The government had announced a new rule for partnership firms in the budget presented in July 2024. Certain types of payments will come under the purview of this rule. These will include partner’s salary, renewal, commission, bonus and interest on any account (including capital account)
The government had announced the inclusion of 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 their partners. This rule is going to come into effect from April 1, 2025. After this, all partnership firms will have to deduct TDS on certain payments made to their partners.
TDS will have to be deducted at the time of payment or at the time of credit of money to the capital account of the partners, whichever is earlier. Certain types of payments will come under the purview of this rule. These will include partner’s salary, renewal, commission, bonus and interest on any account (including capital account).
TDS rate and exemption limit
-If the total amount credited to the partner’s account or 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 the rate of 10% on the entire amount.
-Sharing in profit will not come under the purview of TDS, because partnership firms already pay tax on it.
Impact on partnership firms and partners
-Firms will have to deduct TDS before making payments to 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 prevent tax evasion and ensure better tax compliance.
Partnership firms are a popular business structure for small and medium enterprises (SMEs). These also include limited liability partnerships (LLPs). Till now, the calculation of profit sharing and partner’s remuneration was done at the end of the financial year when the firm’s money came into its books of account. Now under the new rule, firms will have to close their accounts on time so that TDS can be deducted on remuneration and other types of payments.
Earlier, firms did not have to deduct TDS on payments made to partners, because this amount was taxed under the ‘business income’ head in the partner’s tax return. The introduction of section 194T is aimed at ensuring timely collection of taxes by the Income Tax Department. However, partners will still have to calculate their advance tax liability and deposit any shortfall to avoid any interest on late payments.
Section 194T is a step towards increasing tax compliance. This will allow partnership firms to deduct TDS on certain types of payments to partners. Both partners and firms need to take care of this rule. Failure to do so may result in tax mismatch and penalty may have to be paid.
