Section 194T: New TDS Changes for Partnership Firms & LLPs (Effective April 1, 2025)

The Finance Act, 2024, has brought in significant changes for partnership firms and Limited Liability Partnerships (LLPs) with the introduction of Section 194T. Effective from April 1, 2025, this provision mandates Tax Deducted at Source (TDS) on specific payments made by firms to their partners. This article delves into the intricacies of Section 194T, its implications, and the steps firms need to undertake to ensure compliance.​

Understanding Section 194T

Prior to this amendment, payments such as salary, remuneration, commission, bonus, or interest made by a firm to its partners were not subject to TDS. Section 194T changes this by bringing these payments under the TDS ambit.

Applicability:

• Entities Covered: All partnership firms and LLPs operating in India.​
• Payments Subject to TDS:
  • Salary
  • Remuneration
  • Commission
  • Bonus
  • Interest on capital or loans​
• Exclusions:
  • Drawings or capital withdrawals
  • Profit share exempt under Section 10(2A)
  • Reimbursements for business expenses

TDS Rate and Threshold

• Rate: 10%​
• Threshold: TDS is applicable if the aggregate payments to a partner exceed ₹20,000 in a financial year. Once this threshold is crossed, TDS applies to the entire amount, not just the excess over ₹20,000.​

Example:

If a partner receives ₹25,000 as remuneration and ₹10,000 as interest in a financial year, totaling ₹35,000, TDS at 10% will be deducted on the entire ₹35,000, amounting to ₹3,500.​

Timing of TDS Deduction

TDS under Section 194T must be deducted at the earlier of the following:​

1. Credit of the amount to the partner’s account (including capital account) in the firm’s books.
2. Actual payment to the partner by cash, cheque, draft, or any other mode.​

Note: Even if the amount is credited to the partner’s capital account without actual payment, it is deemed as payment for TDS purposes.​

Compliance Requirements

To adhere to Section 194T, firms must:

1. Obtain a TAN: If not already held, apply for a Tax Deduction and Collection Account Number.​
2. Update Partnership Deeds: Clearly define the nature and terms of partner payments to avoid ambiguities.​
3. Deduct and Deposit TDS Timely: Ensure TDS is deducted at the appropriate time and deposited within the stipulated deadlines to avoid interest and penalties.​
4. File Quarterly TDS Returns: Submit returns detailing TDS deductions and deposits as per the prescribed due dates.​
5. Issue TDS Certificates: Provide Form 16A to partners, enabling them to claim credit in their personal tax returns.​
   

Penalties for Non-Compliance

Failure to comply with Section 194T can result in:

• Interest:
  • 1% per month for failure to deduct TDS.
  • 1.5% per month for failure to deposit TDS after deduction.​
• Late Filing Fee: ₹200 per day for non-filing of TDS returns, capped at the total TDS amount.​
• Disallowance of Expenses: 30% of the expense may be disallowed under Section 40(a)(ia) for non-deduction of TDS.​
  

Practical Implications

1. Impact on Partner Withdrawals

Firms, especially family-owned ones, often allow partners to withdraw funds based on cash flow needs. With Section 194T, such withdrawals, if classified as remuneration or interest, will attract TDS, necessitating a more structured approach to partner payments.​

2. Cash Flow Management

The requirement to deduct TDS on partner payments can impact the firm’s cash flows. Firms need to plan their finances to ensure timely TDS deductions and deposits without hampering operational liquidity.​

3. Clarification in Partnership Deeds

Ambiguities in partnership deeds regarding the nature of payments can lead to misclassification and potential non-compliance. It’s imperative to clearly define terms like salary, remuneration, and interest in the deed.​

No Exemptions or Lower TDS Rates

Unlike other TDS provisions, partners cannot:​

• Submit Form 15G or 15H to avoid TDS.
• Apply for a certificate under Section 197 for lower or nil TDS deduction.​

This underscores the mandatory nature of TDS under Section 194T, irrespective of the partner’s total income or tax liability.​

Conclusion

Section 194T marks a significant shift in the taxation landscape for partnership firms and LLPs. While it aims to enhance tax compliance and transparency, it also introduces additional compliance responsibilities for firms. Proactive measures, such as updating partnership deeds, structuring partner payments, and ensuring timely TDS deductions and filings, are essential to navigate this new regime effectively.​

Need Assistance?

At Treelife, we specialize in guiding partnership firms and LLPs through complex tax landscapes. Our team of experts can assist you in:​

• Assessing the applicability of Section 194T to your firm.
• Updating partnership deeds to align with the new provisions