New TDS Regulations Under Section 194T: Key Implications for Partners and Firms

New TDS Regulations Under Section 194T: Implications for Taxpayers and Businesses Effective from April 1, 2025

Introduction

The Finance (No. 2) Bill, 2024, has introduced Section 194T to the Income Tax Act, which will take effect on April 1, 2025. This new provision requires Partnership Firms and Limited Liability Partnerships (LLPs) to deduct Tax at Source (TDS) on payments made to partners, including remuneration, interest on capital, and various other payments. Previously, these transactions were exempt from TDS as they were viewed as profit-sharing arrangements. With Section 194T, the government intends to enhance tax compliance and transparency while ensuring timely tax collection. TDS will be deducted when the payment is either credited to the partner's account or paid, whichever occurs first. The specific TDS rate and exemption limit will be announced by the government. This regulation facilitates timely tax payment by partners, curbing tax evasion and standardizing the taxation of partner payments with other income sources already subject to TDS.

Scope and Applicability of Section 194T

Section 194T is applicable to Partnership Firms and LLPs that make payments such as salary, remuneration, commission, bonus, or interest to their partners. TDS must be deducted at the earlier of two events:

When the payment is credited to the partner’s account, including the capital account.
When the payment is made to the partner.

TDS obligations apply even if the amount is credited without a physical disbursement. This provision aligns the treatment of partners with salaried employees who are subject to TDS under Section 192 of the Income Tax Act, 1961, thus promoting timely tax collection and reducing evasion.

Threshold and Rate of Deduction

Under Section 194T, TDS will only apply if total payments to a partner exceed ₹20,000 in a financial year. When this threshold is surpassed, TDS will be deducted at a rate of 10% on any amount over ₹20,000. Unlike other TDS regulations, partners are not eligible to submit Form 15G or 15H for TDS exemption under Section 194T, meaning TDS will be deducted for all partners, irrespective of their total taxable income. This ensures uniform taxation of partner payments, enhancing compliance and reducing tax avoidance.

Comparison Between Older and New Remuneration Taxation

Previously, partnership firms were not obliged to deduct TDS on partner payments, which were categorized as profit-sharing rather than compensation or expenses. The changes introduced under Section 194T mean that any payments exceeding ₹20,000 within a financial year will now incur a 10% TDS charge. The previous system allowed partners to defer tax payment until filing their Income Tax Return (ITR); however, the new policy demands TDS deductions at payment or credit time. Consequently, partners may experience reduced initial payouts and might need to seek a refund during ITR filing if TDS exceeds their tax liability.

Below is a table summarizing the differences:

Aspect	Old System (Before Section 194T)	New System (After Section 194T)
TDS Applicability	No TDS on partner remuneration	TDS applicable if total payments exceed ₹20,000
Nature of Payment	Appropriation of profits	Taxable income subject to TDS
Time of Tax Payment	Paid at the time of filing ITR	Deducted at the time of credit/payment
Cash Flow Impact	No immediate tax deduction	Immediate tax deduction, impacting partner cash flow
Tax Refund Possibility	Not applicable	Partners may need to claim a refund if TDS is excessive

Benefits of Section 194T

The introduction of Section 194T offers multiple benefits for tax collection and compliance:

Improved Tax Compliance: TDS is collected at the source, thus minimizing the dependency on partners to report and pay taxes during ITR filing, which curtails the risk of underreporting or delays.
Enhanced Transparency: All TDS deductions will be documented in Form 26AS, allowing partners to easily track their tax deductions and liabilities, ensuring they are credited correctly.
Prevention of Tax Evasion: By taxing payments before partners receive them, this regulation minimizes opportunities for tax avoidance, as tax payments are collected in advance.
Better Tax Management: The upfront TDS deduction helps distribute the tax burden throughout the year, making personal financial planning easier for partners who previously faced substantial tax bills during ITR filing.

Overall, Section 194T ensures fair taxation of partner remuneration, improves tax tracking, discourages non-compliance, and facilitates effective financial planning.

Challenges for Partnership Firms and Partners

Despite the benefits, Section 194T introduces challenges. Firms must now acquire a Tax Deduction and Collection Account Number (TAN) and adhere to regular TDS return filings, increasing administrative burdens—especially for smaller firms lacking dedicated tax professionals. Partners, in turn, may face cash flow constraints as their income will be reduced by immediate TDS deductions, requiring adjusted financial strategies.

Possible Solutions and Best Practices

To address the implications of Section 194T, both partnership firms and partners should undertake proactive measures:

For Firms: Acquire a TAN promptly to avoid compliance issues and establish a timely TDS deduction and deposit system to avoid penalties. Hiring a tax consultant can assist smaller firms in managing the additional workload.
For Partners: Financial planning is vital since TDS deductions will lower take-home income. Partners should review their anticipated tax liabilities and adjust their cash flow accordingly. Maintaining thorough records of TDS deductions is essential for claiming any refunds at ITR filing.
Government Considerations: Simplifying compliance for smaller firms by relaxing return filing requirements or introducing measures to allow lower-income partners to file for TDS exemptions may further ease the regulatory burden.

In summary, while Section 194T promotes better tax compliance and transparency, firms and partners must adapt to these changes by refining their financial planning and compliance processes to mitigate potential challenges.