Section 194T Explained: TDS on Payments by Partnership Firms to Partners

The Finance Act, of 2024 has brought a significant change in the taxation of payments made by partnership firms to their partners by introducing Section 194T. This provision ensures that payments like salary, remuneration, commission, bonus, and interest to partners are now subject to TDS (Tax Deducted at Source), which was previously not applicable.

Background: Before the enactment of the Finance Act, 2024, there was no provision prevailed regarding payments made to partners in respect of Salary, Remuneration, Commission, Interest, or Bonus by the partnership firm.

• • Regarding TDS on Salary: Explanation 2 Section 15 of Income Tax Act,1961 payments made to partners in the form of Salary, Remuneration, Commission, Interest, or Bonus cannot be considered as “Salary” therefore Section 192 of Income Tax Act,1961 for deduction of TDS on Salary could not be applied.
  • Regarding TDS on Commission: Under the provision of section 40(b)(i) of the Income Tax Act 1961, any payment of salary, bonus, commission, or remuneration by whatever name called ( hereinafter referred to as remuneration) to partner, hence section 194 was not in the picture.
  • Regarding interest paid to Partners: As per provisions of section 194(3)(iv), TDS does not apply to interest paid by the firm to its partners. 

In a nutshell, we can say before the amendment of the Finance Act 2024, withholding tax provisions did not apply to salary, remuneration, commission, bonus, and interest to Partners by firm.

Now, Provisions of Finance Act 2024, come into effect vide section 194T of Income Tax Act.

Provisions of Section 194T of the Income Tax Act, 1961

Legal Provisions: 

The Finance Act (No.2), 2024 enacted on August 16, 2024, inserted Section 194T to the Income Tax Act, 1961 to bring the payments such as salary, remuneration, commission, bonus, and interest to any account (including capital account) of the partner of the firm under the purview of TDS.

Applicability: The provisions of section 194T are applicable from 1st April 2025.

The time limit for deduction of TDS: Under the provision of section 194T at the time of credit of such amount to the account of partner (including capital account) or payment whichever is earlier

Summary of applicability of TDS u/s 194T:

(C) CANON:

• Section 194T is an obligation on the firm(deductor) to deduct TDS on payments made to partners.
• As per Section 194T (1) TDS is to be deducted on the payments such as salary, remuneration, commission, bonus, and interest to any account (including capital account) of the partner of the firm at the time of Credit or Payment Whichever is earlier
• As per Section 194T (2) TDS is deductible if the aggregate amount exceeds Rs.20,000 in Financial Year.
• TDS is to be deducted at the rate of 10%.

(D) KEEP IN MIND: 

• The firm shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall also include a Limited Liability Partnership as defined under the Limited Liability Partnership Act, 2008. 

• The distinction between Partnership firm assessable as Such (PFAS) and as AOP required under Section 184 is Irrelevant w.r.t. Section 194T.

• Section 194 T is applicable on Indian LLP’s only and not on Foreign LLP’s.

• The payee will be the partner of the Firm/LLP who may or may not be the resident.

• Remuneration paid to work or non-working partners both come under the umbrella of Section 194T.

• Whether Interest is allowable or disallowable under Section 40(b) is irrelevant in the application of Section 194T.

• The facility of obtaining a certificate for no deduction or lower deduction of tax under Section 197 is not available with respect to payments covered by Section 194T.
• No provision is there for non-deduction of TDS u/s 194T, based on self-declaration by the payee partner in Form 15G/Form 15H.
• If the deductee (Partner) does not furnish PAN/Aadhaar, TDS is to be deducted @ 20% u/s 206AA.

Conclusion

The introduction of Section 194T ensures better compliance and clarity regarding TDS on payments made by firms to partners. With the Finance Act, of 2024, firms must now adhere to this provision to avoid penalties. By understanding these changes, firms and partners can ensure seamless compliance and efficient tax management.

Frequently Asked Questions

Question 1 : Who is liable to deduct the TDS and who is the deductee/payee?

Answer:  Firm/LLP is liable to deduct the TDS and Partners of the firms/LLP including minors admitted to the benefit of partners are deductee/Payee.

Question 2 : Whether the remuneration be disallowed to the firm if it fails to deduct the TDS?

Answer: Remuneration paid to non-working partners: The deduction for remuneration to non-working partners is disallowed by section 40(b) of the Income Tax Act. Section 40(a) does not override the section 40(b). Hence section 40(a) does not come into effect.

Remuneration paid to working partners: The deduction for remuneration to working partners is allowed under Section 40(b) only subject to the limits specified in Section 40(b)(v). Therefore, a view can be taken that Section 40(a) will not apply to TDS defaults under Section 194T since Section 40(a) is expressed to override Sections 30 to 38 but not Section 40(b)