How TDS on Partners’ Remuneration Affects Your Tax Planning

The recent introduction of new provisions regarding Tax Deducted at Source (TDS) on partners’ remuneration has sparked significant discussion among partnership firms in India. With the Finance Bill 2024 now proposing Section 194T, firms must prepare for a new tax landscape that affects how payments to partners are handled.

Understanding the New TDS Provisions under Section 194T

What is Section 194T?

Effective from April 1, 2025, Section 194T mandates that any partnership firm or Limited Liability Partnership (LLP) must deduct TDS at a rate of 10% on payments made to partners, which include salary, remuneration, commission, bonus, and interest. This is a significant shift from the previous framework where such payments were not subject to TDS.

Key Features of Section 194T

• Threshold Limit: TDS is applicable only if the aggregate payments to a partner exceed Rs. 20,000 in a financial year. If a partner receives, for example, Rs. 5,00,000 in remuneration, the TDS deducted would amount to Rs. 50,000 (10% of Rs. 5,00,000) regardless of the threshold limit being surpassed.
• Timing of Deduction: TDS must be deducted at the earliest of the following:
  • At the time of crediting the sum to the partner’s account (including capital accounts).
  • At the time of actual payment to the partner.

Implications for Partnership Firms

The introduction of Section 194T means that partnership firms will need to adjust their accounting practices. Partners may need to rationalize their withdrawals, as these will now entail TDS deductions. This change could lead to complexities, especially for firms that determine partner remuneration based on profitability at the end of the financial year.

Additional Changes in Remuneration Limits

Alongside the TDS provisions, the Budget 2024 has also updated the limits for partner remuneration under Section 40(b). The new structure allows for:

• 90% of the first Rs. 6,00,000 of book profit or Rs. 3,00,000, whichever is higher.
• 60% of the remaining book profit.

These changes aim to provide clarity and structure to the remuneration process, ensuring that partners are compensated fairly while also adhering to tax regulations.

Conclusion

The new TDS provisions under Section 194T represent a significant change in how partnership firms in India manage payments to their partners. Firms must prepare for these changes by revising their financial practices and ensuring compliance with the new regulations. As the effective date approaches, it is crucial for firms to stay informed and adapt accordingly.

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