The Finance Act, 2024 has introduced a new enabling provision under Section 194T, mandating tax deduction at source (TDS) at the rate of 10% on payments made or credited by a partnership firm to its partners in the nature of salary, remuneration, commission, bonus, or interest. This provision shall come into effect from 1st April 2025, thereby applying from the Financial Year 2025–26, relevant to Assessment Year 2026–27. A threshold limit has been prescribed, exempting TDS where the aggregate payment during the financial year to the partner of the firm does not exceed Rs. 20,000. Additionally, the initial slab of book profit for computing allowable remuneration under Section 40(b) has been revised upward from ₹3 lakhs to ₹6 lakhs with effect from AY 2025–26.
At first glance, the section may not appear to involve any technical complexities; however, upon actual application, several practical challenges emerge—particularly with respect to Salary, Remuneration, Bonus which are as under :-
1. Even if Remuneration or Interest is not allowable as per section 40(b) of the Income tax Act, 1961 and accounted for in the Books of Account, TDS is required to be deducted u/s 194T.
2. No firm would like to pay remuneration to a working partner in excess of allowable remuneration as per Section 40 (b)(v) which is normally calculated on finalisation of book profit which is normally done at the time of filing of IT return of the firm i.e. 31st Remuneration in Excess of allowable remuneration as per Section 40 (b)(v) will lead to disallowance of such excess remuneration at firm level vis-à-vis taxable at Partner level resulting double taxation.
3. Partners are withdrawing from firm money out of the remuneration accrues and final remuneration may vary at the year end because remuneration to Partners finalised on closure of books and ascertainment of book profit then now monthly remuneration as well TDS amount can be determined.
4. Thus Monthly TDS on Remuneration and Bonus poses practical difficulties and non-compliance will lead to heavy Interest and Late filing fee burden.
5. Even for the Last Qtr. The due date for deposition of TDS is 30th and till that date it is normally practically difficult to ascertain quantum of remuneration hence how TDS can be deducted and deposited.
6. In view of the fact narrated in point 3 supra Qtly TDS Return will also get delayed or may required to be revised as due date of filing of last Qtr. TDS Return is 30th May every year.
- Late deduction and deposition of TDS will hit Interest payable @1% / @1.50% pm.
- Late filing of TDS Return also results in levy of Late fee 200 per day
- In case of failure to Pay TDS [276B(a)] provides rigorous imprisonment for 3 months and 271C(1)(a) being Penalty for failure to deduct TDS which is a sum equal to tax amount which remain to be deducted.
- Provision of Section 40(a)(ia) shall be invariably applicable as allowability of the deduction of Interest and remuneration shall be tested by Section 37 and not by Section 40(b).
- The concept of working and non-working partners are not relevant for Section 194T.
7. For mere understanding, where a Partnership firm has given remuneration to non-working partner and failed to deduct TDS u/s 194T in that case such remuneration is actually not allowable u/s 40(b) then question of disallowance by virtue of 40(a)(ia) is not relevant at all.
MATTERS NEED CONSIDERATION :-
1. First of all at least by the month of April-May 2025, Review the clauses of Partnership Deed relating to Interest and remuneration etc. and align the same () with the provision of Section 194T.
2. Ensure that remuneration shall be paid/credited to working partners as per Partnership deed.
3. Open two types of Partner’s Capital account – one is Capital account and another one is Current (Capital) A/c.
4. It is advisable to debit the withdrawals made during the year by Partners, in Capital Account so as to avoid monthly TDS.
5. If remuneration etc. and/or Interest is paid/credited on Monthly basis TDS has to be deducted on monthly basis to avoid Interest and Late filing fee.
6. For enabling yearly TDS on remuneration etc. suggested para to be incorporated in partnership deed to make it compatible with section 194T :-
“It has been mutually agreed between the partners that The Partnership firm shall be responsible for paying remuneration to working partners at the year end after calculating book profit as contemplated in Explanation 3 of Section 40(b) of the Income Tax Act, 1961.”
“It has been mutually agreed between the partners that the Partnership firm shall be responsible for paying Interest to partners as allowable under section 40(b)(iv) of the Income Tax Act, 1961 at the year end only.”
CONCLUSION :-
The introduction of Section 194T under the Finance Act, 2024 marks a significant shift in the tax compliance framework for partnership firms by mandating TDS on payments such as salary, remuneration, commission, bonus, or interest to partners. Though the provision is seemingly straightforward, its practical implementation from FY 2025-26 poses several operational and compliance-related challenges—particularly due to the linkage with book profit computation, timing of payments, and finalization of remuneration. The interplay between Section 40(b), Section 194T, and other penal provisions under the Income Tax Act can lead to unintended consequences such as disallowance, double taxation, interest, penalties, and even prosecution in case of non-compliance.
Hence, proactive steps such as timely review and amendment of partnership deeds, structured partner capital accounts, and clear documentation of remuneration and interest policies are essential. Firms must align their accounting and tax practices in advance to mitigate exposure and ensure seamless adherence to the new TDS regime. With proper planning and documentation, the transition to the new regime under Section 194T can be managed effectively, safeguarding both the firm and its partners from avoidable tax disputes and penal consequences.
Author Bio
