Summary: Section 194T, introduced by the Finance (No.2) Act 2024, mandates a 10% tax deduction at source (TDS) on payments like salary, remuneration, bonus, commission, or interest exceeding ₹20,000 annually made by firms to their partners. The TDS applies at the earlier of crediting the sum to the partner’s account or making the payment. Firms must obtain a Tax Deduction Account Number (TAN), deduct and deposit TDS timely, file returns, and issue TDS certificates (Form 16A). Noncompliance could lead to penalties, disallowances under sections 40(a) and 40(b), and financial strain, especially for smaller entities. Complexities arise in determining TDS timing, especially when partner withdrawals are adjusted against final remuneration or interest, or when remuneration depends on financial results finalized post-year-end. The April 30th deposit deadline often precedes account finalization, creating practical difficulties in quantifying partner payments and risking default. This provision adds compliance costs and ambiguity, burdening firms and potentially hindering smaller businesses. Many suggest withdrawing Section 194T retrospectively to avoid complications.1
Introduction
Finance (No.2) Act 2024 added a new section 194T to the TDS provisions which extends TDS requirements on certain payments to partners by the partnership firms with a view to broadening the tax base and to curve tax evasion.
Section 194T reads as under:-
“194T. (1) Any person, being a firm, responsible for paying any sum in the nature of 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 thereof, whichever is earlier shall, deduct income tax thereon at the rate of ten per cent.
(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.”
The Memorandum explaining the provisions in the Finance Bill 2024, provides as under:-
“Presently there is no provision for deduction of tax at source (TDS) on payment of salary, remuneration, interest, bonus, or commission to partners by the partnership firm. Hence, it is proposed that a new TDS section 194T may be inserted to bring payments such as salary, remuneration, commission, bonus and interest to any account (including capital account) of the partner of the firm under the purview of TDS for aggregate amounts more than Rs 20,000 in the financial year. Applicable TDS rate will be 10%.
2. The provisions of section 194T of the Act will take effect from the 1st day of April, 2025.”
The newly introduced section 194T imposes a requirement for tax deduction at source (TDS) on certain payments made to partners of a firm and Indian LLP including salary, remuneration, bonus, commission and interest. The provision requires to deduct TDS @ 10% if the total payment within a F/Y exceeds Rs. 20,000/-.
Timing of Tax Deduction and payment of TDS.
As per section TDS should be deducted at the earlier of the following two events:-
a) At the time of credit- when the sum is credited to the account of the partners.
b) At the time of payment- when the payment is made to the partners, whether through cash, cheque or any other mode of payments.
Implication of the provision on firms (compliance)
a) This new regulation imposes an obligation on firms to obtain TDS Account Number (TAN).
b) It imposes a burden to timely deduct and deposit the TDS amount.
c) File TDS returns.
d) Issue TDS certificates to provide Tax certificates to the partners (form 16A).
This enactment increases a compliance burden for firms which may affect smaller entities in terms of compliance cost also. Noncompliance with section 194T may lead to:-
a) Late fees, penalties, fines and interest on delayed deposit of TDS.
b) Disallowance U/S 40(a) in respect of interest payment.
c) Disallowance U/S 40(b) in respect of salary, remuneration, commission etc.
Complexities and intricacies of the provision
The time for tax deduction at source is credit of sum to the account of the partner or payment whichever is earlier.
a) The partners may introduce/withdraw his capital due to variety of reasons. The sum withdrawn by the partners may be adjusted against remuneration or interest accruing to him at the end of the year on finalization of accounts. There is no clarity about the timing of TDS and deposit thereof.
b) A partner may either be entitled to a fixed periodical remuneration or the remuneration may be dependent on the financial results of the firm, which can be ascertained only after the end of the financial year and finalization of the accounts. This may cause ambiguity and practical difficulties in applying the provisions of section 194T.
c) The due date for TDS deposit is 30th of April. Generally firm’s accounts are finalized after that date and it is practically difficult to quantify the remuneration etc to the partners which may result in default in deposit of TDS leading to late fees, penalty and interest.
Conclusion/Suggestions
This provision seems to be difficult to comply with and may lead to a number of complications and this needs to be withdrawn with retrospective effect.
Author Bio
let the better sense previals in budget to be declared on 31st Jan 25