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Comprehending Section 194T: TDS on Payment Made by Partnership Firms to Partners

Amit

April 26, 2025

With the income tax situation changing, it is more crucial for firms to remain connected with their tax affairs. One of the major areas which partnership firms should be well aware of is Section 194T of the Income Tax Act, 1961 introduced in the Finance (No. 2) Bill, 2024, concerning the Tax Deducted at Source (TDS) on payment made to partners. This provision aims to ensure that tax compliance is streamlined and that partners are fairly taxed on the distributions they receive. In this blog, we’ll delve into Section 194T, exploring its implications for partnership firms and partners, and how it affects the broader landscape of income tax e-filing in India.

What is Section 194T?

Section 194T was added to solve the issue of tax on payment given by partnership companies to their partners. According to this section, any payment in excess of a certain amount received by a partner from the partnership firm would be subject to TDS. The very fundamental concept of TDS itself is to check if the tax is being deducted at the time of generation of income so that potential evasion of tax might be avoided.

When Does Section 194T Become Effective?

Section 194T would be particularly effective for:

Registered and Unregistered Partnership Firms: They come under that category.
Payment to Partners: Where a payment is being made to partners by a partnership firm that crosses the limit amount — defined as ₹20,000 in a financial year—the firm needs to deduct TDS at the rate of 10% at the time of crediting the income or before effecting the payment whichever is earlier.

It is compulsory for firms in partnership to monitor their payments so that this section is complied with, particularly as far as remitting their income tax returns is concerned. If the TDS is not deducted, then it will attract penalties and interest, and this will cause problems in the entire firm filing its taxes.

It is required to know the effect of TDS on partners in the interest of the firm and the partners. On payment made to partners, deducting TDS:

Declaration of Income: Partners have to declare what they get from the firm (after deduction of TDS) as income while submitting the income tax return. It keeps the transaction in an open form and makes their identification of total income rightfully easier.
TDS Deduction Claim: Partners can claim TDS deducted by the firms at the time of filing the income tax return, thus lowering their overall tax payment.
Effect on Cash Flow: Since TDS lessens the partners' cash flow, partners will have to take care of their own finances.

Significance of Compliance

Compliance by the partnership firm and also by partners is mandatory under Section 194T provisions. Non-compliance can result in:

Penalties: Firms can be penalized if they fail to deduct or pay the TDS in time.
Legal Consequences: Filing in delay will draw the income tax department's attention, and they may issue notices.

Tax Filing Procedure for Partnership Companies

Process for filing taxes of partnership firms for TDS includes the following:

Calculation of TDS: The firm has to calculate the amount of TDS to be deducted while paying partners with utmost caution. The threshold should be kept in mind so that deductions are not made unnecessarily.
Payment of TDS: The deducted sum should be paid to the government on the income tax e-filing website. TDS is usually payable within a week from the end date of the month in which deduction is being done.
Filing of TDS Returns: The firm is also required to file quarterly TDS returns, reporting the TDS deducted and paid, in Form 26Q. This is an important process in being compliant.
Issuance of TDS Certificate: Once the TDS return is filed, the firm is required to issue TDS certificates (Form 16A) to partners, indicating the TDS deducted. The certificate is useful for partners when they are reporting income tax return.

e-Filing Simplified

The Government of India has eased the process of e-filing income tax. Partnership firms and partners can now file their tax requirement online from the income tax e-filing portal. They are:

Filing of Income Tax Returns: Partners need to file their return with the e-filing website taking into consideration the credit of TDS to be reflected appropriately.

Keeping Proper Records

A successful tax planning largely depends on maintaining proper records. Partnership Firms should have proper records of:

Payments made to partners
Withholdings of TDS
Certificates of TDS issued

This will not only become easy to file appropriately but will also ready the firm in advance for any potential demand from the income tax department.

Payments Subject to TDS Under Section 194T

Type of Payment	TDS Applicability	Remarks
Salary/Remuneration	Yes	TDS applies if the aggregate exceeds ₹20,000 in a financial year.
Commission	Yes	TDS applies if the aggregate exceeds ₹20,000 in a financial year.
Bonus	Yes	TDS applies if the aggregate exceeds ₹20,000 in a financial year.
Interest on Capital/Loan	Yes	TDS applies if the aggregate exceeds ₹20,000 in a financial year.
Profit Share	No	Exempt from TDS under Section 194T.
Capital Withdrawal	No	Exempt from TDS under Section 194T.
Expense Reimbursement	No	Exempt from TDS under Section 194T.

Pros and Cons of Section 194T

✅ Pros	❌ Cons
Improved Tax Transparency Helps the Income Tax Department monitor partnership remuneration.	Cash Flow Disruption Partners may receive less than expected as TDS is cut upfront.
Better Financial Planning Regular deduction helps partners manage advance tax and avoid last-minute burdens.	Increased Compliance Burden More documentation, TDS returns, and deadlines to handle for firms.
Stronger Documentation & Accountability Firms are encouraged to maintain clear financial records, improving audit-readiness.	TDS on Book Entries TDS applies even on credited (not paid) amounts—affecting firms with cash constraints.
Ease in ITR Filing for Partners With TDS credit shown in Form 26AS, partners can smoothly proceed with income tax return filing.	Ambiguity in Deed Interpretation If the partnership deed isn’t clearly defined, categorizing payments becomes tricky.
Aligns with Digital India Mission Encourages usage of income tax e filing portal, and other paperless tools.	Risk of Penalties Delay in deduction, payment, or filing of TDS returns may lead to interest, penalty, or disallowance of expenses.

Tax Strategy: Planning and Consultation

Due to the intricacy in taxation and rules under Section 194T, it is recommended that partnership firms use tax experts or consultants. This assists businesses:

Keep abreast with modifications in taxation legislation
Develop tax savings schemes
Provide seamless compliance with income tax and TDS

Conclusion

All the partnership firms in India need to be aware of Section 194T. With due precautions while being TDS compliant and making use of facilities available on the website of e-filing income tax, firms can manage their taxations better. Tax tides change constantly and hence it is better to remain updated so that partners and partnerships can both meet their dues and pay lesser tax.

Overall, Section 194T is not only a compliance but also a chance for partnership firms to enhance their financial health by adopting strategic tax planning. Having knowledge about the TDS mechanism and its impact on income tax return filing, partnerships can foster transparency cultures, sense of responsibility, and compliance that ultimately prove to be beneficial to all concerned stakeholders.

📌 Disclaimer by Book My Accountant (BMA):
This blog is for informational purposes only and does not constitute legal or tax advice. Readers are advised to consult their tax advisors or reach out to Book My Accountant (BMA) for tailored professional guidance based on their specific circumstances. BMA will not be liable for any decision taken based on the content of this blog.