Section 194T : TDS on Payment by Partnership Firm to Partners

Section 194T : TDS on Payment by Partnership Firm to Partners

Section 194T is a newly introduced TDS provision under the Income-tax Act, 1961, aimed at bringing payments by firms to partners within the TDS framework. It covers various types of payments to partners like Interest ,salary, remuneration,bonus and commission. This provision aims to ensure better compliance and bring greater transparency in partnership taxation.

 

1. What is Section 194T of Income Tax Act 1961

Prior to insertion of Section 194T:

• Payments such as interest, salary, bonus, commission, remuneration to partners were taxable in the hands of partners.
• However, no TDS obligation existed on firms.

This created:

• Information asymmetry (no reporting trail like other TDS sections)
• Potential revenue leakage

👉 Section 194T ensures:

• Tracking of Partner-Level Income
• Improved Compliance and Reporting of Partnership Taxation

2. Applicability of Section 194T

Person responsible to deduct TDS

• Partnership Firm, including:
  • General partnership firms
  • Limited Liability Partnerships (LLPs)

Recipient

• Any partner of the firm, including:
  • Working partners
  • Non-working partners

3. Nature of Payments Covered

TDS is required on any sum paid or credited to a partner, including:

• Salary
• Remuneration
• Commission
• Bonus
• Interest on capital
• Any other payment (very wide scope)

👉 The phrase “any sum” makes the section comprehensive and inclusive.

4. Rate of TDS

• 10% (flat rate)

No slab benefit applies.

5. Threshold Limit

• TDS applicable only if aggregate payment exceeds ₹20,000 in a financial year.

👉 Important:

• Threshold is per partner per firm
• Aggregate of all covered payments is considered

6. Time of Deduction

TDS shall be deducted at the earlier of the following :

• Credit of such sum to partner’s account (including capital account), or
• Actual payment to the partner

👉 Even credit to capital account triggers TDS.

 

7. Effective Date

• Applicable from 1 April 2025
• Relevant from FY 2025–26 onwards (AY 2026–27)

8. Consequences of Non-Compliance

If TDS is not deducted or deposited:

(a) Disallowance:

• Section 40(a)(ia) may apply (subject to interpretation once implemented)

(b) Interest:

• Section 201(1A):
  • 1% per month (non-deduction)
  • 1.5% per month (non-payment)

(c) Penalty:

• Section 271C – equal to TDS amount

(d) Prosecution:

• Section 276B (in extreme cases)

9. Practical Issues & Interpretational Challenges

⚖️ (i) Withdrawals from Capital Account Balance

• Any payment to partner in nature of salary, interest, bonus, commission, or remuneration which is credited to partner’s capital account, is also subject to TDS u/s 194T.
• But withdrawals from capital account of the partner is not subject to TDS u/s 194T.

⚖️ (ii) Capital account credit

• Explicitly covered → TDS applicable even without cash outflow

⚖️ (iii) Loss-making firms

• Still required to deduct TDS if payment is made

10. Compliance Requirements

• Deduct TDS
• Deposit within due dates
• File TDS returns (Form 26Q)

Issue TDS certificate (Form 16A)