H M R R & Associates

20. Tax Update: TDS on Payments by Firm to Partners (Section 194T)

Our FM Ms. Nirmala Sitharaman introduced Section 194T in Budget 2024, making certain payments from partnership firms (including LLPs) to partners liable for TDS. Aiming to boost tax compliance and transparency within partnership firms and LLPs, this new provision will be effective from 1st April 2025.

Which Payments Are Subject to TDS?

Section 194T applies to the following payments made by a firm to its partners:

Salary
Remuneration
Commission
Bonus
Interest (on capital account, loan account, or any other account)

Is there a threshold limit and rate of TDS?

TDS is to be deducted at 10%, only if the aggregate payments to a partner exceed Rs. 20,000 in a financial year.

When should it be deducted?

TDS is to be deducted at the time of:

Credit of such payment to the partner’s account in the firm’s books (including capital account), or
Actual payment to the partner,

whichever is earlier.

What are the implications for Firms & Partners?

Firms are required to obtain a Tax Deduction Account Number (TAN), deduct TDS at the prescribed rate at prescribed time, deposit it within the stipulated time frame, file quarterly TDS returns, and issue TDS certificates (Form 16A) to partners.

This could bring about challenges to firms in terms of compliance burden and cash flow management necessitating careful financial planning. Firms and partners must familiarize themselves with these provisions and plan ahead to ensure compliance and mitigate these potential challenges.