Section 194T: TDS on Payment to Partners by Firms (Partnership Firms or LLP)

Section 194T: TDS on Payment to Partners by Firms (Partnership Firms or LLP)

Introduction

The Union Budget 2024 introduced a significant change in the TDS landscape with the insertion of Section 194T.

This section mandates Tax Deducted at Source (TDS) on payments made by partnership firms or Limited Liability Partnerships (LLPs) to their partners. Let's delve into the details of this new provision.  

Applicability of Section 194T

Section 194T applies to payments made by a firm (partnership or LLP) to its partners in the following forms:

• Salary
• Commission
• Bonus
• Interest on any account (including capital account)  
• Remuneration

Important Note: TDS is not applicable on drawings or repayment of capital account balance.

Threshold Limit and TDS Rate

TDS under Section 194T is applicable only if the aggregate amount paid to a partner in a financial year exceeds Rs. 20,000. The TDS rate is fixed at 10% on the entire amount paid, even if it exceeds the threshold limit.  

Example: If a firm pays Rs. 50,000 as remuneration to a partner, TDS of Rs. 5,000 (10% of Rs. 50,000) will be deducted, even though the threshold limit of Rs. 20,000 has been exceeded.

Timing of TDS Deduction

The TDS must be deducted at the earlier of the following:

• The time of credit of the payment to the partner's account
• The time of payment to the partner, whichever is earlier

Compliance Obligations

Firms are required to:

• Deduct TDS at the prescribed rate.  
• Issue TDS certificates to the partners.  
• File quarterly TDS returns.

Non-compliance with these obligations can lead to penalties and interest.

Impact of Section 194T

The introduction of Section 194T is expected to increase tax compliance and broaden the tax base. However, it may also lead to increased administrative burden for firms and potential liquidity issues for partners.  

Conclusion

Section 194T marks a significant change in the tax landscape for partnership firms and LLPs. It is crucial for these entities to understand the implications of this provision and ensure compliance to avoid any penalties.

Disclaimer: This article is intended to provide general information and does not constitute professional tax advice. It is recommended to consult with a tax professional for specific advice based on your circumstances.