In the Union Budget 2024, the government introduced Section 194T of the Income Tax Act, which mandates that partnership firms deduct TDS (Tax Deducted at Source) on certain payments made to their partners.
This rule will be effective from April 1, 2025.
Details of the New Rule:
When to Deduct TDS: Partnership firms will need to deduct TDS at the time of payment or when the amount is credited to the partner’s capital account, whichever occurs first.
Types of Payments Covered: TDS will apply to payments such as the partner’s salary, commission, bonus, renewal payments, and interest on any account, including capital accounts.
TDS Rate and Exemption Limit:
Exemption: If the total amount credited or paid to the partner during the year is less than Rs 20,000, no TDS will be deducted.
TDS Deduction: If the total payment exceeds Rs 20,000, a TDS of 10% will be deducted on the entire amount.
Profit Sharing: Sharing profits among partners will not be subject to TDS, as partnership firms already pay taxes on profit distribution.
Impact on Partnership Firms and Partners:
For Firms: Firms will need to deduct TDS before making any payments to partners, ensuring compliance with the new rule.
For Partners: Partners will receive their payments after TDS is deducted and must report this deduction while filing their income tax returns.
Tax Compliance: This change aims to reduce tax evasion and promote better tax compliance by ensuring timely collection of taxes.
Why the Change?
Partnership firms, including LLPs (Limited Liability Partnerships), are popular among small and medium enterprises (SMEs).
Previously, firms did not have to deduct TDS on payments to partners, as these were taxed under the head “business income” in the partner’s tax return.
However, with the introduction of Section 194T, firms must close their accounts in time to deduct TDS on remuneration and other payments.
This change ensures that taxes are collected more promptly by the income tax department.
Partners will also need to assess their advance tax liability and pay any shortfall to avoid interest on late payments.
