Introduction
From July 1, 2024, partnership firms and LLPs must deduct TDS on payments to partners under the newly introduced Section 194T. This new provision, part of the Finance Bill 2024, aims to ensure transparency and compliance in partnership income distribution. Earlier, payments like interest and salary to partners were not subject to TDS, but this amendment changes that.
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Firms and partners must now prepare for compliance, understand how this impacts their financial planning, and update their accounting systems accordingly.
What Is Section 194T?
Section 194T mandates TDS on income credited or paid by a partnership firm or LLP to its partners, excluding capital contributions and loan repayments. The goal is to widen the tax base and ensure accurate reporting of partner income.
Key Changes Before & After Section 194T
| Aspect | Before Section 194T | After Section 194T (From July 1, 2024) |
|---|---|---|
| TDS on Interest & Salary | Not applicable | Mandatory on specified payments |
| Tax Compliance | Firms reported payments, but no direct TDS tracking | Firms must deduct & report TDS |
| Transparency | Less control over tax evasion | Improved tax monitoring |
Key Features of Section 194T
| Feature | Details |
|---|---|
| Applicability | Partnership firms and LLPs making specified payments to partners |
| Effective Date | July 1, 2024 |
| Covered Payments | Interest on capital, remuneration/salary, bonus, commission, other payments as per deed |
| Exclusions | Capital contributions, repayment of capital or loans |
| TDS Threshold & Rate | Yet to be notified by the government (expected via Rules/Circulars) |
Why Was Section 194T Introduced?
This measure aims to plug tax loopholes where payments to partners were often underreported or went untaxed. By enforcing TDS deductions, the Income Tax Department ensures:
- Better tracking of interest and salary payments to partners.
- Improved compliance by firms and LLPs.
- Reduction in tax evasion among partners with low or nil taxable income.
- Cross-verification of income in the hands of partners through Form 26AS.
Impact on Firms and Partners
For Firms:
- Increased Compliance – Firms must deduct TDS, file TDS returns, and issue Form 16A to partners.
- Accounting Adjustments – Firms must update ERP and payroll systems to handle TDS deductions.
- Penalties for Non-Compliance – Failure to deduct/deposit TDS may lead to interest, penalties, and disallowance under Section 40(a)(ia).
For Partners:
- Advance Tax Credit – Partners will receive TDS credits in Form 26AS for tax filing.
- Higher Transparency – Payments from firms will be closely monitored by tax authorities.
- Impact on Cash Flow – Net payouts may temporarily reduce due to TDS deductions.
How to Prepare for Section 194T Compliance
To ensure a smooth transition before July 1, 2024, firms and LLPs should:
- Review the Partnership Deed – Ensure all payment clauses are clear and updated.
- Identify Payments Attracting TDS – Classify interest, remuneration, or other incomes accordingly.
- Update Accounting & Payroll Systems – Modify ERP or accounting software to automate TDS deductions.
- Train Finance Teams – Educate accountants and finance teams on the new TDS obligations.
- Consult Tax Advisors – Seek expert guidance on restructuring payments and compliance measures.
Conclusion
The introduction of Section 194T marks a significant shift in tax compliance for partnership firms and LLPs. While this increases the regulatory burden, it enhances transparency and accountability in income distribution.
Businesses must act now to understand the nuances, update their financial systems, and implement compliance measures before the July 2024 deadline. CaptainBiz recommends that all firms consult their tax advisors to ensure a smooth transition and avoid penalties.
Frequently Asked Questions (FAQs)
1. Who is liable to deduct TDS under Section 194T?
Partnership firms and LLPs must deduct TDS on specified payments made to partners, excluding capital contributions and loan repayments.
2. What payments to partners are subject to TDS under Section 194T?
Payments such as interest on capital, salary, bonus, and commission are covered under this section.
3. What is the TDS rate under Section 194T?
The government has not yet notified the specific TDS threshold or rate. It will be clarified through official Rules or Circulars.
4. Will partners get a TDS credit in their tax return?
Yes, deducted TDS will be reflected in Form 26AS, which partners can claim while filing their income tax returns.
5. What happens if a firm does not deduct TDS under Section 194T?
Non-compliance can result in interest penalties, fines, and disallowance of expenses under Section 40(a)(ia).
6. Do capital contributions attract TDS under Section 194T?
No, capital contributions and loan repayments are specifically excluded from TDS provisions.
7. How should firms update their compliance process?
Firms should update ERP systems, modify payroll processes, train finance teams, and consult tax experts to ensure compliance.
