Summary: A new tax provision, Section 194T, was introduced to the Income Tax Act, effective April 1, 2025, which requires partnership firms to deduct a 10% tax on payments such as salary, remuneration, or interest made to partners, if the total amount exceeds Rs. 20,000 in a financial year. According to the author, this provision presents a difficult challenge for firms, increasing their compliance obligations and exposing them to potential penalties and interest payments. The author asserts that this is an illogical requirement, as a firm is essentially deducting tax from its owners. The text outlines several practical issues with Section 194T. A key problem is the mismatch in timing between the required TDS remittance (by the end of April) and the calculation of a firm’s book profits (typically in July). This timing gap could subject firms to interest and penalties. Furthermore, there may be inconsistencies between the amounts on which tax is deducted and the final income computed for book profits. The author concludes that the entire process is an inefficient use of resources, as the deducted tax is often fully refunded, creating unnecessary costs for both taxpayers and the tax department.
IMMEDIATE RE-LOOK REQUIRED ……
Section 194T of Income tax act
The Hon’ble Finance Minister in her Budget presented before the Parliament in the year 2024 has introduced a new section 194T in the Income Tax Act w.e.f. 01.04.2025.
The section provides for a Partnership firm to deduct tax at 10 per cent on the payments made by the firm to the partners in the nature of salary, remuneration, commission, bonus or interest, in case the sum or aggregate of the sums exceed Rs.20,000.00 during the financial year.
This is a very tough proposition which would increase the compliance burden on the firms and they would stand to lose heavy sums towards interest and penalties.
The rationale behind introducing and expanding the coverage of provisions of tax deduction at source is to minimize the risk associated with tax evasion and to reduce the administrative burden of year-end tax collection. However, this should not lead to avoidable unwanted compliance burden on the assesses.
First, this provision is not correct for the reason that TDS is made applicable to the firm for payment to self. In other words, the firm is owned and managed by the Partners themselves and TDS is being deducted for the payments made to their own selves.
From the year 1993, when the provision of Sec 40(b) was introduced wherein Salaries and interest to Partners were allowed, the constitution and drafting of Partnership deed went for a change and the quantum of interest payable to Partners and the sum of Salaries to Partners [subject to the limitations prescribed in the respective sections] were stated in the Deed. The Salaries to Partners were restricted to the quantum allowed U/s. 40(b) of the act and then the share of each of the Partners would be specified either in the ratio of Profit sharing or any other method as mutually agreed amongst them.
PRACTICAL PROBLEMS EXPLAINED
Consider an example….
A Partnership firm [with two partners] earns an income of Rs. 10, 00,000 [Ten Lakhs] as income before appropriation of the salaries and interest to Partners. The capital balances of partners are about Rs. 25, 00,000.00, which is eligible for interest at the rate of 12% as per the income tax act. The interest allowable @ 12% would be Rs. 3, 00,000.00 and the balance left for appropriation of Salaries would be Rs. 7, 00,000.00. Therefore, the allowable salaries would be Rs.6, 00,000.00 [being 90% of the first six lacs and 60% of the balance].
Now, with two partners dividing the Interest and salary equally amongst them, the income of each Partner would be Rs. 450,000.00. Considering other income, there would be a case that income of each such partner will be below Rs. 12, 00,000.00 on which after considering tax rebate, tax payable will be NIL from AY 2026-27.
In such case, the firm would be left with an unnecessary liability / responsibility of deducting TDS and filing the TDS Returns, the outcome of which would be a total refund of Tax deducted under section 194T.
Secondly, the time for filing the Income tax Returns is 31st of July [assuming the assessee firm is not subjected to Audit] and the Profits / Income would be arrived at only in the month of July before the due date of filing the Returns of income. However, the assessee firm would be subjected to interest and penal provisions of the act for not deducting and remitting the tax U/s. 194T in time, which is before the end of April and filing the TDS return before the end of May.
Third, there may be instances where remuneration, salary etc., to partners have been debited to the Profit and loss account and tax is deducted thereon while at the time of computation those may vary based on book profits. This will result in mismatch on account of difference between TDS on amount debited and actual computed income based on book profits.
Last but not the least, in the case of income derived by the partners from the firm; it cannot go unnoticed for the reasons that firms are under obligation to file return wherein such payments are disclosed. Partners, except in few small cases, in general are on the rolls of the department. Hence, there is no sound reason to impose TDS and its compliance burden on the firms.
The whole exercise is meaningless and leads to wasteful expenditure both to the assessee and the Department.
The Tax so deducted would be on hold with the Department only to be refunded after a certain period of time to the assessee. For the assessee, the filing charges would involve cost and for the Department the cost of Processing.
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This section needs a relook and withdrawing the section is highly recommended. IT IS THEREOFRE REPRESENTED THAT THIS PROVISION NEEDS TO BE DELETED.
D.Venkataramana, Chartered Accountant | dvrfca@gmail.com
Author Bio
In those case where remuneration may be provided in the books but may not be claimed in ITR filed by the firm u/s 44ADA as the same is not allowed if the firm selects presumptive taxaxtion. In this case remuneration will also be not taxable in the hands of partners and accordingly TDS if aapplied in the books as per section 194T will be an added obligation on the firm resulting into refund of TDS so applid. The autiorities have not looked in to all these situation and enacted the law in hest. I hope this should brought to their notice and suitable amendments be made In new Income Tax Act.