Basic Framework
Q1: What is Section 194T and when does it come into effect?
Section 194T is a new provision introduced by the Finance (No. 2) Act, 2024, effective from April 1, 2025. It mandates Tax Deduction at Source (TDS) on certain payments made by firms to their partners. This provision aims to bring partner payments under the TDS framework to ensure better tax compliance and tracking of income.
Q2: Who is responsible for deducting tax under Section 194T?
Any firm, including Limited Liability Partnerships (LLPs), is responsible for deducting tax when making specified payments to its partners. The definition of 'firm' follows Section 2(23) of the Income Tax Act, 1961.
Q3: What is the applicable rate of TDS under Section 194T?
The tax must be deducted at a flat rate of 10% on the qualifying payments.
Scope and Coverage
Q4: What types of payments are covered under Section 194T?
The following payments to partners are covered: - Salary - Remuneration - Commission - Bonus - Interest on capital Note: Profit distributions are specifically excluded from the scope of Section 194T.
Q5: Is there any threshold limit for TDS applicability?
Yes. No TDS is required if the aggregate of payments to a partner during a financial year doesn't exceed ₹20,000. However, once this threshold is crossed, TDS applies to the entire amount, not just the excess over ₹20,000.
Timing and Implementation
Q6: When should tax be deducted under Section 194T?
Tax must be deducted at the earlier of: - The time of crediting such sum to the partner's account (including capital account) - The time of actual payment
Q7: How does Section 194T apply to payments relating to FY 2024-25 but made after April 1, 2025?
Section 194T does not apply to such payments. The provision only covers payments relating to FY 2025-26 and onwards, regardless of when the actual payment is made.
Special Scenarios and Challenges
Q8: How does Section 194T interact with Section 40(b) limitations?
TDS under Section 194T must be deducted on the full amount paid/credited to partners, even if part of such payment is not allowable as a deduction to the firm under Section 40(b). This can create a mismatch between: - The amount on which TDS is deducted (full payment) - The amount allowable as a deduction to the firm - The amount taxable in the partner's hands
Q9: What about interest payments on loans from partners?
Interest paid on loans taken from partners (as opposed to interest on capital) is likely to attract TDS under Section 194A rather than Section 194T, as the partner acts in the capacity of a lender rather than a partner for such transactions.
Q10: How does Section 194T apply to non-resident partners?
This creates an interesting overlap with Section 195 (TDS on payments to non-residents). Since neither section contains a non-obstante clause, there's ambiguity about which provision would apply. The safest approach would be to: - Apply the higher of rates prescribed under Section 194T and Section 195 - Follow the specific procedures required for payments to non-residents - Consider the applicable tax treaty provisions
Common Practical Issues
Q11: What happens if partner remuneration is based on book profits?
This can create timing challenges because: - Book profits can only be determined after year-end - Partner remuneration based on book profits might be finalized after the TDS due date - Firms need to plan for provisional calculations and adjustments
Q12: How should firms handle TDS compliance for different types of partner payments?
Firms should:
1. Maintain detailed accounts for different types of payments
2. Track cumulative payments against the ₹20,000 threshold
3. Document the nature of each payment clearly
4. Have systems to identify payment timing (credit vs actual payment)
Record Keeping and Compliance
Q13: What records should firms maintain for Section 194T compliance?
Firms should maintain:
- Detailed partner payment records
- Documentation of payment nature and timing
- Calculations showing threshold tracking
- TDS calculation worksheets
- Proof of TDS deposits and returns
Q14: What are the consequences of non-compliance?
Failure to comply can result in: - Interest under Section 201(1A) - Penalties under Section 271C - Disallowance of expenses under Section 40(a)(ia) - Potential prosecution under Section 276B
Best Practices
Q15: What best practices should firms follow to ensure compliance?
1. Implement robust accounting systems to track partner payments
2. Set up alerts for threshold monitoring
3. Maintain clear documentation of payment classification
4. Review partnership deed provisions regularly
5. Consider monthly provisional TDS on estimated payments
6. Conduct periodic reconciliation of TDS deducted and deposited
7. Keep partners informed about TDS implications
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