TDS U/s 194T on payments made to partners
Section 194T is effective from 1 Day on April 2025. Therefore from financial year 2025-2026 TDS deduction U/s.194 should be made by the partnership firm on certain payments made to the partners.
What are payments on which TDS u/s.194T should be deducted ?
If the single or cumulative aggregate payments to a single partner exceeds Rs.20,000 during the financial year on following payments.
- Salary
- Remuneration
- Bonus
- Interest on Capital
- Interest on loan given to firm
- Commission
For salary paid to partners it is irrelevant to consider basic exemption limit which we calculate for salary payments to employees.
What is the rate of TDS to be deducted on payments made to the partners ?
TDS at the rate of 10 % shall be deducted U/s.194T on gross amount of above specified payments, secondary and higher education cess is not applicable.
When should the firm deduct the payment ?
TDS should be deducted earlier of date of payment or date of passing accounting entry in the books of accounts.
For example if accounting entry is passed on 30 th June 2025, and the payment is made on 5 th July 2025, then the date of deduction shall be 30 th june and TDS should be paid to the government on or before 7 th day of next month that is 7 th july 2025.
On what payments TDS U/s 194 is not applicable or not required to be deducted ?
- Up to Rs.20,000 of above specified payments all together.
- Loan repayments to partners
- Drawings of the partners
- Withdrawal of profits
- Reimbursements
- On GST portion when GST is charged by the partner in case of commission.
The logic behind exempting above 2 nd to 6 th payment from 194T TDS applicability is that, anyway the partners are not liable to pay tax in their personal capacity.
What are practical impacts of section 194T ?
- Generally in case of small and medium sized firms, the nature of withdrawal will be determined only at the end of the financial for taxation purpose. Now the firms should be clear on what is the nature of payment made to the partner.
- Incase of family operated partnership firm, it is not any more take it easy withdrawal policy of payments from the firm.
- Requires proper accounting of payments to partners.
- TAN number should be applied immediately for all partnership firms, once the registration of partnership firm is completed , earlier it will be applied only when the partnership firm make certain payments like rent, contact payment, professional fees which exceeds maximum limit on which TDS is not required to be deducted under the respective section.
- Interest on late deduction of TDS and late payment of TDS will be applicable.
- Periodic TDS return filing will be an additional compliance for most of the partnership firms.
How to avoid TDS deduction U/s.194T with proper compliance ?
When the partners personal income tax rate on remuneration is 30 %, there will be no additional tax savings to the partner or the firm on account of remuneration or withdrawal of profit, is payable. In such case the payments can be structured as withdrawal of profits by amending the partnership deed by giving effect to the changes in profit sharing ratio and remuneration clause. This way additional burden of TDS compliance U/s.194T shall be avoided.
Therefore instead of periodic payment of remuneration, if same amount is withdrawn as profits then Section 194T will not be applicable.