Earlier, payments made by a partnership firm to partners in the form of salary, commission, interest or other money were not allowed as per section 194 T of the Income Tax Act for deduction of TDS. This was rather different from the TDS that related to payments made to employees of an organization. That however has changed with Clause 62 of the Finance (No. 2) bill, 2024 introduced by the government. After that to further complicate matters a new Section 194T has been added which requires that TDS is to be deducted on payment made by a firm including any firm which is a limited liability partnership firm or a partnership firm to its partner.
Applicability of TDS under Section 194T
Section 194T will make it mandatory on firms including the partnership firms or LLPs to deduct tax at source on specified payments to be made to partners with effect from 01.04.2025. This is in addition to the amount already provided as wages, remunerations , fees, charges, interest, commissions or bonuses. That said, it must be pointed out that the TDS provision does not apply where the payment is actually to be effected as reimbursement of capital or through drawing cheques in case of partners. However, the law of TDS is applied on interest on capital or partners loans.
Threshold Limit and TDS Rate
Another condition of Section 194T is Threshold limit for TDS deduction. According to the Indian income tax law TDS applicability for the partner firm it is mandatory for the firm to deduct TDS at the rate of 10% if such payments made to the partner during the fiscal year exceeds Rs. 20000.
However, it is worthy to note that if once the threshold of Rs. 20,000 is met, both the threshold and subsequent payment attracts TDS and not only subsequent payment greater than Rs. 20,000. For instance where there is a partnership firm and the partnership firm has paid Rs. 5,00,000 to a partner in a financial year under compensation then TDS required under section 194T shall be Rs. 50,000 being ten percent of Rs. 5,00,000.
When Should TDS be Deducted under Section 194T?
TDS should be deducted at the earliest of the following events:
- When the payment is made and entered into the firm’s books in the partner’s account which includes the capital account.
- To which of the partners does the payment go or is made to.
Does Section 194T Apply to an LLP?
Yes Section 194T also made applicable to the Limited Liability Partnerships (LLPs). Section 2(23)(i) of the Income Tax Act defines an LLP as a firm for the purpose of the Act. Furthermore, a “partner” also refers to those admitted under the provisions of the Indian Partnership Act, 1932 and the Limited Liability Partnership Act, 2008 and therefore includes the traditional partners also.
Why Does TDS under Section 192 Not Apply to Partner’s Pay or Compensation?
Particularly of the payments made under Section 192 According to Section 192 TDS is paid on salaries. But based on Explanation 2 to Section 15 of the Income Tax Act, technically, any payment (compensation, bonus, commission, etc.) received from the firm by a business partner is not ‘salary’ for IT purposes. For this reason, TDS under section 192 does not apply to payments made to the partners.
Conclusion
Section 194T is a significant addition to the taxation provision in India in the due sense as it extends the TDS provisions on the payments or any other amount made by the firms to partners. This new provision is designed to bring in more transparency and non- compliance obligations, in business transactions, to ensure that the firm and other associated parties observe the tax laws. The implementation of TDS compliance on partner payments and part payment by LLPs in it will go a long way in development ofIndia’s taxation system.
Section 194T is implemented in a way that it will bring certain transformations in the methods of how the partnership businesses and LLPs operate and manage their financial transactions with the partners. Firms need to be aware of these changes and hence should be very careful to adhere to the new tax deduction rules from 1st April 2025.
