Section 194T, inserted by the Finance Act, 2024, introduces a new TDS obligation on firms for payments made to their partners. From 1 April 2024, any partnership firm or LLP must deduct tax at source at 10% on amounts paid or credited to partners as salary, remuneration, commission, bonus, or interest. The deduction applies at the earlier of credit (including to the capital account) or payment. A partner-wise threshold of Rs. 20,000 per financial year is provided, and once crossed, TDS applies on the entire amount. The provision applies irrespective of the allowability of such payments under Section 40(b), marking a clear shift from the earlier regime where no TDS applied to partner remuneration or interest. Even book entries attract TDS, and compliance includes timely deposit, filing of TDS returns, and issuance of certificates. The change moves tax collection from the assessment stage to the point of payment, increasing compliance responsibility for firms.
Bare Act: Section 194T–Payments to partners of firms
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.]
Introduction
The Finance Act, 2024 has inserted a new provision, Section 194T, to provide for deduction of tax at source (TDS) on certain payments made by a firm to its partners. This amendment marks a significant shift in the taxation of partner remuneration and interest, which were earlier not subject to TDS.
This article explains the scope, applicability, rate, threshold, compliance requirements, FAQs, and comparison with the earlier law.
Statutory Provision (Brief)
Section 194T provides that any firm responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner shall deduct income-tax at the time of credit or payment, whichever is earlier.
Person Responsible for Deduction
- Deductor: Any firm (Partnership Firm or LLP)
- Deductee: Partner of the firm
Nature of Payments Covered
TDS under Section 194T applies to payments made to partners in the nature of:
- Salary
- Remuneration
- Commission
- Bonus
- Interest
The provision applies even if the amount is credited to the capital account of the partner.
Rate of TDS
- 10% of the amount paid or credited
- No surcharge or health & education cess
- PAN of partner must be available (else higher deduction provisions may apply)
Time of Deduction
TDS shall be deducted at the earlier of:
- Credit of such sum to the partner’s account (including capital account), or
- Actual payment thereof
Threshold Limit
- No TDS if the aggregate amount paid or credited to a partner does not exceed ₹20,000 during the financial year.
- Once the threshold is crossed, TDS applies on the entire amount, not merely on the excess.
Illustrations
Illustration 1
Interest Credited to Partner-X Account during FY 2024-25: ₹10,000
➡ No TDS, as it does not exceed ₹20,000.
Illustration 2
Remuneration credited to Partner-Y Account: ₹40,000
➡ TDS @10% = ₹4,000
➡ Net amount payable = ₹36,000
Illustration 3
Interest ₹19,000 + Commission ₹11,000 paid to the same partner i.e. Partner-X Account.
➡ Total = ₹30,000
➡ TDS applicable on full ₹30,000 @10%
Applicability
- Effective from 1 April 2024
- Applicable for FY 2024-25 onwards
- Relevant for Assessment Year 2025-26 and subsequent years
Compliance Requirements
- Deposit TDS within prescribed due dates
- File quarterly TDS return (generally Form 26Q)
- Issue TDS certificate to partner
- TDS credit will reflect in Form 26AS / AIS of the partner
Important Points to Note
- Applicable to both Partnership Firms and LLPs
- Threshold is calculated partner-wise, not payment-wise
- Covers interest and remuneration together
- Even book entries attract TDS
- Section 194T operates independently of Section 40(b)
Comparison with Earlier Law
| Particulars | Earlier Position (Up to 31-03-2024) | New Position (From 01-04-2024) |
| TDS on partner’s remuneration | Not applicable | Applicable @10% |
| TDS on interest to partner | Not applicable | Applicable @10% |
| Reporting in TDS returns | Not required | Mandatory |
| Threshold limit | Not applicable | ₹20,000 per partner |
| Timing of tax collection | Only at assessment stage | At source (TDS) |
Frequently Asked Questions (FAQs)
FAQ 1: Does Section 194T apply to LLPs?
Yes. The term “firm” includes Limited Liability Partnerships (LLPs).
FAQ 2: Is TDS applicable on remuneration allowed under Section 40(b)?
Yes. Allowability under Section 40(b) and TDS under Section 194T are independent provisions.
FAQ 3: Is TDS applicable if the amount is credited to capital account?
Yes. The law specifically includes capital account credits.
FAQ 4: Is TDS applicable on reimbursement of expenses to partners?
No, provided it is a pure reimbursement and not in the nature of remuneration or benefit.
FAQ 5: Does the ₹20,000 limit apply payment-wise or partner-wise?
The threshold applies partner-wise on aggregate basis for the entire financial year.
FAQ 6: Is surcharge or cess to be added on TDS?
No. TDS is deducted at a flat rate of 10%.
FAQ 7: What if payment is made without deducting TDS?
The firm may be liable for:
- Interest under Section 201
- Penalty and late fee
- Possible disallowance of expenditure
Conclusion: –
Section 194T introduces a new compliance obligation for firms by bringing partner payments under the TDS mechanism. Firms must revise their accounting and compliance systems to ensure timely deduction, deposit, and reporting of TDS to avoid interest and penalties.
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