Finance Act, 2024 introduced Section 194T under the Income-tax Act, 1961, which mandates TDS on certain payments made by firms (including LLPs) to their partners. The provision is applicable with effect from 1st April, 2025 — and requires immediate action from all partnership firms and LLPs.
Introduction to Section 194T
Section 194T represents a paradigm shift in the taxation of payments made by partnership firms and LLPs to their partners. Prior to this provision, there was no requirement to deduct TDS on partner payments, which created a perception of preferential treatment for partnership entities as compared to companies (where TDS on employee salaries has always been mandatory).
The Finance Act, 2024 sought to address this asymmetry by introducing mandatory TDS on specified partner payments, bringing partnership entities in line with the broader TDS framework and ensuring proper tracking of income received by partners.
Key Background: Before Section 194T, partners receiving remuneration, salary, interest, or commission from their firms had no TDS deducted at source. This provision now brings such payments within the TDS net — a significant compliance change for all partnership entities.
Applicability: Covered Payments
TDS is required to be deducted by any partnership firm or LLP on payments made to its partners in the following categories:
Salary
All salary payments made by the firm or LLP to any of its partners are covered under Section 194T.
Remuneration
Remuneration paid to working partners under the partnership deed falls within the scope of this provision.
Commission
Commission paid to partners for services rendered or for business introduced is subject to TDS under this section.
Bonus
Performance-based or contractual bonus payments to partners are also covered under Section 194T.
Interest on Capital
Interest paid on partner's capital account, including current account balances, is subject to TDS deduction.
Irrespective of Turnover
The obligation applies regardless of turnover or whether the firm is subject to tax audit under Section 44AB.
Threshold Limits & TDS Rate
| Particulars | Details |
|---|---|
| Threshold Limit | ₹20,000 per partner per FY (aggregate of all covered payments) |
| TDS Rate | 10% |
| TDS Rate (if PAN not available) | 20% (per Section 206AA) |
| Applicable From | 1st April, 2025 |
Important Note: The threshold of ₹20,000 is to be computed partner-wise and includes the aggregate of all covered payments (salary + remuneration + commission + bonus + interest) made to that partner during the financial year.
Time of Deduction & Compliance Requirements
TDS shall be deducted at the earlier of: credit of such sum to the partner's account (including the capital account), or at the time of actual payment.
| Compliance Requirement | Due Date |
|---|---|
| TDS Deposit (April to February) | 7th of the following month |
| TDS Deposit (March) | 30th April |
| TDS Return (Form 26Q) | Quarterly |
Late deduction or deposit will attract interest (under Sections 201 and 220), penalty (under Section 271C), and disallowance of the underlying payment under Section 40(a)(ia) of the Income Tax Act.
Key Points for Effective Compliance
-
01No Exception for Deed-Permitted PaymentsTDS applies even if the payments to partners are expressly permitted and authorized by the partnership deed. The mere authorization in the deed does not exempt the payment from TDS.
-
02Applies Even in Loss / NIL Tax Income YearsTDS is required even if the firm has a business loss or nil taxable income for the year. The TDS obligation is determined by the quantum of payments, not by the profitability of the firm.
-
03Partner-wise Tracking EssentialProper partner-wise tracking of all covered payments throughout the year is essential to correctly calculate the threshold (₹20,000 per partner) and ensure timely TDS deduction.
-
04Advance Planning for Cash FlowAdvance planning is needed to avoid cash-flow issues for partners. Partners should be made aware that their drawings will be subject to TDS deduction, potentially affecting their short-term liquidity.
Section 194T significantly changes the tax treatment of payments made to partners. Firms and LLPs are advised to review partnership deeds, accounting practices, and payment structures to ensure timely deduction and deposit of TDS. Early alignment with the new provisions will not only ensure statutory compliance but also help manage partner cash flows and prevent future disputes with tax authorities. Proactive implementation is therefore strongly recommended.
— APMH Consulting | Direct Tax Advisory Practice | www.apmhconsulting.com