Section 194T: Understanding TDS on Partner Payments by Firms

Currently, partnership firms and LLPs do not deduct TDS on payments made to their partners. TDS is only applicable when payments are made to employees of the firm. So, if you receive remuneration, interest, bonus, or commission as a partner, there is no TDS deduction on these payments.

Budget 2024 brought about a new provision that payments by a partnership firm to partners would now be subject to TDS (Tax Deducted at Source) under Section 194T.

This will help you understand Section 194T better, which includes:

• Types of Payments Covered Under This Section
• TDS Rate & Applicable Limits
• When TDS Needs to Be Deducted
• Who Is Affected by This Rule
• Practical Impact of Section 194T

What Types of Payments Are Included in Section 194T?

Partnership firm payments to the partners falling under Section 194T are salary, remuneration, commission, bonus, and interest. The interest can either be on a loan account or on a capital account. These payments are now liable to TDS deduction in accordance with the new provision made effective in the 2024 budget.

Applicable TDS Rate and Limit in Section 194T

TDS will be deducted at a rate of 10%. However, it applies only if the total payments made to a partner exceed Rs. 20,000 in a financial year.

At What Point Is TDS Deducted Under Section 194T?

TDS should be deducted on whichever happens first:

when the amount is credited to the partner’s account in the firm’s books or

when the payment is actually made to the partner.

How Section 194T Affects Firms and Partners

In family-owned firms, partners usually withdraw their remuneration based on factors like cash flow needs and tax impact, often without any fixed pattern. With the new regulation coming into effect, a TDS of 10% will be deducted on such withdrawals, and partners would have to make their withdrawals in a more considered manner to contain their tax outgo.