Section 194T of the Finance Act 2024 added new provisions in the Income Tax Act 1961, which require partnership firms and Limited Liability Partnerships to deduct taxes at source from payments going to their partners. Starting April 1, 2025, this law aims to increase financial document transparency while ensuring firms obey taxation rules. Companies and partnership members need to understand all aspects of Section 194T because it determines their proper compliance with new tax regulations.
Applicability Of Section 194T
The provisions contained within Section 194T apply across all partnership firms and Limited Liability Partnerships operating in India. The tax payment rules affect payments directed towards resident and non-resident members of partnerships. The rule covers several payment types, including employee salary and bonus, together with commission and interest. Section 194T applies to payments made into the partner's capital account, together with other non-cash transactions, which must be tax-deductible at source.
Threshold Limit And TDS Rate
Section 194T requires TDS deductions at 10% when payments to partners exceed ₹20,000 during one financial year's total amount. After the threshold of ₹20,000 is reached, TDS duties are applied to all payments regardless of the excess amount.
Timing Of TDS Deduction
The time to deduct Tax Deducted at Source depends on whichever event occurs first between two specified dates.
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At the time of credit: TDS deduction happens when funds move from the company to the partner's account, including both capital and other payments.
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At the time of payment, TDS applies for partner payments that are disbursed through cash, cheque, draft and alternate payment methods at the time of payout.
Exemptions Under Section 194T
The Section 194T payment rules do not apply to selected types of payments.
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Profit Share: TDS rules do not apply to the share of profit, which deductibility code 10(2A) states is exempt from income tax.
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Capital Contributions and Withdrawals: The TDS law does not apply to capital account transactions of money transfer or withdrawal.
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Loan Repayments: The repayment of loans when partners obtain funds from the firm falls outside Section 194T's scope.
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Reimbursements: Partners who use firm funds for expenses do not trigger income tax deductions at source (TDS).
Also Read: Guide To Filing Taxes In May 2025
Illustrative Example
A partner earns a total of ₹55,000 in financial payments, where TDS at 10% applies to the whole amount during the year.
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June: ₹18,000
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October: ₹22,000
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March: ₹15,000
Total payments: ₹55,000
The total payment amount exceeding ₹20,000 triggers TDS at 10% deduction across the family.
TDS = 10% of ₹55,000 = ₹5,500
The firm requires a ₹5,500 TDS deduction followed by a governmental account deposit.
Compliance Requirements For Firms
Any firm or LLP that functions under Section 194T must:
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Obtain TAN: A Tax Deduction and Collection Account Number must be secured by entities to comply.
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Deduct TDS: The law requires firms to deduct 10% TDS on payments greater than ₹20,000 each year to partners.
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Deposit TDS: The company must transfer all deducted TDS payments to government accounts before the deadlines expire.
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File TDS Returns: Organisations need to prepare quarterly TDS statements, which must show all deduction and payment data.
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Issue TDS Certificates: Partners will receive TDS certificates (Form 16A) from the firm for demonstrating their tax deductions.
Also Read: Exploring The Benefits Of India's New Tax Regime For FY 2025-26
Implications For Partners
When investors receive payments falling under Section 194T TDS rules, they must understand the following requirements:
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Tax Credit: Tax deductions through TDS appear in Form 26AS, which taxpayers can use for tax return claims.
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Cash Flow Impact: Partners may experience reduced net receipts following TDS deductions, which decreases financial liquidity.
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Advance Tax Adjustments: Tax deductions stated in TDS can directly reduce someone's required advance tax payments.
Challenges And Considerations
Implementing Section 194T may present challenges:
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Administrative Burden: The added compliance requirements represent a substantial strain on available resources, particularly within smaller firms.
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Cash Flow Management: Companies need to directly manage their cash resources to make space for performing both TDS deductions and payments to government branches.
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Clarification of Payment Nature: Such distinction between profit share and remuneration payments remains necessary to understand TDS tax regulations.
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System Updates: The TDS computation and reporting requirements demand system changes both in accounting platforms and payroll software.
Conclusion
Section 194T brings partner income taxes under TDS requirements as the new key change in partnership firm and LLP tax rules. The system aims to boost both tax compliance and transparency, yet it brings new obligations to business entities. System upgrades combined with staff training represent essential proactive steps to ensure smooth compliance with the new laws set to take effect from April 1 2025.
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