INTRODUCTION
A number of significant changes have been observed with the introduction of The Finance Act, 2024[1]. One such change has been made in the governance of payments made by the Firms. The newly introduced Section 194T[2] Compels all the firms to deduct 10% TDS on payment of any sum in the nature of salary, remuneration, commission, bonus or interest to the partner of the firm.
Section 194T is only applicable when the amount credited to a partner exceeds the limit of twenty thousand rupees in a financial year. It is crucial to notice that the newly added section does not apply to AY 2025-26. Rather, it comes into effect from 1st April 2025 and is applicable to all transactions afterwards.
APPLICABILITY
The use of the word ‘Firm’ in Section 194T[3] restricts the applicability of the section towards Partnership Firms and Limited Liability Partnerships in accordance with Section 2(23)(i) of the IT Act, 1961[4].
The said section is subject to payments of the nature of Salary, remuneration, commission, bonus or interest to a partner.
The said section is applicable for the TDS deduction, even if there has been no real cash flow, but the payment has been credited in the books of account.
However, it is crucial to understand that the said deduction is only applicable when the aggregate sum paid or credited exceeds the predetermined limit of Rs. 20,000/- in a financial year.
The said provision applies to all the partners of the firm, including both working and non-working partners.
RATE OF DEDUCTION
For the said section, the TDS is meant to be deducted at the rate of 10%. However, the TDS is to be deducted on the amount that exceeds the threshold limit of Rs. 20,000/-.
Subsequently, like other TDS provisions where individuals can claim exemption by submitting Form 15G[5] or 15H[6], inhere no such relaxation is provided to the partners.
OBLIGATIONS OF THE FIRM
With the introduction of Section 194T[7] the firms have been obligated to take certain measures. Such measures include deduction of tax at 10% from all the transactions towards the partners of the nature of Salary, remuneration, commission, bonus or interest.
The firms also need to be careful to maintain a book of accounts to avoid any ambiguity towards the nature of the payment, failure to do so may attract undesirable tax liability to the firm.
The firms are now also under an obligation to let go of the common practice of Interim Withdrawals. Where, partners were at the liberty to withdraw funds to their liking and the nature of the same was determined upon finalisation of accounts. Such practices cannot be carried out anymore as the said provision demands, the immediate categorisation of the transaction based on its nature. Failure to do so may result in penal consequences for the firm.
BENEFITS FROM INTRODUCTION OF SECTION 194T
CHALLENGES TO BE FACED
The said provisions create another hurdle for the small firms. Small firms usually operate without a Tax Deduction and Collection Account Number (TAN), as the transactions that such firms are involved in are not of a higher tune. Now, with the introduction of the said provision, even the smallest of the firms that fall within the definition of a firm in respect of Section 2(23)(i) of the IT Act[10], need to have a compulsorily registered TAN to be able to operate. This significantly increases the burden on the small firms to ensure tax compliance and TDS return filing.
Profit Share Mechanism in the firms may also face certain roadblocks. According to Section 10(2A) Instances of retirement of the partner nay also face the deduction of TDS. The final settlement with partners comprises of capital invested, profits accumulated, goodwill etc. If the partnership deed is not executed properly these elements may not be differentiable from remuneration or bonuses rather than capital receipts. This will also attract the enforcement of Section 194T[14] resulting in either 10% deduction from the total amount and if not done so will attract proceedings from the IT Act.
The application of Section 194T may also result in a difference between Form 26AS and Return of Income of the partner. Section 28(v)[15] of the IT Act is subject to allowability under section 40(b)[16] of the IT Act. Wherein, Section 194T[17] compels the firms for TDR on payment of any sum to the partner’s account.
For instance,
1.A firm pays Rs. 15,00,000/- as bonus to one of the partners. In compliance with Section 194T, the firm needs to deduct the TDS of Rs. 1,50,000/- at the very outset of the payment being made.
2. However, Section 40(b) of the IT Act only allows for maximum bonus payment worth Rs. 6,00,000/-. Herein, in accordance with Section 28(v) the partner only needs to pay tax on the total amount of Rs. 2,00,000/-.
In such cases, the IT Department may show special interest and the firm, along with the partners will have to face unwanted assessment proceedings.
The applicability of Section 194Tthe non-residents has also been within the ambit of question. Section 195[19] of the IT Act confers that the payment made to a non-resident by any person in the form of interest, royalty, technical services etc. (Excluding Salary) is subject to Tax Deduction at Source. Now, the question arises whether the partner of a firm is non-resident in this case which Section of the IT Act needs to be followed for the deduction of TDS. The Central Board of Direct Taxation (CBDT) needs to issue clarity regarding the same.
CONCLUSION
Section 194T[20], effective from April 1, 2025, marks a significant shift in the taxation landscape for partnership firms and LLPs. By mandating a 10% TDS on payments such as salary, commission, interest, bonus, or remuneration to partners—once the aggregate exceeds ₹20,000 annually—it promotes tax transparency and curbs potential under-reporting. While this move enhances traceability through Form 26AS[21] and strengthens source-based compliance, it also introduces new challenges. Smaller firms now face the administrative load of obtaining TANs, maintaining detailed records, and ensuring accurate categorization of payments. Moreover, transactions without actual cash flow and partner retirement settlements may be misclassified, risking excess tax deduction or scrutiny. Profit-sharing, though exempt under Section 10(2A)[22], could blur with taxable payments if not distinctly documented. To ease the transition, CBDT guidance on non-resident partners and clearer demarcation between profit and remuneration would be instrumental. With thoughtful implementation, Section 194T[23] can balance robust tax governance with practical compliance for firms of all sizes.
[1]The Finance Act,2024
[2] Sec 194T of IT Act,1961
[3] Sec 194T of IT Act,1961
[4] Sec 2(23)(i) of the IT Act, 1961.
[5] Sec 197A (1), Sec197A (1A) & rule 29C of IT Act,1961
[6] Sec197A (1C) & rule 29C of IT Act,1961
[7] Sec 194T of IT Act,1961
[8] 194T of IT Act,1961
[9] Form 26AS of IT Act,1961
[10]Sec 2(23)(i) of the IT Act,1961
[11] Sec 10(2A) of IT Act,1961
[12] Sec 194T of IT Act,1961
[13] Sec 194T of IT Act,1961
[14] Sec 194T of IT Act,1961
[15] Sec 28(v) of IT Act,1961
[16] Sec 40(b) of IT Act,1961.
[17] Sec 194T of IT Act,1961
[18] Sec 194T of IT Act,1961
[19] Sec 195 of IT Act,1961
[20] Sec 194T of IT Act,1961
[21] Form 26AS of IT Act,1961
[22] Sect 10(2A) of IT Act,1961
[23] Sec 194T of IT Act,1961
Author Bio
This section is going to give a lot of problems to the assessees in the sense that in many firms partners’ salaries are decided only in the year end depending on profits and if tax was deducted throughout the year on the salary drawn and if no salary is given to the partner at the year end, what will happen to the TDS? So long as there is credit balance in the account of the partner the salaries drawn are to be treated as drawings and the Tax is to deducted at the year end only.