TDS on Payment Made to Partners w.e.f. 1st April 2025| Newly Inserted Section 194T of Income Tax Act

Payments to partners have been kept outside the TDS ambit whether the payment is made on account of interest on Capital, Partner’s Remuneration, Interest on Loan, Commissio,n, etc. However, such a concept has been changed w.e.f. 1st April 2025. The Finance (No. 2) Act, 2024, has inserted Section 194T into the Income Tax Act, 1961, which provides for the deduction of TDS on payments made to partners for remunerations, interest, bonuses, etc.

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This article carries out a detailed analysis of Section 194T of the  Income Tax Act, 1961.

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1. Legal Extract

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• Section 194T is reiterated below for ready reference:

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“Payments to partners of firms.

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194T. (1) Any person, being a firm, responsible for paying any sum like salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment there of, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.

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(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.”

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2. Payments on which TDS is to be deducted under Section 194T

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As per Section 194T, TDS is to be deducted on the following payments made to partners by a Partnership firm, including LLP:

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1. Salary;
2. Remuneration;
3. Commission;
4. Bonus;
5. Interest on Loan;
6. Interest on Capital

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3. Rate of TDS

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As per Section 194T of the Income Tax Act, TDS is to be deducted at the rate of 10% on such payments. If payment is made to resident partners, TDS is to be deducted at a flat rate of 10% without any education cess and surcharge.

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Read Also: Lower TDS on Salary Income: Employee to File Form 12BAA with Employer to Avail Credit of Other TDS and TCS

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4. Threshold Limit for TDS Deduction

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Section 194T provides that the threshold limit for TDS deduction shall be INR 20,000. It is pertinent to note that such a limit is to be checked on an aggregate basis and not for every nature of payment. 

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Therefore, if the aggregate of all payments made to partners, including remuneration, Interest, commission, etc., exceeds INR 20,00,0 then TDS is to be deducted on all payments. 

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Illustration:

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5. When TDS is to be deducted

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Similar to other TDS provisions, TDS is to be deducted at the earlier of the following dates:

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1. credit of such sum to the account of the partner (including the capital account)
2. Date of Payment

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6. Payments outside the ambit of Section 194T:

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Any payment made to partners on account of drawing capital out of the firm shall not be eligible for TDS deduction. Therefore, if payment is made for drawing capital from the firm, then no TDS shall be deducted from such an amount.

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7. TDS on payments made to Non-resident Partners

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• As per Section 194T of the Income Tax Act, TDS shall be deducted on payments made by any person, being a firm, to the partner of the firm. This section does not specifically mention whether the partner should be a resident or non-resident.

• On the other hand, Section 195 specifically provides for TDS provisions on payments made to non-residents.

• Therefore, ideally, TDS on payments made to non-resident partners should be deducted under Section 195 instead of Section 194T of the  Income Tax Act.

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8. Disallowance of expense on Account of non-deduction of TDS

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• As per Section 40(a)(ia),  deduction shall not be allowed under head PGBP upto 30% of any sum payable to a resident, on which TDS is deductible under Chapter XVII-B and such TDS has not been deducted or has been deducted but not deposited on or before the due date specified in sub-section (1) of section 139.

• As per Section 40(b), a deduction to remuneration and interest on capital paid to a partner is admissible up to a specified limit.

• As per Section 40 read with 194T, if any payment is made to partners for which deduction is allowed under section 40(b) of Income Tax Act but TDS is not deducted on the same under section 194T then 30% of such expense shall be disallowed under section 40(a)(ia) of Income Tax, 1961.

• However, what if any amount is getting disallowed as the amount exceeds the limit specified under Section 40(b) of the Income Tax Act? Whether the Firm is still required to deduct TDS on such an amount under section 194T as the same is already not allowed as an expenditure.

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Conclusion

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Section 194T is a drawback for the partners as it will affect their cash inflows substantially. Similarly, it will cast an additional compliance on the partnership firm as well. Further, Section 194T is getting implemented from 1st April 2025, however, many issues are yet to be clarified by the department.

The department is required to issue a detailed clarification and FAQs on TDS on payments made to partners to avoid confusion and bring uniformity.