Building on the government’s goal of streamlining tax collection with minimal administrative efforts, the Budget 2024 introduces new provisions for deducting TDS on partners’ income from the firm in the form of remuneration & interest. These provisions are effective for payments made on or after 1st April 2025.
Section 194T can be summarized as:
(1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.
The section applies to all firms irrespective of their size, turnover limits, etc. Effective from April 1, 2025, Section 194T requires partnership firms and Limited Liability Partnerships (LLPs) to deduct TDS on payments made to partners that exceed a specified threshold.
- Payments Covered include: Salary, Remuneration, Commission, Bonus, Interest on capital or loan accounts
- Threshold Limit: TDS is applicable only if the aggregate amount of such payments to a partner exceeds Rs. 20,000 during the financial year.
- TDS Rate: The applicable TDS rate is 10%.
- Timing of Deduction: TDS should be deducted at the time of credit to the partner’s account (including capital account) or at the time of payment, whichever is earlier.
The primary benefit of applying these provisions is the intention to collect tax with minimal administrative effort, along with improved tax reporting, professional governance, better accountability, and more.
However, there are practical issues that either need to be addressed by the authorities or, in some cases, by the firms themselves.
- Drawings: TDS provisions do not apply on drawings. However, in some cases, drawings may include an element of income in the form of remuneration, interest, etc., on which TDS is deductible. Therefore, it is advisable to maintain separate ledgers for Drawings, Capital, and Income.
- Capital Repayment: Similar to drawings, such repayments may also include an income element. If a partner withdraws a lump sum without a clear breakdown, TDS could be deducted at a higher rate unnecessarily or may might be missed altogether.
- Non-working partners: Section 194T uses the term ’Partner’ without distinguishing between working or non-working partners. Therefore, the distinction is irrelevant under this section, and TDS will apply to both working and non-working partners.
- Non-Resident Partners: A question arises as to whether TDS should be deducted under section 194T or section 195. Since section 195 specifically addresses cross-border taxation, it will override section 194T. Therefore, TDS for non-resident partners will be governed by provision of section 195.
- Cash Flow: Firms may need to adjust their cash flow strategies to accommodate TDS deductions, particularly if the remuneration is performance-based or variable.
Section 194T represents a significant shift in the taxation of partnership firms and LLPs, aligning with the government’s goal of improving tax compliance and transparency. This provision imposes additional responsibilities on firms, requiring them to update their accounting systems, educate partners, and ensure timely compliance. To navigate this change effectively, firms must adopt a proactive approach in adjusting their financial practices and ensure that all stakeholders are well-informed. Embracing these changes not only ensures regulatory compliance but also strengthens the firm’s governance and accountability practices.