Decoding Section 194T: New TDS Rule for Partnership Firms & LLPs (Effective April 1, 2025)
A significant tax update is on the horizon! Starting April 1, 2025, Section 194T of the Income Tax Act, 1961 introduces mandatory TDS on payments made by Partnership Firms and LLPs to their partners.
Let’s explore everything you need to know about this new rule, its purpose, applicability, compliance requirements, and how it impacts both firms and partners.
What is Section 194T & Why is it Introduced?
Traditionally, payments like salary, remuneration, commission, bonus, and interest made by firms to partners were not subject to TDS, unlike employee salaries. Partners themselves reported these incomes while filing returns, which left room for delays or underreporting.
Section 194T aims to:
- Improve tax compliance.
- Increase transparency in partner-firm transactions.
- Ensure tax deduction at the source, aligning with broader TDS mechanisms.
Who Needs to Comply with Section 194T?
Applicability:
- All Partnership Firms (under the Indian Partnership Act, 1932).
- All LLPs (under the LLP Act, 2008).
Key Point: There’s no turnover limit. Even small firms & LLPs must comply if payments exceed specified limits.
Which Payments Are Covered Under Section 194T?
| Payments Covered | Payments Excluded |
|---|---|
| Salary | Profit Distributions |
| Remuneration | Capital Repayments |
| Commission | Reimbursement of Business Expenses |
| Bonus | |
| Interest on Capital/Loans |
TDS Rate & Threshold Under Section 194T
| Aspect | Details |
|---|---|
| TDS Rate | 10% |
| Threshold Limit | Aggregate payments exceeding ₹20,000 per partner annually |
| Deduction Applicability | Once threshold crossed, TDS applies on entire amount, not just excess |
When is TDS Deducted?
TDS must be deducted at the earlier of:
- When payment is credited to the partner’s account (including capital account).
- When actual payment is made (cash, cheque, transfer).
Key Compliance Requirements for Firms & LLPs
- Obtain TAN (Tax Deduction and Collection Account Number).
- Deduct TDS timely—credit/payment date, whichever is earlier.
- Deposit deducted TDS to the government within prescribed timelines.
- File Quarterly TDS Returns (Form 26Q).
- Issue TDS Certificates (Form 16A) to each partner.
No TDS Relief Allowed Under Section 194T
Certain usual TDS relaxations do NOT apply:
- Form 15G/15H Declarations: Not permitted.
- Lower TDS Certificate (Section 197): Not available.
TDS deduction is mandatory under Section 194T once conditions are met.
Quick Recap: Key Aspects of Section 194T
| Aspect | Details |
|---|---|
| Applicability | All Partnership Firms & LLPs |
| Effective Date | April 1, 2025 |
| Payments Covered | Salary, Remuneration, Commission, Bonus, Interest |
| TDS Rate | 10% |
| Threshold | ₹20,000 aggregate payments per partner, per financial year |
| Exempt Payments | Profit share, capital repayments, expense reimbursements |
| Relief Options | No Form 15G/15H, No Section 197 Certificate |
Conclusion: Ready for Section 194T?
The introduction of Section 194T is a clear step towards formalizing financial dealings in partnership firms and LLPs. Effective from April 1, 2025, it mandates TDS deduction on specified payments to partners, ensuring enhanced compliance and transparency.
Firms & LLPs must act now:
- Obtain TAN.
- Upgrade accounting systems.
- Monitor partner payments closely.
- File timely returns and issue certificates.
Need professional assistance to manage TDS compliance under Section 194T?
Contact TaxGV.com and simplify your transition to the new regime.
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