Introduction
“At present, payments made by a firm (whether a partnership firm or an LLP) to a partner are not subject to TDS. Currently, TDS is applicable only when payments are made to an employee of the firm. However, if a partner draws remuneration from the firm or receives payments in the form of interest, bonus, or commission, TDS provisions are not applicable to these payments.”
In the Budget 2024, a new provision was introduced under the Income Tax Act, specifically targeting the deduction of Tax Deducted at Source (TDS) on certain payments made by a partnership firm to its partners. This provision is encapsulated in Section 194T, which outlines the circumstances and manner in which TDS must be deducted on specific payments made to partners.
As mentioned in the Finance Bill, the provisions of Section 194T shall be made applicable from 1st April, 2025.
What are the Payments Covered in Section 194T?
Section 194T of the Income Tax Act, introduced in the Finance Bill 2024, mandates Tax Deducted at Source (TDS) on certain payments made by partnership firms or LLPs to their partners. The payments covered under this section include:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on any account (such as a loan or capital account)
The TDS rate is set at 10%, and it applies only if the aggregate payments to a partner exceed ₹20,000 in a financial year. The provisions of Section 194T will come into effect from April 1, 2025
For instance, if a partnership firm/LLP pays Rs. 5,00,000 to a partner as remuneration in a financial year, the TDS under Section 194T would amount to Rs. 50,000 (i.e., 10% of Rs. 5,00,000).
When to Deduct TDS under Section 194T?
Under Section 194T, TDS (Tax Deducted at Source) must be deducted by a partnership firm or LLP on payments made to its partners. The key points are:
- Payments Covered: Salary, remuneration, commission, bonus, or interest on any account (loan or capital).
- Rate of Deduction: 10%.
- Threshold: TDS is applicable if the aggregate payments to a partner exceed ₹20,000 in a financial year.
- Timing: TDS should be deducted at the earlier of the following dates:
- When the sum is credited to the partner’s account in the firm’s books.
- When the payment is made to the partner.
These provisions will be effective from 1st April 2025
Practical Implications Due to Insertion of Section 194T
The insertion of Section 194T in the Income Tax Act has several practical implications for partnership firms and LLPs. Here are some key points:
- TDS Deduction: Partnership firms and LLPs are now required to deduct TDS at a rate of 10% on payments made to partners, including salary, remuneration, commission, bonus, and interest, if the aggregate amount exceeds ₹20,000 in a financial year.
- Compliance Burden: This new requirement increases the compliance burden on firms, especially smaller ones. They need to obtain a Tax Deduction and Collection Account Number (TAN) and ensure timely TDS deductions and deposits.
- Impact on Cash Flow: Partners may need to rationalize their withdrawals from firms, as these will now be subject to TDS. This could affect the liquidity of both the firm and the partners.
- Administrative Challenges: Firms will need to maintain strict records and ensure timely compliance. This includes closing books of accounts in a timely manner to determine the profitability and corresponding remuneration for partners.
- Effective Date: The provisions of Section 194T will be applicable from April 1, 2025, giving firms some time to prepare and implement the necessary systems.
Overall, while Section 194T aims to improve tax compliance and broaden the tax base, it also introduces additional administrative and financial challenges for partnership firms and LLPs.
Key Takeaways Section 194T
Section 194T of the Income Tax Act was introduced in the Finance Act, 2023. It deals with the Tax Deducted at Source (TDS) on payments made by a firm to its partners. Here are the key takeaways:
1. Applicability:
- Section 194T applies to any payment made by a firm to its partners.
- The section targets the payment of income in the nature of interest, salary, bonus, commission, or remuneration, by whatever name called, to a partner of the firm.
2. Threshold Limit:
- TDS under Section 194T is applicable only when the total payment during the financial year exceeds ₹20,000.
3. Rate of TDS:
- The TDS is deducted at the rate of 10% on the amount of income paid to the partner.
4. Time of Deduction:
- TDS is required to be deducted at the time of crediting the income to the partner’s account or at the time of payment, whichever is earlier.
5. Non-applicability:
- Section 194T is not applicable to payments made to partners of a Firm if it is for:
- Capital Repayment
- Drawing
6. Responsibility of the Firm:
- The firm is responsible for deducting the TDS and depositing it with the government within the due date.
- The firm must issue a TDS certificate (Form 16A) to the partner.
7. Consequences of Non-compliance:
- Failure to deduct or deposit TDS will attract interest and penalties as per the provisions of the Income Tax Act.
8. Reporting:
- The firm must report the TDS deducted under Section 194T in its quarterly TDS return (Form 26Q).
This section aims to ensure that tax is collected upfront on certain payments made by firms to their partners, ensuring better tax compliance and reducing tax evasion.
Discover more from taxdot.in
Subscribe to get the latest posts sent to your email.