,000.
- Deposit TDS
with the government on time.
- File quarterly TDS returns (Form 26Q).
- Issue TDS certificates (Form 16A) to your partners.
⚖️ Penalties and Consequences of Non-Compliance
Failure
to comply with Section 194T can lead to:
๐ธ Financial
Penalties
- Interest
@ 1% per month for late deduction
- Interest
@ 1.5% per month for late deposit after
deduction
- Late
fee of ₹200/day for delayed TDS return filing
(capped at total TDS)
- Disallowance
of expense under Section 40(a)(ia):
30% of the payment may be disallowed as a deductible expense
๐ Prosecution Under
Section 276B
In
serious cases of default, especially willful failure to deposit
TDS, the firm or responsible person may face prosecution under Section 276B
of the Income Tax Act.
- Punishment: Rigorous imprisonment for a minimum of 3 months,
which can extend up to 7 years, along with a fine.
❌
Can Partners Avoid TDS via Form 15G/15H?
No. Unlike other TDS provisions, partners
cannot submit Form 15G or 15H to avoid TDS under Section 194T.
Also, they cannot apply for a
lower or nil deduction certificate under Section 197 for this section.
๐ Summary
|
Feature
|
Details
|
|
Effective From
|
1st April 2025
|
|
Applicable To
|
Partnership Firms & LLPs
|
|
Applies On
|
Remuneration, bonus, interest,
commission to partners
|
|
Exempt Items
|
Share of profit, capital
withdrawal, reimbursements
|
|
TDS Rate
|
10% (20% if PAN not provided)
|
|
Threshold
|
₹20,000 per partner in a financial
year
|
|
PAN Requirement
|
Mandatory for lower rate
|
|
Forms Involved
|
26Q (TDS return), 16A (TDS
certificate)
|
|
Penalties
|
Interest, disallowance of expense,
late fees, prosecution
|
๐ง
Final Thoughts
Section 194T marks a big change in
how firms handle tax on payments to their own partners. If you operate a
partnership firm or LLP, it’s time to review your partnership deed, restructure
your accounting processes, and train your finance team to handle
these new TDS obligations.
Staying ahead of this change will
not only ensure legal compliance but will also help your firm avoid unwanted
penalties and interest. When in doubt, it’s always advisable to consult your CA
or tax advisor for firm-specific planning.
