TDS Rules for Partners’ Pay & Interest – Section 194T

What is TDS?

TDS stands for Tax Deducted at Source. It is a mechanism where the payer (deductor) deducts tax while making certain specified payments like salaries, commissions, rent, or professional fees. This list is inclusive and not exhaustive.

The payer (deductor) is responsible for deducting the tax and depositing it with the government. The recipient (deductee) is the person who receives the payment.

When Should TDS be Deducted?

TDS should be deducted at the earlier of the following events:

• Payment
• Credit in the books of accounts

This rule applies to most payments covered under the TDS provisions.

Due Dates and Compliance

• TDS deducted must be deposited to the government by the 7th of the following month.
• For the month of March, the due date is 30th April.
• TDS returns/statements must be filed on time to avoid penalties.

Interest on Non-Compliance

• Non-deduction of TDS: Interest at 1% per month or part of the month.
• Non-payment of TDS after deduction: Interest at 1.5% per month or part of the month.

Applicability of TDS Rates

TDS rates apply to:

• Residents
• Non-residents
• Domestic companies
• Foreign companies

Introduction of Section 194T (Finance Bill 2024)

Section 194T will be effective from 1st April 2025. It introduces a requirement for partnership firms and LLPs to deduct TDS on certain payments made to their partners.

Scope of Section 194T

The following payments made by a firm or LLP to its partners will attract TDS:

• Salary
• Remuneration
• Commission
• Bonus
• Interest (on loan account or capital account)

Point of Tax Deduction

TDS must be deducted at the time of:

• Credit to the partner’s account in the books or
• Actual payment, whichever is earlier.

Threshold Limit and TDS Rate

• TDS is required only if aggregate payments to a partner exceed ₹20,000 in a financial year.
• The TDS rate is 10% for the amount exceeding this threshold.

No Provision for Lower/Nil TDS

Provisions under Section 197/197A for obtaining a lower or nil TDS certificate are not applicable under Section 194T. This means partners cannot apply to reduce the TDS rate.

TAN and Filing Requirements

Firms and LLPs must:

• Obtain a TAN (Tax Deduction and Collection Account Number)
• File periodic TDS returns within the prescribed due dates.

Impact on Partner Cash Flows

With the introduction of this section, partners’ immediate cash flows will be reduced, as TDS will be deducted upfront before making the payment.

Exclusions from TDS under Section 194T

The following payments are not subject to TDS under Section 194T:

1. Repayment of Capital Account Balances

Withdrawals by partners of their capital contributions will not attract TDS.

2. Reimbursement of Business Expenses

Reimbursement of expenses incurred by partners on behalf of the firm are excluded from the scope of TDS.

Conclusion

It is essential for partnership firms and LLPs to understand and implement the provisions of Section 194T starting 1st April 2025. Proper compliance will help avoid interest, penalties, and ensure smooth financial operations while bringing transparency in partner-related transactions.