by Section 194T: A Comprehensive Guide
Introduction
The Finance Act, 2024, introduced Section 194T into the Income Tax Act, mandating Tax Deducted at Source (TDS) on specific payments made by partnership firms and Limited Liability Partnerships (LLPs) to their partners. This provision, effective from April 1, 2025, aims to enhance tax compliance and transparency in financial transactions between firms and their partners.
In this blog, we will delve into the nuances of Section 194T, covering its applicability, the nature of payments subject to TDS, compliance requirements, and its implications for both firms and partners.
Understanding Section 194T
Section 194T requires partnership firms and LLPs to deduct TDS at a rate of 10% on specified payments made to partners if the aggregate amount exceeds ₹20,000 in a financial year. This deduction applies at the time of crediting the amount to the partner’s account or at the time of payment, whichever occurs earlier.
Key Provisions of Section 194T
- Applicability: Pertains to all partnership firms and LLPs making specified payments to their partners.
- Payments Covered:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on capital or loan accounts
- Threshold Limit: TDS is applicable only if the total payment to a partner exceeds ₹20,000 in a financial year.
- TDS Rate: A flat rate of 10% is to be deducted on qualifying payments.
- Effective Date: The provisions come into effect from April 1, 2025, applicable for the Assessment Year 2025-26 and onwards.
Compliance Requirements for Firms
To adhere to Section 194T, partnership firms and LLPs must undertake the following:
- Obtain TAN: Secure a Tax Deduction and Collection Account Number (TAN) as mandated for entities responsible for TDS deductions.
- Timely TDS Deduction: Deduct TDS at the time of crediting the specified payment to the partner’s account or during actual payment, whichever is earlier.
- Deposit of TDS: Ensure that the deducted TDS is deposited with the government within the prescribed timelines to avoid interest and penalties.
- Quarterly TDS Returns: File quarterly TDS returns, detailing the deductions made under Section 194T, using the appropriate forms.
- Issuance of TDS Certificates: Provide partners with TDS certificates (Form 16A), serving as evidence of tax deducted, which partners can use for their tax filings.
Implications for Partners
Partners receiving payments subject to TDS under Section 194T should consider the following:
- Inclusion in Taxable Income: Report the gross amount received (before TDS) as income under “Profits and Gains of Business or Profession” in their individual tax returns.
- Claiming TDS Credit: Utilize the TDS deducted by the firm as a credit against their total tax liability, thereby reducing the amount of tax payable.
- Refund Procedures: If the TDS deducted exceeds the partner’s tax liability, they are eligible to claim a refund upon filing their income tax return.
Comparison with Previous Provisions
Prior to the enactment of Section 194T:
- No TDS Requirement: Payments such as salary, remuneration, or interest made by firms to partners were taxable in the hands of the partners but did not attract TDS, leading to potential discrepancies in income reporting.
Post-implementation of Section 194T:
- Mandatory TDS Deduction: Firms are now obligated to deduct TDS on specified payments to partners, ensuring improved tax compliance and streamlined tax collection.
Potential Challenges and Considerations
While Section 194T aims to enhance tax compliance, it may present certain challenges:
- Cash Flow Management: The requirement to deduct TDS may impact the cash flow of both firms and partners, necessitating effective financial planning.
- Administrative Burden: Firms may face increased administrative responsibilities due to the need for regular TDS deductions, timely deposits, and accurate return filings.
- Awareness and Training: Both firms and partners should stay informed about the new provisions to ensure compliance and avoid potential penalties.
Illustrative Examples
Example 1: A partnership firm pays a partner ₹25,000 as remuneration in a financial year. Since this exceeds the ₹20,000 threshold, the firm must deduct TDS at 10% on the entire amount, resulting in a ₹2,500 deduction.
Example 2: If the total payment to a partner is ₹18,000 in a financial year, it falls below the threshold, and no TDS deduction is required.
Recent Updates and Amendments
- Enhanced Remuneration Limits: The Finance Act, 2024, has revised the limits for deductible remuneration under Section 40(b), aligning them with the provisions of Section 194T.
- Clarifications on Applicability: Recent circulars have provided guidance on the applicability of Section 194T to various types of partnership arrangements, ensuring uniform compliance.
FAQs on TDS on Partner Remuneration (Section 194T)
Q1: Is TDS required on partner’s salary or remuneration?
Ans1: Yes, under Section 194T, partnership firms and LLPs must deduct TDS at 10% on salary, remuneration, commission, bonus, or interest paid to partners if the aggregate amount exceeds ₹20,000 in a financial year.
Q2: Can a firm voluntarily deduct TDS on partner’s remuneration if the amount is below ₹20,000?
Ans2: No, TDS under Section 194T is applicable only when the aggregate payment exceeds ₹20,000 in a financial year.
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