Introduction
1. The Finance Act, 2024, introduced a new provision, Section 194T, into the Income-tax Act, 1961 (“the Act”), mandating Tax Deduction at Source (“TDS”) on payments made by firms to their partners. This section, effective from April 1, 2025, has ignited debate within the business community, particularly among partnership firms. This article explores the complexities of Section 194T, analyzing its provisions, underlying rationale, practical challenges, and possible solutions.
Understanding Section 194T
2. Section 194T of the Act mandates that any firm paying salary, remuneration, commission, bonus, or interest to its partners must deduct TDS at a rate of 10%. This deduction is applicable at the time of crediting such sums to the partner's account (including the capital account) or at the time of payment, whichever is earlier. The provision, however, includes a threshold limit: No TDS is required if the aggregate sum credited or paid to a partner during the financial year does not exceed twenty thousand rupees. If the aggregate payments exceed this threshold, TDS will be deducted from the entire amount, not just the amount exceeding Rs.20,000/-.
Practical Implications from Firms/LLP's perspectives:
3. Firms will need to implement systems and processes to track aggregate payments to partners and ensure timely TDS deductions.
4. Partners may experience a change in their cash flow as payments from the firm will be received after the deduction of TDS. However, they can claim credit for this TDS when filing their individual income tax returns.
5. Smaller firms, in particular, may face an increased administrative burden related to TDS compliance (obtaining TAN, deducting TDS, depositing TDS, filing returns, and issuing certificates).
Conclusion:
The insertion of Section 194T marks the end of a long-standing tax-friendly regime for partnership firms and LLPs. The government aims to widen the tax net and ensure transparency in within the firm financial flows by mandating TDS on partner remuneration and interest. However, the increased compliance burden, especially for smaller firms, could discourage the LLP model that has, until now, offered ease and flexibility.
With the new tax regime offering significant relief for salaried individuals (up to Rs.12.75 lakh, effectively tax-free), Private Limited Companies may emerge as a more attractive vehicle for startups and professionals.
