New Section 194T TDS Rules: Impact on Taxpayers, Effective April 2025

New TDS Rules Under Section 194T: Impact on Taxpayers & Businesses – Effective from 1st April 2025

Introduction

The Finance (No. 2) Bill, 2024, has introduced Section 194T in the Income Tax Act, which will be effective from April 1, 2025. This new provision mandates that Partnership Firms and LLPs must deduct Tax at Source (TDS) on certain payments made to their partners, such as remuneration, interest on capital, and other payments. Earlier, these payments were not subject to TDS as they were considered part of the firm’s profit-sharing arrangement. However, with the introduction of Section 194T, the government aims to bring partner payments under the TDS framework to improve tax compliance, transparency, and timely tax collection. The tax will be deducted when the amount is credited to the partner’s account or paid, whichever is earlier. The TDS rate and exemption limit will be notified separately by the government. This provision ensures that partners pay tax on their earnings in a timely manner, preventing tax evasion and aligning taxation of partner payments with other forms of income that are already subject to TDS. By implementing this change, the government strengthens tax collection mechanisms, ensuring that all incomes are properly taxed at the source.

Scope and Applicability of Section 194T

Section 194T applies to Partnership Firms and LLPs making payments such as salary, remuneration, commission, bonus, or interest to their partners. This provision mandates TDS deduction at the earlier of two events: (1) when the payment is credited to the partner’s account, including the capital account, or (2) when the payment is actually made to the partner. This means that even if the payment is not physically disbursed but is credited in the books of accounts, TDS must still be deducted. The objective of this law is to bring parity between partners and salaried employees, as salaried individuals are already subject to TDS on salary payments under Section 192 of the Income Tax Act, 1961. By introducing Section 194T, the government aims to ensure timely tax collection and prevent tax evasion, making the taxation of partner payments more structured and transparent.

Threshold and Rate of Deduction

Under Section 194T, TDS will be applicable only if the total payments (such as salary, remuneration, commission, bonus, or interest) made to a partner exceed ₹20,000 in a financial year. Once this threshold is breached, TDS will be deducted at a rate of 10% on the total amount exceeding ₹20,000. Unlike other TDS provisions in the Income Tax Act, where individuals with lower incomes can submit Form 15G or 15H to claim exemption from TDS, partners cannot avail themselves of this exemption under Section 194T. This means that TDS will be deducted for all partners, regardless of their total taxable income. This provision ensures that partner payments are brought under the tax net uniformly, improving compliance and preventing tax avoidance.

Comparison Between Old and New Remuneration Taxation

Earlier, partnership firms did not have to deduct TDS on payments made to their partners, as these payments were considered part of the firm’s profit-sharing rather than a salary or expense. However, under the new tax rule (Section 194T), any payments exceeding ₹20,000 in a financial year—such as salary, remuneration, commission, bonus, or interest—will now be subject to TDS at 10%. This changes how these payments are taxed. Previously, partners paid tax on their remuneration only when filing their Income Tax Return (ITR), allowing them to defer their tax liability. Now, with TDS deducted at the time of payment or crediting the amount, tax is collected in advance, just like it is for salaried employees. As a result, partners might receive lower payouts initially and may have to claim a refund when filing their ITR if the TDS deducted is more than their actual tax liability. This new rule ensures that taxes are paid on time and reduces the chances of tax evasion.

Here is a simple comparison between the old and new taxation rules for partner remuneration under Section 194T:

Here is a simple flowchart explaining the new process:

Partnership Firm Makes Payment to Partner

⇓

Is the total payment in a financial year > ₹20,000?

⇓

┌─────────────┴─────────────┐

⇓                                ⇓

No                              Yes

⇓                                ⇓

No TDS Deduction             Deduct TDS at 10%

⇓

Deposit TDS with Govt & File TDS Return

⇓

Partner Receives Payment (Net of TDS)

⇓

Partner Claims TDS Credit While Filing ITR

With this change, TDS is deducted upfront, ensuring timely tax collection, while partners must adjust their tax liability or claim refunds at the time of filing their Income Tax Return (ITR).

Benefits of Section 194T

The introduction of Section 194T brings several important benefits for tax collection and compliance.

First, it helps improve tax compliance by ensuring that tax on partner payments is collected at the source, rather than depending on partners to declare and pay tax later while filing their Income Tax Return (ITR). This reduces the chances of tax underreporting or delay.

Second, it increases transparency because all TDS deductions will be recorded in Form 26AS, a tax statement that shows the amount of tax already deducted. This makes it easier for partners to track their tax deductions and liabilities, ensuring that the correct amount is credited to them.

Third, it helps prevent tax evasion by ensuring that all payments made to partners are taxed before they receive them. Earlier, partners could defer their tax payment until they filed their ITR, but now, the tax is collected in advance, leaving less room for tax avoidance.

Lastly, it helps partners manage their tax payments better by spreading out the tax burden throughout the financial year. Without TDS, partners might face a large tax bill at the time of filing their ITR, which could be difficult to pay at once. Now, with tax being deducted in smaller amounts throughout the year, it becomes easier to plan finances and manage cash flow effectively.

Overall, Section 194T ensures that partner payments are taxed fairly, improves tax tracking, prevents non-compliance, and helps in better financial planning.

Challenges for Partnership Firms and Partners

While Section 194T improves tax compliance, it also brings certain challenges. For firms, the new requirement means they must obtain a Tax Deduction and Collection Account Number (TAN) and comply with periodic TDS return filings. This increases the administrative and compliance burden, particularly for smaller firms that may not have dedicated tax professionals. Partners, on the other hand, will experience cash flow issues as their payments will be subject to immediate tax deductions, reducing their take-home income. Additionally, partners who previously relied on deferment of tax payments may now have to plan their finances differently.

Possible Solutions and Best Practices

While Section 194T helps improve tax compliance, it also comes with some challenges for both partnership firms and partners.

For firms, the biggest challenge is the additional compliance burden. Now, firms must obtain a Tax Deduction and Collection Account Number (TAN) if they don’t already have one. They will also have to deduct TDS on partner payments, deposit it with the government, and file TDS returns regularly. This increases their administrative workload, especially for small firms that may not have a tax expert or accountant to handle these extra tasks.

For partners, the main issue is cash flow management. Since TDS will now be deducted upfront before they receive their payments, their take-home income will be lower than before. This means partners will have to adjust their personal financial planning to account for the reduction in immediate cash inflow.

Another challenge is that partners who used to defer their tax payments until filing their Income Tax Return (ITR) will no longer have this flexibility. Earlier, they could delay paying tax and manage their money accordingly, but now, since tax is deducted at the time of payment, they will need to plan their finances differently to ensure they have enough funds throughout the year.

Overall, while Section 194T improves tax collection and transparency, it also increases compliance work for firms and affects the cash flow of partners, requiring both to adapt to these changes.

Suggestion

To effectively manage the impact of Section 194T, both partnership firms and partners should take proactive steps. Firms should ensure they obtain a TAN (Tax Deduction and Collection Account Number) early to avoid last-minute compliance issues. They should also set up a system for timely TDS deduction and deposit to prevent penalties. Appointing a tax consultant or accountant can help small firms manage the additional workload of TDS return filing efficiently.

For partners, careful financial planning is essential since their take-home income will be lower due to TDS deductions. They should review their estimated tax liability and adjust their personal cash flow accordingly. Partners can also claim refunds while filing their Income Tax Return (ITR) if excess TDS has been deducted, so maintaining proper records of TDS deductions is important.

Additionally, the government could consider providing some relief for small firms by introducing simplified compliance procedures or relaxing return filing requirements for firms below a certain turnover limit. Allowing partners with lower total income to submit Form 15G/15H for TDS exemption, similar to salaried individuals, could also be considered.

Overall, while Section 194T ensures better tax compliance and transparency, firms and partners must adapt to these changes by improving their tax planning and compliance processes to minimize financial and operational challenges.