Section 194T of the Income Tax Act, introduced in the Union Budget of 2024, mandates that partnership firms and Limited Liability Partnerships (LLPs) deduct Tax Deducted at Source (TDS) on certain payments made to their partners. This provision aims to enhance tax compliance and transparency within business operations.
Payments Covered Under Section 194T
The following payments made by a firm to its partners are subject to TDS under Section 194T:
- Salary: Regular payments for services rendered by the partner.
- Remuneration: Compensation for specific roles or responsibilities undertaken by the partner.
- Commission: Payments based on sales or business generated.
- Bonus: Additional earnings linked to the firm's performance or other criteria.
- Interest: Payments on capital invested or loans provided to the firm.
TDS Rate and Threshold Limit
A TDS rate of 10% is applicable on the aggregate payments exceeding ₹20,000 made to a partner within a financial year. It's essential to note that this threshold is cumulative; thus, even if individual payments are below ₹20,000, TDS will be deducted once the total payments surpass this limit during the year.
Timing of TDS Deduction
TDS should be deducted at the earlier of the following two events:
- Credit of the sum to the partner's account in the firm's books, including the capital account.
- Actual payment to the partner, whether in cash, cheque, or any other mode.
Applicability and Implementation
Section 194T will be effective from 1st April 2025, corresponding to the Assessment Year 2025-26. This means that for the financial year 2025-26, if the aggregate payments to a partner exceed ₹20,000, TDS at 10% will be applicable.
Practical Implications
The introduction of Section 194T brings several operational considerations for firms:
- Increased Compliance: Firms will need to obtain a Tax Deduction and Collection Account Number (TAN) and adhere to quarterly TDS filing requirements.
- Cash Flow Management: Partners may experience a temporary reduction in available funds due to TDS deductions.
- System Updates: Firms should update their accounting and payment systems to accommodate TDS calculations and ensure timely compliance.
- It's advisable for firms to review their payment structures and consult with tax professionals to align with the new TDS obligations and mitigate any operational challenges.
Conclusion
Section 194T represents a significant shift in the taxation of partner payments, aiming to streamline tax collection and enhance transparency. Firms should proactively prepare for its implementation by understanding the provisions, updating internal processes, and ensuring compliance to avoid potential penalties.