Introduction
Whenever a new TDS section comes, we the professionals and students might feel that government is making this TDS as a subject for them, and it's not just sections of income tax act, today in this article I will discuss new section of TDS, keeping my own thoughts and opinion.
In the Union Budget of 2024, India's Finance Minister Nirmala Sitharaman introduced this new section of TDS in the Income Tax Act, 1961 i.e. Section 194T. This section imposes Tax Deducted at Source on certain payments made to partners of a firm, including salary, bonus, commission, interest, or remuneration.
This provision aims to ensure tax compliance and transparency in financial transactions within firm which includes both partnership firm or LLP.
What is Section 194T all about?
Section 194T mandates that any salary, bonus, commission, interest, or remuneration paid to a partner of a firm will be subject to TDS at a rate of 10% if the aggregate amount for the relevant financial year exceeds Rs. 20,000. This new provision covers all firms, regardless of their size, thus increasing the compliance burden on small firms as well.
Example: Dhairya is a partner in M/s ABD and company. She received a salary of 40,000 in the month of April 2025, then M/s ABD and company is required to deduct TDS on the same at the rate of 10% i.e. Rs 4000 and shall deposit the same irrespective of turnover of the firm.
Let's discuss the Key Provisions of the section in short
Applicability
This section of TDS applies to payments made to partners of a firm, including salary, bonus, commission, interest, or remuneration.
Threshold Limit
The TDS will be applicable only if the aggregate amount paid to a partner in a financial year exceeds Rs. 20,000
Rate of TDS
The applicable TDS rate is 10%.
Timing of TDS Deduction
According to Section 194T, TDS should be deducted at the earlier of the following two events:
- At the time of credit to the account of the partner.
- At the time of payment, whether in cash, cheque, draft, or any other mode.
Ensuring that the tax is deducted promptly and accurately, preventing any potential evasion or delay in tax payment.
How the limit of Rs. 20,000 is calculated?
The threshold limit of Rs. 20,000 is calculated in two ways:
Single Payment: If a single payment exceeds Rs. 20,000, TDS must be deducted, as I discussed in above example relating to Dhairya
Aggregate Payments: If multiple payments are made, each less than Rs. 20,000, TDS must be deducted if the total of such payments exceeds Rs. 20,000 in the financial year.
Like for example Anjita is drawing renumeration of Rs 15,000 per month from her partnership firm, now in April 2025 she received 15,000, as it is below thresh-hold limit no TDS is liable to be deducted, next month she again receive salary of Rs. 15000 now as per my opinion TDS will be deducted on Rs. 10,000 as it exceeds threshold limit.
This cumulative approach ensures that even smaller payments made over time are accounted for, thereby broadening the tax base.
Impact on Firms
Increased Compliance Burden
One of the significant impacts of Section 194T is the increased compliance burden on firms, especially smaller ones. These firms are now required to obtain a Tax Deduction and Collection Account Number and ensure timely TDS deductions and deposits. This adds an administrative layer to their operations, requiring meticulous record-keeping and timely compliance.
Capital Blocking
The deduction of TDS at the rate of 10% on payments exceeding Rs. 20,000 can lead to a temporary blocking of capital for partners. This could affect their liquidity, especially if the refunds are delayed. Firms will need to manage their cash flows efficiently to mitigate this impact.
What is the Applicability Date of this section?
Based on my previous two examples, you might have understood the same, that Section 194T will come into effect from 1st April 2025. Firms have a window to prepare for this change, including setting up the necessary systems and processes to comply with the new TDS requirements.
How it is different from Section 192?
Section 192 of the Income Tax Act deals with TDS on salaries, which is applicable only to income chargeable under the head "Salaries." It specifically excludes payments made to partners of a firm, as these are not considered under the "Salaries" head.
Explanation 2 to Section 15 explicitly states that salary, bonus, commission, or remuneration to partners of a firm are excluded from the income head "Salaries." Therefore, these payments were not liable for TDS under Section 192.
Section 194T bridges this gap by bringing such payments under the preview of TDS, ensuring that partners' income from the firm is subject to tax deduction at source.
Compliance and Record-Keeping- Tips from my side
To comply with Section 194T, firms must:
- Obtain TAN if it hadn't obtained the same yet: Firms must obtain a Tax Deduction and Collection Account Number (TAN) if they do not already have one.
- Deduct TDS: Ensure that TDS is deducted at the rate of 10% on payments exceeding the Rs. 20,000 threshold, from April 2025 i.e. date of applicability of this section
- Deposit TDS: Deposit the deducted TDS to the government within the stipulated time frame, and in correct manner to avoid any fees or penalties
- File TDS Returns: File quarterly TDS returns detailing the deductions and payments made, which increased the burden on small firms as I discussed earlier
- Issue TDS Certificates: Issue TDS certificates (Form 16A) to the partners, providing them with proof of the tax deducted.
Benefits of Section 194T
In real it's just a burden but I am here trying to see positive aspects of this section
Improved Tax Compliance
By bringing partner payments under the TDS net, Section 194T ensures better tax compliance and reduces the scope for tax evasion. This contributes to the overall transparency and integrity of the tax system.
Broadened Tax Base
The inclusion of partner payments in TDS broadens the tax base, ensuring that more income is subject to tax at source. This helps in increasing the revenue collection for the government.
Financial Discipline
The requirement to deduct TDS instils financial discipline among firms, encouraging them to maintain accurate records and adhere to tax laws.
Challenges and Considerations
Administrative Burden
For small firms, the administrative burden of complying with Section 194T can be significant. They need to invest in systems and manpower to handle the additional compliance requirements.
Impact on Liquidity
The deduction of TDS can impact the liquidity of partners, particularly in cases where refunds are delayed. Firms and partners need to plan their finances accordingly to manage this impact.
Awareness and Education
It is crucial to create awareness and educate firms about the new TDS provisions to ensure smooth implementation.
Conclusion
Section 194T is a pivotal amendment in the Income Tax Act, aimed at improving tax compliance and broadening the tax base. While it brings about additional compliance requirements and potential liquidity challenges for firms and their partners, it also ensures that income is appropriately taxed at source. Firms need to prepare for this change by setting up robust systems and processes, obtaining TAN, and ensuring timely TDS deductions and deposits. With effective implementation and adequate awareness, Section 194T can contribute significantly to the transparency and efficiency of the Indian tax system.
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