Applicability of TDS U/S 194 T W.E.F 01.04.2025
APPLICABILITY OF TDS U/S 194T W.E.F 01.04.2025
Section 194T of the Income Tax Act, 1961, introduces a tax deduction at source (TDS) on certain payments made by a partnership firm (including Limited Liability Partnerships or LLPs) to its partners. This provision aims to bring more transparency and accountability to transactions between firms and their partners.
Key Aspects of Section 194T
1. Insertion and Applicability:
- Section 194T was inserted by the Finance Act 2024.
- It will become applicable from April 1, 2025.
2. Who is Responsible for Tax Deduction (Deductor)?
The partnership firm (including LLP) making the payment to the partner is responsible for deducting TDS under Section 194T. This means the firm itself is the deductor, not any individual partner.
3. Who is the Deductee?
- The deductee is the partner receiving the payment from the partnership firm.
- This includes any individual who is a partner in the firm, regardless of their role or designation.
4. Threshold Limit:
TDS under Section 194T is applicable only if the aggregate amount of payments made by the firm to a partner during the financial year exceeds ₹20,000. If the total payments are ₹20,000 or less, no TDS is required to be deducted.
5. TDS Rate:
The TDS rate under Section 194T is 10%.
6. Time of Tax Deduction:
TDS under Section 194T is deductible at the time of:
- Credit of such sum to the account of the partner in the books of the firm; or
- Payment of such sum to the partner,
- whichever is earlier. It's important to note that credit to the partner's capital account is also considered for determining the timing of TDS deduction.
7. What Payments are Covered?
Section 194T covers a wide range of payments made by a firm to its partners, including:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on capital
- Interest on loan accounts
Practical Implications and Considerations
- Rationalizing Withdrawals: The introduction of TDS may prompt partners to rationalize their withdrawals from the firm, as it will now involve a 10% deduction.
- Timing of Payments: Firms may need to align their accounting practices with the TDS deduction timelines. Since credit to the capital account is also considered, firms may need to close their books earlier to calculate and deduct TDS before the financial year ends.
- Coordination and Communication: Clear communication between partners and the firm regarding these TDS provisions is crucial.
- Record Keeping: Meticulous record-keeping of all payments made to partners and the corresponding TDS deductions is essential for compliance.
- Professional Advice: It is highly recommended that partnership firms and their partners consult with tax professionals to understand the implications of Section 194T and ensure compliance.
Example
A partnership firm pays a monthly salary of ₹25,000 to a partner. Since the annual payment exceeds ₹20,000, the firm is required to deduct TDS at 10% (₹2,500 per month) at the time of salary credit or payment, whichever is earlier.
In Conclusion
Section 194T represents a significant change in how partnership firms handle payments to their partners. By understanding the provisions and requirements of this section, firms can ensure compliance with tax regulations while maintaining transparency in partner transactions. Early preparation and proper implementation of these TDS requirements will help partnership firms avoid penalties and maintain smooth operations.
