New Tax Rule: Partnership firms will have to deduct TDS at the time of payment to partners, check rule here

The government had announced the inclusion of section 194T in the Income Tax Act in the Union Budget presented in July 2024. Under this section, it has become mandatory for partnership firms to deduct TDS on certain payments made to their partners.

This rule is going to come into effect from April 1, 2025. After this, all partnership firms will have to deduct TDS on certain payments made to their partners.

TDS has to be deducted at the time of payment or at the time of credit of money to the partner’s capital account, whichever is earlier. Certain types of payments will come under the purview of this rule. These will include partner’s salary, renewal, commission, bonus and interest on any account (including capital account).

TDS Rate and Exemption Limit

• -If the total amount credited to the partner’s account or payment made during the year is less than Rs 20,000, then there is no need to deduct TDS.
• -If the payment is more than Rs 20,000 then TDS will have to be deducted at the rate of 10 percent on the entire amount.
• -Sharing in profits will not be subject to TDS as partnership firms already pay tax on it.
• Impact on partnership firms and partners
• -Firms will have to deduct TDS before making payments to partners.
• -Partners will receive money after deducting TDS and they will have to provide correct information about it while filing income tax return.
• -This change will help in preventing tax evasion and ensure better tax compliance.

Partnership firms are a popular business structure for small and medium enterprises (SMEs). These also include limited liability partnerships (LLPs). Till now, the profit sharing and partner’s remuneration was calculated at the end of the financial year when the firm’s money was credited to its books of account. Now under the new rule, firms will have to close their accounts on time so that TDS can be deducted on remuneration and other types of payments.

Earlier, firms were not required to deduct TDS on payments made to partners as the amount was taxed under the head ‘business income’ in the partner’s tax return. The introduction of section 194T is aimed at ensuring timely collection of taxes by the income tax department. However, partners will still have to calculate their advance tax liability and deposit any shortfall to avoid any interest on late payments.

Section 194T is a step towards increasing tax compliance. This will allow partnership firms to deduct TDS on certain types of payments to partners. Both partners and firms need to take care of this rule. Failure to do so may result in tax mismatch and penalty may have to be paid.

(The author is a chartered accountant. He is an expert in personal finance, especially income tax related matters)

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