The Income Tax Department has introduced a major change that impacts partnership firms and LLPs in India starting from April 1, 2025. Despite being notified earlier via Notification No. 13/2022 dated June 22, 2022 and Circular No. 14/2022 dated June 28, 2022, many taxpayers are either unaware or still not complying with this crucial update.
This change involves the insertion of a new TDS section, Section 194T, under the Income Tax Act, which mandates tax deduction at source (TDS) on specific payments made by a firm to its partners. This blog aims to help you understand the new provision, its applicability, and the steps you need to take to remain compliant.
What is Section 194T?
Section 194T is a newly introduced provision that applies to any partnership firm or LLP that pays certain sums to its partners. These payments include:
- Remuneration
- Salary
- Commission
- Bonus
- Interest on capital
Until now, such payments were not subject to TDS, as they were considered internal transactions. But from FY 2025–26 onwards, these transactions are under the TDS net.
Who is Liable to Deduct TDS?
As per Section 194T, any firm or LLP making the specified payments to a partner is now mandated to deduct TDS.
This deduction is applicable even if the amount is credited to the partner’s capital account, not just when it is paid in cash or via bank transfer. So even if no actual payment is made, but the amount is credited in the books, TDS must be deducted.
When Should TDS be Deducted?
TDS under Section 194T must be deducted at the earlier of the following:
- At the time of credit of the amount to the partner’s account (including the capital account), or
- At the time of actual payment, whether in cash, cheque, or any other mode.
This means TDS cannot be deferred simply because the payment is not immediately made. The moment the amount is recorded in the books, the firm becomes liable to deduct tax.
What is the Rate of TDS under Section 194T?
The TDS rate is 10% of the total amount paid or credited. This rate is in line with several other TDS provisions under the Income Tax Act, such as Section 194A.
Is There Any Threshold Limit?
Yes. No TDS is required if the total amount credited or paid to a partner during a financial year does not exceed Rs.20,000.
This threshold is:
- Per partner
- Per financial year
Once the Rs.20,000 limit is crossed, TDS must be deducted on the full amount, not just the amount exceeding the threshold.
Is Nil/Lower TDS Deduction Allowed?
No. Unlike other TDS provisions, Section 194T does not allow for nil or lower deduction certificates under Section 197. Also, partners cannot submit Form 15G or 15H to avoid TDS under Section 197A.
This means once the payment crosses ₹20,000, TDS at 10% becomes mandatory, with no exceptions.
Can Partners Claim This TDS?
Absolutely. While the firm deducts TDS, the partner can claim credit for the same in their Income Tax Return (ITR). The amount will reflect in their Form 26AS or Annual Information Statement (AIS).
The deducted TDS can be:
- Adjusted against the partner’s tax liability, or
- Claimed as a refund if there is no tax payable.
So, while TDS will be deducted, the tax impact on the partner will ultimately be neutral if their overall tax liability is lower.
Implications of Non-Compliance
If a firm fails to deduct or deposit TDS under Section 194T, it may face the following consequences:
- Disallowance of expense under Section 40(a)(ia) in income tax assessment.
- Interest under Section 201(1A) for late deduction or payment.
- Penalty under Section 271C for non-deduction of TDS.
- Increased scrutiny from tax authorities.
Non-compliance not only affects the firm’s finances but may also raise red flags during audits or assessments.
Steps for Firms to Stay Compliant
To comply with Section 194T, firms and LLPs must:
- Review their partnership deed to identify all types of payments made to partners.
- Update accounting systems to track and apply TDS at the correct time.
- Train finance and accounts teams about the new rule.
- Monitor total payments to each partner to track when the ₹20,000 threshold is crossed.
- Ensure timely payment and filing of TDS returns (Form 26Q).
Final Words
Section 194T represents a significant shift in how partnership firms and LLPs handle payments to partners. With effect from April 1, 2025, TDS at 10% becomes mandatory on specified payments exceeding ₹20,000 in a financial year.
Though the move is aimed at enhancing transparency and compliance, it also adds a layer of responsibility for firms. Partners, on the other hand, can claim the deducted TDS in their returns either as an adjustment or refund.To avoid penalties and ensure seamless implementation, timely action is crucial.
