Section 194T: Compliance and Impact of TDS on Payments to Partners

Introduction

The insertion and implementation of new TDS provisions showcase the government’s approach and willingness to adopt more sophisticated and intricate tax compliance measures. With the introduction of Section 194T in the Budget 2024 by the finance minister Nirmala Sitharaman, the government has brought all payments made to partners in the form of salary, remuneration, etc., by whatever name called, under its compliance net.
Until the introduction of this new section, payment to the partners was not subjected to TDS. This was also established through various case laws by different adjudicating authorities. Payments made to outsiders and employees were covered by the TDS provisions. But now, with this new section, payments to partners are also subject to TDS.
Fortunately, the TDS applicability from this section is made effective from 1^st April 2025 and not in the year 2024 when this section was introduced. This can be safely established through the notes on clauses and explanatory memorandum with the budget.

Section 194T briefly from the Income Tax Act,

(1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.

(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.

Summary of the section 194T

The section states that any firm paying any amount in the nature of salary, remuneration, commission, bonus or interest shall deduct 10% interest at the time of credit or payment whichever is earlier.
If the amount is likely to be less than Rs. 20,000/-, TDS shall not apply.
The section applies to all firms irrespective of their size, turnover limits, etc.

Current position upto 31^st March 2025

At present there is no requirement and applicability of TDS on partners’ salary, remuneration, commission, bonus or interest paid by the firm.
This contention was also upheld in the decision of the Gauhati Tribunal (ACIT v. Dhar Construction Company [2023]).
The summarized ratio decidendi of the judgment are as follows:
- Explanation 2 to Section 15 of the Income Tax Act states that “Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.” Thus, Partners’ remuneration is not taxable as salary and thereby TDS Section 192 becomes inapplicable.
- Further, Section 40(b)(i) of the Income Tax Act collectively refers – salary, bonus, commission or remuneration, by whatever name called as “remuneration”. Thus, TDS Section 194H also becomes inapplicable.
- Thus the judgement upheld that no TDS applies on payments made to partners by the firm in nature of salary, bonus, commission or remuneration, by whatever name called.
Furthermore, TDS on Interest paid to partners is specifically excluded u/s 194A in the Income Tax Act.

Firms shall include limited liability partnerships (LLP’s)

Section 2(23) of the Income Tax Act defining the term “firm” is as follows:

“firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (referred as LLP Act)

Thus the expression “firm” as mentioned in Section 194T shall include Limited Liability Partnerships (LLPs) as well.

A pertinent point here is that the LLPs registered under the LLP Act are covered. Thus, foreign LLPs are not covered under this section.

Liability and Obligation to withhold Tax is on “firms”

The section specifically assigns the obligation to firms to withhold the Tax i.e deduct TDS on the payments to be made to the partners.

Is there any threshold like other TDS sections?

Technically, yes, there is a threshold limit of Rs. 20,000/-
However, upon reading the section, govt has used the language “likely to be credited or paid”. If the firm and the partners anticipate that the amounts shall be more than Rs. 20,000/- during the entire year then TDS shall apply on the initial amounts even if they are lower than Rs. 20,000/-

TDS rates and Rs. 20,000/- calculations

If a single payment exceeds Rs. 20,000/-, TDS shall apply immediately.
If multiple payments are made which are likely to exceed the Rs. 20,000/- limit then TDS shall apply even on the initial payments which are less than Rs. 20,000/-.
If multiple payments are made, each less than Rs. 20,000/-, TDS is required only if the total of such payments exceeds Rs. 20,000 within the financial year.
TDS rate applicable shall be 10% in case of resident partners.
In case of non-resident partners the TDS rate shall be applicable as per section 195 in conjunction with section 194T.
If Partner does not furnish Pan / Aadhar, TDS shall be at 20% as per section 206AA of the Income Tax Act.

Timing of the deduction

The TDS section shall apply at the earlier of the following two events:
- At the time of Credit – When book entries are passed by crediting partners account (including credits made to capital accounts of the partners) with any sums in the nature of salary, remuneration, commission, bonus or interest.
- At the time of payment – When Actual payment is made to the partners through cash, bank or other modes (including in “kind”).

Are Non-Resident Partners and/or Minor Partners Also Covered?

Section 194T uses the term “partner” and does not qualify the same with any other conditions.
Section 2(23)(ii) of the Income Tax Act which defines ‘partner” is as follows:

“partner” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include, —

(a) any person who, being a minor, has been admitted to the benefits of partnership; and

(b) a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009)

Thus TDS under section 194T also applies to “minors” admitted in a firm and to whom interest or remuneration is paid. Further even non-residents are covered as no specific exemption to non-resident partners is given.

Whether TDS u/s 194T applies to non-working partners?

The segregation between working and non-working partners are relevant for allowing the remuneration expenses u/s 40(b). Section 40(b) specifies certain limits for allowable remuneration expense to working partners only. Remuneration to non-working partners are not allowed as deduction.
Section 194T uses the term “Partner” and does not specify the same as working or non-working. Thus the distinction between working and non-working partners is not relevant for section 194T and the TDS shall apply to both working and non-working partners.
Similarly, TDS u/s 194T shall apply on interest payments to partners irrespective of the fact that the interest payments are allowed as deduction u/s 40(b) or not.

Does TDS u/s 194T also apply to withdrawal of capital account balance.

Section 194T TDS does not apply on withdrawal of the capital account balance.

Can application u/s 197 for lower tax deduction certificate (LTDC) be made and granted by the Assessing Officer?

Section 197 of the Income Tax Act provides for application in form 13 for lower tax deduction certificates to the assessing officer. Once this application is approved, it allows the deductor to deduct TDS at a lower rate as prescribed and allowed in the LTDC Certificate.
Presently, Section 197 does not provide for application for LTDC against Section 194T. Thus, no application for a lower tax deduction certificate can be made for getting a lower tax rate.

Does the section 194T or similar section is also there is the new Income Tax Bill, 2025?

Yes, the provisions and requirements similar to that of the Section 194T are also present in the new Income Tax Bill, 2025.
These new proposed provisions require withholding of TDS at 10% by the firm when giving any sums to its partners which are in the nature of salary, remuneration, commission, bonus or interest paid or credited to his account (including capital account).
The new Income Tax Bill, 2025 also provides for a threshold limit of Rs. 20,000/-

Impact on the partnership firms and Practical issues

Additional Compliance Burden – With the introduction of the new section on TDS for payments to partners, there will be an additional and increased compliance burden on firms. This shall pose a challenge for very small firms which usually manage their funds tightly.
Family-owned Firms – Many firms in India are family-owned and the withdrawals of remuneration, salary, interest, etc. depends on cash flow management and thus is not certain. With increased compliance, the firms shall need to take care of the 194T provisions while managing their funds as well.
Capital and Funds getting blocked – The funds which was previously available to the partners now shall get blocked. There will be significant capital constraints for partners and firms with both short-term and long-term capital requirements.
Penal Action for non-compliance – Partners and firms shall be liable for penal action in form of interest, late fees and penalty for non-compliance of the TDS Section 194T
Partnership deed revision – The partnership firm shall have to revisit the partnership deed and ensure that it is in compliance with the new section 194T as regards its withholding and payments. Also the partnership firm shall have to amend the necessary clauses in order to ensure that payments outside the purview of section 194T do not get into any legal ramifications.
Awareness and Education – To ensure the smooth implementation and compliance of the new TDS provisions, it is imperative to educate firms accordingly.

Rationale and benefit from introduction of the TDS section 194T

Govt shall be able to keep a tab on the payments made to partners. Further this also broadens the tax base increasing government revenue by ensuring more income is taxed at source.
Early recovery of tax and thereby reducing burden on the partners to pay the tax at the time of filing the returns
Push to the firms to maintain books properly and finalize the books to file the tax returns as early as possible.
Thus, The Government introduced the new section primarily to address the existing legislative gap concerning tax deductions on specific payments. By including section 194T, these payments will now fall under TDS regulations. The main goal, however, seems to be creating a more organized and timely system for maintaining and finalizing accounts, which will help reduce the last-minute rush during income tax return submissions

Conclusion

The impact of the newly introduced Section 194T on firms’ compliance and management practices, as well as the potential for reducing tax issues through more effective and efficient systems, remains uncertain. The implementation of the new TDS legislation presents compliance challenges and potential liquidity issues for firms and their partners, while simultaneously taxing income at the source. It is imperative for firms and tax professionals to prepare for compliance with Section 194T to avoid any penal consequences for non-compliance. Firms should apply for a TAN (Tax Deduction and Collection Account Number), if they have not yet done so, and ensure the timely deduction and deposit of TDS along with filing of TDS returns. With proper implementation and awareness, Section 194T has the potential to contribute to a more transparent and efficient tax system in India.

Author:
Pavan Goyal (CA, CPA – USA, LLB, DISA, M. Com)
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The above article is also published in ICAI SURAT Journal (Mar/Apr 2025 edition) and the taxguru website.

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