income tax

Understanding Section 194T: TDS Compliance for Partner Payments in Budget 2024-25

Introduction

The Budget 2024-25 introduces significant changes with the introduction of Clause 62, which details Section 194T. This section outlines the Tax Deducted at Source (TDS) requirements for payments made by firms to their partners. Effective from April 1, 2025, firms must deduct TDS on certain payments to partners, enhancing transparency in financial transactions.

Overview of Section 194T

Key Provisions

  • Applicability: Section 194T mandates that any firm making payments in the nature of salary, remuneration, commission, bonus, or interest to its partners must deduct TDS at a rate of 10% if the cumulative payments exceed Rs. 20,000 during a financial year.
  • Deduction Timing: The TDS must be deducted at the earliest of the following two events:
    • When the amount is credited to the partner's account (including their capital account).
    • When the payment is made, regardless of the mode (cash, cheque, draft, etc.).

Threshold Limit

  • The TDS applies only if total payments to a partner exceed Rs. 20,000 in a financial year. If the total is lower, no TDS will be deducted.

Understanding Section 194T

  • What It Covers: Section 194T addresses all forms of payments to partners, such as salary, bonus, commission, and interest.
  • Important Exclusion: As per Explanation 2 of Section 15, such payments are not classified as “salary” under Section 192, thereby ensuring that Section 194T operates independently.

Compliance Requirements

Firms must adhere to the following compliance steps under Section 194T:

  1. Obtain a Tax Deduction and Collection Account Number (TAN) before deducting TDS.
  2. Deduct TDS at the prescribed rate of 10%.
  3. Timely Deposit the deducted TDS with the government.
  4. File Quarterly TDS Returns as required.
  5. Issue TDS Certificates (Form 16A) to the partners for their records.

Conclusion

The implementation of Section 194T marks a vital step toward greater accountability and transparency in partnerships. Businesses should ensure compliance with these new provisions to avoid penalties and uphold proper financial governance. By understanding and following the regulations outlined in this section, firms can effectively manage their TDS responsibilities related to partner payments.