Section 194T: TDS on Payment by Partnership Firm to Partners
The Finance Act, 2023 introduced a new section in the Income Tax Act — Section 194T, effective from 1st April 2025, which mandates deduction of Tax Deducted at Source (TDS) on certain payments made by a partnership firm or LLP to its partners.
This blog explains Section 194T in detail, including its applicability, rate, threshold, examples, and compliance requirements.
Applicability of Section 194T
Deductor: Partnership Firm or Limited Liability Partnership (LLP)
Deductee: Partner of the Firm or LLP
Nature of Payments Covered
Payments such as Salary, Remuneration, Commission, Bonus, Interest on Capital, and Interest on Loan are covered under Section 194T.
Key Provisions
Applicability Date: 1st April, 2025
Threshold Limit: Exceeding ₹20,000 in a financial year
TDS Rate: 10%
When to Deduct TDS: At the time of Credit or Payment, whichever is earlier
Important Clarifications
TDS is to be deducted when the amount is credited to the partner's account (including their capital account) or at the time of payment, whichever is earlier. If the total payments during a financial year do not exceed ₹20,000, no TDS deduction is required.
Practical Examples
Example 1:
Scenario: A partner is paid ₹40,000 in April 2025, but the amount was credited in March 2025.
Analysis: Since the credit happened in March 2025, before Section 194T becomes effective, no TDS will be applicable in April.
Example 2:
Scenario: A partner receives ₹11,000 in May 2025, ₹9,000 in June 2025, and ₹8,000 in July 2025.
Analysis: In May and June, no TDS as the cumulative threshold is ₹20,000. In July, since cumulative payments exceed ₹20,000, TDS @ 10% will be deducted on the excess ₹8,000 (i.e., ₹800).
Compliance Requirements
Firms must ensure TDS is deducted promptly at the time of credit or payment. The deducted TDS must be deposited with the government within the prescribed timelines. Appropriate TDS returns must be filed, and TDS certificates must be issued to partners.
Conclusion
Section 194T aims to bring transparency and ensure tax collection at the source from payments made to partners by firms and LLPs. With effect from 1st April 2025, firms should carefully monitor partner payments and ensure proper TDS compliance to avoid penalties and interest.
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