New TDS Section 194T: What You Need to Know for Firm-to-Partner Payments

The Finance Bill 2024 has introduced a new TDS section 194T in the Income Tax Act, 1961. This change will affect partnership firms by bringing payments to partners under the purview of TDS, including salary, remuneration, commission, bonus, and interest.

Currently, there is no provision for TDS on such payments. However, the proposed section 194T will require partnership firms to deduct TDS at a rate of 10% on aggregate payments exceeding Rs 20,000 in a fiscal year, including credits to the partner’s capital account or any other account. This provision will take effect from April 1, 2025, for the AY 2025-26.

Purpose of TDS Firm-to-Partner Payment

All payments to partners, such as salary, remuneration, commission, bonus, or interest, will be combined and treated as a single aggregate amount for TDS purposes. Even if individual payments are below Rs 20,000, they will still be subject to TDS when the total amount exceeds the threshold.

Key Points of Section 194T

Section 194T states that any firm paying salary, remuneration, commission, bonus, or interest to a partner must deduct income tax at a rate of 10% when crediting or making payments to the partner’s account. No deduction is required if the total amount does not exceed Rs 20,000 in a financial year.

Revised Remuneration Limits for Working Partners

Starting from AY 2025-26, there will be revised limits for remuneration paid to working partners. Although there is no relief for partnership firms in the budget proposals, the increased limit on deductions for remuneration meets some expectations of taxpayers.

Partnership firms must prepare for the new TDS regime and ensure compliance in the upcoming fiscal year. Understanding the implications of section 194T and incorporating TDS deductions when making payments to partners is essential for firms to avoid penalties.

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