Summary of Section 194T of Income Tax Act,1961

Background: Before enactment of Finance Act, 2024, there was no provision prevail regarding payments made to partners in respect of Salary, Remuneration, Commission, Interest or Bonus by the partnership firm.

• Regarding TDS on Salary: Explanation 2 Section 15 of Income Tax Act,1961 payments made to partner in form of Salary, Remuneration, Commission, Interest or Bonus is not be considered as “Salary” therefore Section 192 of Income Tax Act,1961 for deduction of TDS on Salary could not be applied.
• Regarding TDS on Commission: Pursuant to provision of section 40(b)(i) of Income Tax Act 1961, any payment of salary, bonus, commission or remuneration by whatever name called (hereinafter referred to as remuneration) to partner, hence section 194H was not in picture.
• Regarding interest paid to Partners: As per provisions of section 194A(3)(iv), TDS is not applicable on interest paid by firm to its partners.

In nutshell, we can say before amendment of Finance Act 2024, withholding tax provisions are not applicable on salary, remuneration, commission, bonus and interest to Partners by firm.

Now, Provisions of Finance Act 2024, come into effect vide section 194T of Income Tax Act.

Provisions of Section 194T of Income Tax Act, 1961

Legal Provisions:

The Finance Act (No.2), 2024 enacted on August 16, 2024 inserted Section 194T to the Income Tax Act, 1961 to bring the payments such as salary, remuneration, commission, bonus and interest to any account (including capital account) of the partner of the firm under the purview of TDS.

Applicability: The provision of section 194T are applicable from 1^st April 2025.

Time limit for deduction of TDS: Pursuant to provision of section 194T at the time of credit of such amount to account of partner (including capital account) or payment whichever is earlier

Summary of applicability of TDS u/s 194T:

(C) CANON:

• Section 194T is an obligation on firm(deductor) to deduct TDS on payments made to partners.
• As per Section 194T (1) TDS is to be deducted on the payments such as salary, remuneration, commission, bonus and interest to any account (including capital account) of the partner of the firm at the time of Credit or Payment Whichever is earlier
• As per Section 194T (2) TDS is deductible if aggregate amount exceeds Rs.20,000 in Financial Year.
• TDS is to be deducted at the rate of 10%.

(D) KEEP IN MIND:

• Firm shall have the meaning assigned to it in Indian Partnership Act, 1932 and shall also include Limited Liability Partnership as defined under Limited Liability Partnership Act, 2008.
• Distinction between Partnership firm assessable as Such (PFAS) and as AOP required under Section 184 is Irrelevantr.t. Section 194T.
• Section194T is applicable on Indian LLP’s only and not on Foreign LLP’s.
• Payee will be the partner of Firm/LLP who may or may not be the resident.
• Remuneration paid to working or non-working partner both come under umbrella of Section 194T.
• Whether Interest is allowable or disallowable under Section 40(b) is irrelevant in application of Section 194T.
• The facility of obtaining a certificate for no deduction or lower deduction of tax under Section 197 is not available with respect to payments covered by Section 194T.
• No provision is there in respect of non-deduction of TDS u/s 194T, based on self-declaration by payee partner in Form 15G/Form 15H.
• If deductee (Partner) does not furnish PAN/Aadhaar, TDS to be deducted @ 20% u/s 206AA.

Frequently Asked Questions

Question: Who is liable to deduct the TDS and who is deductee/payee?

Answer:  Firm/LLP is liable to deduct the TDS and Partners of the firms/LLP including minor admitted to the benefit of partners are deductee/Payee.

Question: Whether the remuneration will be disallowed to firm is failed to deduct the TDS?

Answer: Remuneration paid to non-working partners: The deduction for remuneration to non-working partners are disallowed by virtue of section 40(b) of Income Tax Act. Section 40(a) does not override the section 40(b). Hence section 40(a) does not come into effect.

Remuneration paid to working partners: The deduction for remuneration to working partners is allowed under Section 40(b) only subject to the limits specified in Section 40(b)(v). Therefore, a view can be taken that Section 40(a) will not apply to TDS defaults under Section 194T since Section 40(a) is expressed to override Sections 30 to 38 but not Section 40(b)