Section 194T under Income Tax Act: TDS on Payments by Partnership Firms
Section 194T deals with the TDS on payments made by partnership firms or LLPs to their partners. Recently, a new proviso was added to this section, and further changes have become effective as of April 1, 2025. Earlier, the tax was deducted at the source only in cases where the payments were made to an employee by a firm. However, payments made to a partner by a partnership firm or LLP were not subject to any TDS. From now on, if a partner draws remuneration from a firm as taking payments in the form of interest, bonus, or commission, then they will receive exemptions. This blog has covered all the possibilities under Section 194T of the Income Tax Act.
Payments Covered under Section 194T
Certain payments made by a firm to its partners are covered under section 194T, and the partnership firms or LLP are liable to deduct tax at the source on the that certain payments made to their partners. Below mentioned are the payments
- Salary
- Remuneration
- Commission
- Bonus
- Interest on any account (be it a loan account or a capital account)
Threshold Limit for Deductions under Section 194T
For the financial year 2024-25, the rate of TDS will be applicable from the 1st of April 2025 for the assessment year 2025-26. The applicable rate would be 10% at the specified payment under Section 194T. However, if the aggregate payments made to a partner in any financial year do not exceed Rs. 20,000, no TDS will apply to such payments.
| Terms | TDS Rates | TDS Threshold |
| Aggregate payments include interest, bonus, commission, or remuneration | 10% | >Rs. 20,000 in a financial year |
By When to Deduct TDS?
The TDS is to be deducted at the earlier of the following dates
- Credit of sum/payment to the account of a partner in the books of the firm or
- Payment to the partner
*credit to the partner’s capital account will be considered for determining the date in (1) above.
The new provision will be made effective from the 1st of April 2025, as mentioned in the Finance Bill 2024.
Potential Challenges after Insertion of New Clause
- Revision in partnership deeds
All partnership firms or LLPs make payments to their partners based on the deed signed earlier. Now, after the addition of the new clause, partnership deeds are to be revised.
- Additional compliance
Additional compliance needs have arisen as the firms have to file ITR 5 to disclose the payments made to partners in the form of interest, remuneration, bonus, or salary. The computation of TDS has also become a compliance now.
- Rationalize withdrawal plans
As from now on, the withdrawal by the partners is subject to TDS at the rate of 10%, the partners have to make rationalized plans to optimize the taxes and meet the compliance altogether. It will impact the cash flow and affect the finances in the short term, though there will be benefits in the long term as it helps to simplify the tax structure and avoid tax evasion.
Get Started with TaxDunia
Though the insertion may possibly increase the compliance burden, it aims to address the current legislative gap regarding the tax deductions. It will result in establishing a more orderly and timely system for maintaining and finalizing accounts and reducing the last-minute rush associated with ITRs.
Reach out to TaxDunia to meet the legal compliance and stay updated with the latest rules and regulation changes. Let your business thrive with personalized advice from professionals, and everything is made hassle-free.
