1. Introduction
The Finance Act, 2024 introduced a brand-new section i.e. Section 194T, which comes into effect from 1 April 2025 (Financial Year 2025–26 onwards). This provision requires every firm or LLP to deduct TDS on certain payments made to its partners.
Till now, payments such as remuneration or interest to partners were not subject to TDS, even though they were taxable in the hands of the partner. Section 194T has been brought in to ensure transparency and better reporting of such transactions.
2. Who Will Deduct and On What Payments?
The responsibility to deduct tax lies with every partnership firm or LLP. The provision applies when such entities pay or credit to their partners any amount in the nature of:
- Salary or remuneration
- Commission or bonus
- Interest (on capital or loan from partners)
It is important to note that the language used is “in the nature of,” which means that substance will prevail over form. Even if a payment is booked under some other head but in essence represents partner remuneration, commission, bonus, or interest, it will fall within the ambit of Section 194T.
3. Payments Not Covered
Certain payments to partners remain outside the scope of TDS under this section, such as:
- Share of profit from the firm (which is exempt in the hands of the partner under Section 10(2A)).
- Return of capital or drawings.
- Allocation of reserves or revaluation surpluses, unless they are in the nature of remuneration or interest.
4. Threshold, Rate, and Timing
- No threshold limit has been provided. Even a rupee of covered payments to a partner during a year triggers a TDS liability.
- Rate of deduction is 10%.
- Deduction is required at the time of credit (to the capital account of the partner) or actual payment, whichever is earlier (Section 194T).
5. Resident vs Non-Resident Partners
While Section 194T is generally applicable to all partners, in cases where the partner is a non-resident, the provisions of Section 195 may also come into play. Careful analysis will be needed to determine whether deduction should be under Section 194T or Section 195, particularly in the interplay between tax treaties.
6. Interaction with Other Provisions
- Business income of the partner, such as remuneration or interest, is taxable on a net basis (under Section 40(b)).
- The firm will not be able to claim such expenses, adjusted to the limits laid down under Section 40(b).
- TDS, however, will apply on the entire credited or paid amount, not just the portion allowable under Section 40(b). This may create reconciliation issues between TDS returns filed in Form 26Q and income actually taxable in the partner’s hands.
7. Compliance Requirements
Firms and LLPs must ensure compliance with the following:
- Deposit of TDS – By the 7th of the following month, and for March, by 30th April.
- Quarterly returns – In a Form 26Q, payment due dates.
- TDS Certificates – Form 16A to be issued within 15 days of filing the quarterly TDS return.
- Statement of Computation – From FY 2025–26, commission statements cannot be filed without deduction of tax at source whenever financial year closes.
8. Numerical Illustration
Example: A partner earns ₹4,00,000 as interest and capital and ₹8,00,000 as remuneration in FY 2025–26.
- Under Section 194T, TDS will apply on the gross amount (₹12,00,000).
- At 10%, the firm must deduct TDS of ₹1,20,000.
9. Key Considerations
- Consolidation of Payment: Clear drafting in the partnership deed is essential to support allocation of payments, especially to avoid double deduction of capital account credits.
- Non-Deductibility of Excess: Payments in excess of Section 40(b) limits, though disallowed in the firm’s computation, may be deducted on amounts that are not deductible within Section 40(b).
- Non-Resident Partners: Uncertainty remains about whether Section 194T or Section 195 will apply.
- Special Cases: Payments such as Admission of Partner/Capital structuration is excluded from TDS.
10. Penalties and Consequences
Failure to deduct or deposit TDS can lead to:
- Disallowance of expenses (Section 40a)(ia)).
- Late fees under Section 234E and penalty for delayed return filing.
- Prosecution (Section 276B).
- Disallowance of Section 271C.
11. Conclusion
Section 194T marks a significant change in the taxation of partnership firm and LLP payments from 1st April 2025. Till now, such firm’s payments of remuneration, bonus, interest etc. were taxable in the hands of the partner but without deduction of tax at source.
Now, this provision is designed to improve transparency, reporting, and matching between partner’s declared income and firm’s claimed expenses. By ensuring deduction of tax at source, the Finance Act has closed a major compliance gap. This proactive approach will ensure smooth compliance and avoid disputes in future.
