Effective 1 April 2025, a new Section 194T of the Income-tax Act, introduced in Budget 2024, mandates partnership firms and LLPs to deduct Tax Deducted at Source (TDS) on payments made to partners.
Key Provisions of Section 194T :
- TDS Rate: 10% of the sum paid or credited.
- If the partner does not provide a PAN/Aadhaar, the TDS rate increases to 20%.
- Threshold Limit: TDS is applicable only if the aggregate amount of specified payments to a partner exceeds ₹20,000 in a financial year.
- Once this threshold is crossed, TDS is deducted on the entire amount, not just the excess.
- Nature of Payments Covered:
- Salary or Remuneration.
- Commission or Bonus.
- Interest on Capital or Interest on Loan.
- Timing of Deduction:
- TDS must be deducted at the earlier of two events:
- At the time of credit to the partner’s account (including the capital account).
- At the time of actual payment (cash, cheque, or other modes
- TDS must be deducted at the earlier of two events:
Exclusions & Specific Rules
- Share of Profit: No TDS is applicable on the partner’s share of profit, as it is exempt under Section 10(2A).
- Capital Withdrawals: TDS does not apply to simple drawings or repayment of the original capital contribution.
- No Self-Declaration: Partners cannot submit Form 15G or 15H to avoid this TDS.
- No Lower Deduction Certificate: The option to apply for a lower or Nil TDS certificate under Section 197 is not available for this section.
Compliance Requirements for Firms
- TAN Requirement: Firms must obtain a Tax Deduction and Collection Account Number (TAN) if they don’t already have one.
- Quarterly Returns: Deductions must be reported in quarterly TDS returns (typically Form 26Q for residents or Form 27Q for non-residents).
- TDS Certificates: Firms must issue Form 16A to partners as proof of tax deduction.
- Interplay with Section 40(b): TDS must be deducted on the actual amount paid or credited, even if that amount exceeds the deductible limit allowed to the firm under Section 40(b).
