Section 194T is a significant new provision introduced in the Income Tax Act, 1961, by the Finance Act, 2024 (which became effective from April 1, 2025, for the Financial Year 2025-26 / Assessment Year 2026-27). Its primary purpose is to mandate the deduction of Tax Deducted at Source (TDS) on certain payments made by partnership firms and Limited Liability Partnerships (LLPs) to their partners.
Prior to this section, there was no specific TDS provision for payments like salary, remuneration, commission, bonus, or interest made by a firm to its partners. This created a legislative gap, and Section 194T aims to bridge this gap to enhance tax compliance and transparency in financial transactions involving partners.
Here's a detailed breakdown of Section 194T:
1. Applicability:
- Who is the Deductor? Any person, being a firm (including a Limited Liability Partnership as defined in the LLP Act, 2008).
- Who is the Payee? A partner of the firm.
2. Payments Covered:
Section 194T applies to any sum paid or credited that is "in the nature of" the following to a partner:
- Salary
- Remuneration
- Commission
- Bonus
- Interest (on any account, including capital accounts or loan accounts)
Important Note: The phrase "in the nature of" is crucial. It means that even if a payment isn't explicitly labeled as "salary" but functions similarly, it could fall under the purview of Section 194T. However, it's widely understood that share of profit from the firm is not covered under this section, as it is a share of the firm's income after tax. Also, withdrawals from a partner's capital account are generally not subject to TDS under this section, as it's a repayment of their own capital.
3. TDS Rate:
- The tax is to be deducted at the rate of 10% of the sum paid or credited.
4. Threshold Limit:
- No TDS is required if the sum, or the aggregate of such sums, credited or paid (or likely to be credited or paid) to the partner during the financial year does not exceed ₹20,000.
- This threshold is for the aggregate of all specified payments (salary, remuneration, interest, etc.) to a single partner in a financial year. If the total exceeds ₹20,000, TDS is applicable on the entire amount, not just the amount exceeding the threshold.
- Example: If a partner receives ₹15,000 as interest and ₹10,000 as remuneration in a financial year, the aggregate is ₹25,000. Since ₹25,000 exceeds ₹20,000, TDS @ 10% will be applicable on the entire ₹25,000.
5. Time of Deduction:
The firm must deduct TDS at the earlier of the following events:
- At the time of credit of such sum to the account of the partner (including the capital account).
- At the time of payment thereof.