194T – TDS on payment to partners from Partnership Firm
Applicable from 01.04.2025 (FY 2025-26 onwards)
Budget 2024 inserted a new provision in the Act stating that certain payments made to a partner by a firm shall be liable for TDS deduction in accordance with the provisions of Section 194T.
Deductor – Partnership Firm / LLP
Deductee – Partner of the Firm / LLP including Minor
Type of Payment – Following Payments are covered under 194T
- Salary
- Remuneration
- Commission
- Bonus
- Interest on any account( Loan or capital)
Threshold Limit
TDS is applicable only if the aggregate amount paid to a partner in a financial year exceeds Rs.20,000
194T Not Applicable on
- Drawings / Capital Repayment
- Profit Share
- Payments not exceeding Rs.20,000 per annum
When should TDS be deducted?
TDS needs to be deducted at the time of credit or at the time of payment whichever is earlier
Implications of 194T on Firms:
Section 194T introduces several implications for firms, particularly in terms of compliance and financial management:
Compliance and Administrative Burden
- Increased Compliance: Firms must now deduct TDS on specific payments to partners and ensure they file TDS returns accurately and timely.
- Revised Partnership Deeds: Firms may need to update partnership deeds to align with the new TDS requirements.
- Penalties for Non-Compliance: Failing to deduct or deposit TDS on time could lead to penalties and interest charges.
Financial Implications
- Cash Flow Management: Regular TDS deductions may impact the firm’s cash flow, especially if payments to partners are significant.
- Cost of Compliance: Additional administrative and professional costs may arise to manage TDS compliance effectively.
Strategic Adjustments
- Review of Partner Payments: Firms might need to reevaluate how they compensate partners to optimize tax efficiency.
- Awareness and Training: Ensuring that the accounting and finance teams are well-informed about the new regulations is crucial to avoid errors.
Non-compliance with 194T
Non-compliance with Section 194T of the Income Tax Act can lead to several penalties and consequences:
Penalties for Non-Compliance
- Failure to Deduct TDS: If a firm fails to deduct TDS as required under Section 194T, it may be liable to pay the amount of TDS that should have been deducted, along with interest at 1.25% per month or part of a month from the date on which TDS was supposed to be deducted to the date of actual payment.
- Late Payment of TDS: If the deducted TDS is not deposited with the government within the prescribed time, interest is charged at 1.5% per month or part of a month from the date on which TDS was deducted to the date of actual payment.
- Penalty for Non-Deduction or Late Deduction: Under Section 271C, a penalty equal to the amount of TDS not deducted or not paid can be imposed.
- Prosecution: In severe cases, non-compliance can lead to prosecution under Section 276B, which may result in rigorous imprisonment for a term ranging from three months to seven years, along with a fine.
Additional Consequences
- Disallowance of Expenses: Payments made to partners without deducting TDS may be disallowed as expenses under Section 40(a)(ia), leading to higher taxable income for the firm.
- Increased Scrutiny: Non-compliance can attract increased scrutiny from tax authorities, leading to audits and further investigations.
Steps to be taken to ensure compliance :
Ensuring compliance with Section 194T involves a few key steps that firms need to follow. Here’s a roadmap to help you stay on track:
Steps to Ensure Compliance with Section 194T
Review Partner Payments:
- Identify all payments made to partners, such as salary, remuneration, bonuses, commissions, and interest.
- Determine if the total annual payments exceed the ₹20,000 threshold.
Deduct TDS at the Correct Rate:
- Deduct TDS at the rate of 10% on the applicable payments made to partners.
- Ensure that TDS is deducted at the time of credit or payment, whichever is earlier.
Update Partnership Deeds:
Review and update the partnership deed to align with the new TDS requirements under Section 194T.
Clearly define the types of payments subject to TDS and the responsibilities of the partners and the firm.
Maintain Accurate Records:
- Keep detailed records of all payments made to partners and the corresponding TDS deductions.
- Maintain documentation to support the compliance with Section 194T, such as payment vouchers, TDS challans, and TDS returns.
File TDS Returns:
- Ensure timely filing of TDS returns (Form 26Q) to report the TDS deducted under Section 194T.
- Correct any discrepancies in the TDS returns to avoid penalties and interest charges.
Deposit TDS Timely:
- Deposit the deducted TDS with the government within the prescribed time limits.
- Avoid delays in depositing TDS to prevent interest and penalties.
Training and Awareness:
- Conduct training sessions for the accounting and finance teams to ensure they are well-informed about the requirements of Section 194T.
- Stay updated with any changes or amendments to the tax laws that may affect the compliance requirements.
Seek Professional Advice:
- Consult with tax professionals or advisors to ensure thorough understanding and compliance with Section 194T.
- Address any complex issues or scenarios that may arise in the course of implementing the new TDS requirements.
