The government had announced to include section 194T in the Income Tax Act in the union budget presented in July 2024. Under this section, it has become mandatory for partnership firms to deduct TDS on certain payments made to its partners. This rule is going to be implemented from 1 April 2025. After this, all partnership firms will have to deduct TDS on some special payments made to their partners.
Tds At the time of payment or in the capital account of the partners, when the money is credited, then which will be first, then it will have to be cut. Some special payments will come under the purview of this rule. These will include the partner’s salary, renunction, commission, bonus and interest (including a capital account) on an account.
TDS Rate and Exgption Limit
If the total credit in the account of the partner or the payment made during the year is less than Rs 20,000, then there will be no need to deduct TDS.
If the payment is more than Rs 20,000, then TDS will have to be deducted at a rate of 10 percent on the entire amount.
-The stake in the project will not come under the purview of TDS, as partnership firms already pay tax on it.
Impact on partnership firms and partners
-Fams will have to cut TDS before paying partners.
-Partners will get money after deducting TDS and they will have to give correct information about it while filing income tax returns.
This change will help in preventing tax evasion and better tax compliance will be ensured.
Partnership firm for small and medium enterprises is a popular business structure. These include Limited Liability Partnerships (LLPS). Till now, the participation of the profit and the partner’s ramunction used to be at the end of the financial year when the firm’s money used to come to his books of account. Now under the new rule, the firms will have to close their accounts on time so that TDS can be deducted on Remunation and other types of payments.
Earlier, firms did not have to deduct TDS on the payment made to the partners, as it was taxed under the ‘Business Income’ head in the tax return of the partner on this amount. The purpose of starting section 194T is to ensure timely collection of tax to the Income Tax Department. However, partners still have to calculate their Advance Tax Liability and deposit a shortfall to avoid any kind of interest on late payment.
Also read: Employees’ Deposit Linked Insurance: Every employee who does private job gets the benefit of this scheme
Section 194T is a step taken to increase the tax compliance. With this, the partnership firms will cut TDS on certain types of payments to the partners. Both partners and firm need to take care of this rule. If you do not do this, tax can be done and may have to pay penalty.
(The author is a chartered accountant. He is an expert on personal finance, especially income tax related cases)