Understanding Tax Deduction at Source for Partnership Firm: Payment to the partner as per Section 194T, 40(b), 40(ia) and 28(v)
A partnership firm is considered a distinct person for taxation purpose, separate from its partners. Both the firm and the partners are treated as separate taxable entities. Any payment made by the firm to its partners, whether in the form of salary, remuneration, commission, bonus or interest is treated as business income of the partner taxable under the head Profits and gains of business or profession. At the same time, such payments are allowable as an expenditure in computing firm’s income under the head Profits and gains of business or profession.
An important update under the Income Tax Act, 1961 pertains to Tax deduction at Source from the payment made to partners by the firm. Non-deduction or lower deduction of TDS on such payment can have several consequences.
This article will primarily cover the provisions of section 28(v), Section 40(ia), Section 40(b), Section 10(2A), and Section 194T of the income Tax Act, 1961.
Quantifying Amount Liable for TDS
Let’s now focus on how to quantify the amount liable for Tax deduction at source. The remuneration of working partners and interest paid to any partners at the rate of 12% p.a., as authorized by partnership deed, is eligible for deduction while computing income of the firm. However, the total remuneration payable to all working partners in a financial year should not exceed
| On the first ₹ 6,00,000 of the books profit or in case of a loss | ₹ 3,00,000 or at the rate of 90% of the book-profit, whichever is more; |
| On the balance the book-profit | at the rate of 60% of the book-profit |
| Total Remuneration of all working partners – |
Any amount paid in excess of above ceiling limit will not be deductible. Such excess amount will neither be eligible for deduction in the firm’s hand as per section 40(b) nor taxable in the partner’s hands under section 28(v).
The partner’s share in the profit of the firm will not be subject to tax deduction, as this share is exempt from Income tax in the partner’s hand under section 10(2A).
For this purpose, Book-profit refers to the net profit as per P&L Account, increased by the aggregate remuneration debited to be paid or payable to all working partners.
Therefore, deduction eligible under section 40(b) will be subject to TDS under Section 194T.
Taxability of payment to Partners
Charging Section 28(v) provides that any amount due to or received by a partner from the firm, by way of salary, bonus, remuneration, commission, interest by whatever name called, to the extent allowed as a deduction under section 40(b), shall be chargeable to tax in partner’s hands as income under the head profits and gains of business or profession.
TDS on Payment to Partners
This is where the provisions of section 194T comes into play, imposing an obligation on the firm to deduct tax at source at the rate of 10% on salary, remuneration, commission, bonus or interest paid or payable to a partner. The liability to deduct arises when the payment, or the aggregate payment to a partner, exceeds ₹20,000 in the financial year. The tax will be deducted at the time of crediting such sum to the partner’s account or at the time of payment, whichever is earlier.
Disallowance for Non-compliance with TDS
Further, the provisions of section 40(ia) aim to ensure compliance with the section 194T by providing for the disallowance of the amount allowable as per section 40(b). Where a firm required to deduct tax under section 194T has not deducted the tax, or after deduction, has not paid the tax on or before the due date of furnishing return of income, then 30 % of such sum will be disallowed, and the remaining 70% will be allowed in computing income of the year. However, the disallowed sum will be allowed in the year in which is tax deducted and deposited.
******
Disclaimer: The information provided in this article is for general informational purposes only and should not be regarded as professional advice. No actions should be taken solely based on the content of this article. For advice specific to your circumstances, it is strongly recommended that you consult a qualified professional.
Author Bio
Article is good, but there is a question. If a partner withdrawing certain amount or randomly withdraw some amount or making his personal payments every month, in that case TDS liability would arise every month or one can show that amount as withdrawal and at the end of financial year, after calculating Remuneration one time TDS is permissible or not ?