TDS Section 194T: Key Provisions & Implications for Partnership Firms & LLPs

Understanding the world of tax regulations can be daunting, and the introduction of new TDS sections frequently implies a trend toward more complex tax filing online compliance obligations. Initially, TDS was not imposed on payments made to a partner by a firm (partnership firm or an LLP). However, firms' payments to employees were subject to TDS. Earlier TDS provisions were mainly concerned with payments to employees within firms, leaving payments to partners—such as remuneration, interest, and commissions—outside the purview of TDS regulations. 

However, the recent addition of Section 194T, which is explained in Clause 62 of the Finance (No. 2) Bill, 2024, means that TDS is now required on these payments that were not required before. According to this, payments made to a partner by the firm will be liable for TDS deduction. 

Simply

Payments made to their partners by a firm (a partnership or LLP) have to deduct TDS. These payments can be salary, remuneration, commission, bonus, or interest on any account.

Please note that TDS does not apply to the drawings or capital repayments to partners. But it applies to interest on capital or a loan from a lender.

Effective Date

The new provisions of Section 194T will be applicable from 1 April 2025

Payments Covered in Section 194T?

Section 194T covers Payments by a firm to a partner as under:

• Salary
• Remuneration 
• Commission
• Bonus or
• Interest (Loan Account or Capital Gain)

Rate of Deduction of TDS and Limit for Section 194T

The rate at which TDS is to be deducted is 10%. The TDS is to be deducted only if the aggregate amount exceeds Rs. 20,000 in a financial year.

For Example

If a partnership firm pays Rs. 5,00,000 as remuneration to a partner in a financial year.
Then, The TDS u/s 194T would be (Rs. 5,00,000 @ 10%) = Rs. 50,000.

Challenges and Considerations due to section 194T

Administrative Burden: Section 194T can impose severe administrative burdens on smaller businesses. To properly handle these compliance obligations, extra system investments and resources may be required.

Impact on Liquidity: TDS deductions may have an impact on partners' liquidity, especially if reimbursements are delayed. To overcome this challenge, companies and partners must arrange their budgets.

Awareness and Education: Firms must be educated about the new TDS regulations to facilitate a seamless implementation and compliance process.

Conclusion:

Section 194T of the Income Tax Act aims to enhance tax filing online compliance and expand the tax base. It has significant implications for partnership firms and LLPs. It will increase the compliance burden and expenses for firms. Where Section 194T introduces new compliance challenges and potential liquidity, it also ensures that income is taxed at source. This is going to contribute significantly to the transparency and efficiency of the Indian tax system. Also, the partnership firm and LLP have time until March 31, 2025, to prepare and implement the system of payment and avoid the complexities involved in TDS.