Summary: Section 194T of the Income-tax Act, 1961, introduced by the Finance (No. 2) Act, 2024 and applicable from FY 2025–26, brings payments made by partnership firms and LLPs to partners under the TDS regime. It covers salary, remuneration, commission, bonus, and interest paid to partners, with TDS applicable at 10% if aggregate payments exceed ₹20,000 annually (20% without PAN under Section 206AA of Income-tax Act). Deduction must occur at the earlier of credit or payment. A critical compliance deadline is 30 April for March deductions, allowing firms to finalize year-end provisions. Failure to deduct or deposit TDS attracts interest at 1.5% per month and triggers disallowance of 30% of expenses under Section 40(a)(ia) of Income-tax Act. Timely calculation and payment are essential to avoid financial and tax consequences.
Arjuna (Fictional Character): Krishna, there is a specific section from the 1961 Act that is currently a hot topic for partnership firms—Section 194T before 30th April. Can you explain the applicability and rules of this section for partners?
Krishna (Fictional Character): Arjuna, Section 194T was introduced by the Finance (No. 2) Act, 2024, and was applicable from FY 2025-26 to bring payments made by partnership firms to their partners under the TDS ambit. Let us first understand the applicability.
1. Applicability and Nature of Payments
The section applies to all partnership firms (including Limited Liability Partnerships – LLPs). Tax must be deducted on any sum paid or credited to a partner in the nature of: Salary or Remuneration, Bonus or Commission, Interest on capital or loans provided by the partner.
2. Threshold Limit and Rate
- TDS is mandatory only if the aggregate amount of such payments to a partner exceeds ₹20,000 in a financial year.
- The standard TDS rate is 10%.
- If the partner does not provide a PAN, the deduction rate jumps to 20% under Section 206AA.
3. Timing of Deduction:
TDS must be deducted at the earlier of the time of credit of such sum to the account of the partner (including the partner’s capital account) or the time of actual payment in cash, cheque, or any other mode.
Arjuna (Fictional Character): Krishna, why is it being said that firms should do their calculations right now, and what are the specific due dates and penalties?
Krishna (Fictional Character): Arjuna, here is the essential guide for year-end compliance under Section 194T:
1. The March Deadline: April 30th
1. For tax deducted during the month of March, the due date for payment to the credit of the Central Government is April 30th. This extra time is provided to allow firms to finalize partner salaries, interest calculations, and commissions before closing the books.
2. Why Calculate Now?
Firms should do their TDS calculations because many firms credit partner salaries, interest, and commissions at year-end, creating “provisions.” Since the FY 2025-26 has ended the firms can now calculate the allowable salary and interest payable to their partners based on which they can do their TDS deductions.
If TDS is not calculated and paid now, and additional salary is provided at the time of return filing, it may trigger interest on late payment.
3. Interest for Late Payment: If taxpayers deduct tax but fail to pay it to the government, interest is charged at 1.5% per month from the date of deduction to the date of payment.
Arjuna (Fictional Character): Krishna, are there any other hidden consequences the firm might have to face due to non-compliance of this section?
Krishna (Fictional Character): Arjuna under Section 40(a)(ia), failure to deduct or deposit TDS results in 30% of the expense (Salary, Interest, or Commission) being disallowed and added back to the firm’s taxable income. This creates a “double burden” where the firm pays extra income tax on an actual business expense, plus additional interest and penalties. Calculating these figures correctly before the April 30th deadline is essential to avoid additional interest burden.
Arjuna (Fictional Character): Krishna, what partnership firms learn from this?
Krishna (Fictional Character): Arjuna, the key takeaway for partnership firms is the importance of timely compliance. Firms need to ensure that they accurately track all payments made to partners throughout the year and apply TDS when required and pay the same before 30th April. By doing so, they avoid facing penalties, interest charges, and the risk of business expenses being disallowed.
FAQs – Section 194T: TDS on Payments to Partners and the 30 April Deadline
Q1. What is Section 194T of the Income-tax Act, 1961, and from when is it applicable?
Answer: Section 194T, introduced by the Finance (No. 2) Act, 2024, is applicable from FY 2025–26. It requires partnership firms, including LLPs, to deduct TDS on specified payments made or credited to partners, such as salary, remuneration, commission, bonus, and interest.
Q2. When is TDS required to be deducted under Section 194T?
Answer: TDS is required at 10% if the aggregate amount of specified payments to a partner exceeds ₹20,000 in a financial year. If the partner does not furnish a PAN, TDS must be deducted at 20% under Section 206AA. The tax must be deducted at the earlier of credit to the partner’s account or actual payment.
Q3. Why is 30 April an important compliance date for partnership firms?
Answer: For TDS deducted during the month of March, the due date for depositing the tax with the Central Government is 30 April. This extended timeline allows firms to finalize year-end calculations of partner remuneration, interest, commission, and other eligible payments before completing TDS compliance.
Q4. What are the consequences of failing to deduct or deposit TDS under Section 194T?
Answer: Failure to deposit TDS after deduction attracts interest at 1.5% per month from the date of deduction until the date of payment. Additionally, under Section 40(a)(ia), 30% of the related expenditure may be disallowed while computing the firm’s taxable income, resulting in a higher tax liability.
Q5. What should partnership firms do to ensure timely compliance with Section 194T?
Answer: Partnership firms should finalize partner remuneration, interest, commission, and other eligible payments at the financial year-end, calculate the applicable TDS, deduct it at the appropriate time, and deposit the tax by 30 April for March deductions. Timely compliance helps avoid interest, expense disallowance, and other tax consequences.
Is 194T applicable when making payment to partners of a Professional partnership firm other than LLP which is filing its income under presumptive taxation of 50% of Total Income under section 44ADA of Income tax Act 1961 . what about Firms other than LLPs opting for presumptive taxation of their Income under 44AD OR 44AE.
How does disallowance apply or even adding back the expenses because there is no need for maintenance of books and expenses are based on percentage of the total turnover.
Good and Timely Article.
is this applicable for 44AE Cases also sir