The Finance Act 2024 has introduced Section 194T, a major amendment to the Tax Deducted at Source (TDS) framework specifically impacting Partnerships Firms and Limited Liability Partnerships in India. Effective April 1, 2025, this new provision aims to tighten tax compliance and reduce revenue leakages. Understanding its implications is crucial for firms to avoid penalties and ensure smooth financial operations.
Key Updates Under Section 194T
TDS on Partner Payments
Section 194T requires partnership firms & LLP to deduct TDS on payments made to partners once they exceed a specified threshold. The key details are:
- TDS Rate: 10%
- Threshold: Payments exceeding ₹20,000 per financial year
- Covered Payments: Remuneration, interest, bonus, commission, or any other amount paid to partners
- When to Deduct: At the time of crediting the partner’s account or making the actual payment, whichever is earlier
- Effective Date: April 1, 2025
Payments Exempt from TDS Under Section 194T
Certain partner payments are excluded from TDS deductions under this provision, including:
- Payments already covered under existing TDS sections
- Profit-sharing payments as per the partnership deed
- Repayment of capital contributions made by partners
Compliance Guidelines for Partnership & LLP Firms
1. TAN Registration & Documentation
- Firms must have a Tax Deduction Account Number (TAN) for TDS compliance
- Maintain detailed records of payments and deductions to avoid discrepancies
2. TDS Deposit and Filing Requirements
TDS Payment Due Date: The deducted TDS must be deposited with the government by the 7th of the following month.
Quarterly TDS Filing (Form 26Q): Firms must file TDS returns as per the schedule below:
- April – June → Due by July 31
- July – September → Due by October 31
- October – December → Due by January 31
- January – March → Due by May 31
TDS Certificates (Form 16A): Must be issued to partners within 15 days from the due date of TDS filing.
Penalties for Non-Compliance
Failing to adhere to TDS provisions under Section 194T can result in severe financial and legal consequences:
Interest Charges
- 1% per month for failure to deduct TDS (Section 201(1A))
- 1.5% per month for failure to deposit deducted TDS (Section 201(1A))
Monetary Penalties
- Equal to the TDS amount for non-deduction (Section 271C)
- ₹10,000 to ₹1,00,000 penalty for non-filing of TDS returns (Section 271H)
- ₹200 per day (up to ₹1,00,000) for late issuance of TDS certificates (Section 272A)
Legal Consequences
- Rigorous imprisonment (3 months to 7 years) and fine for failure to deposit TDS (Section 276B)
- Harsher penalties for repeat offenses (Section 278A)
How Section 194T Impacts Partnership & LLP Firms
1. Cash Flow Management
With the ₹20,000 TDS threshold, even relatively small partner payments will attract TDS deductions. To ensure financial stability, firms should:
- Adjust cash flow planning before April 1, 2025
- Allocate sufficient funds for timely TDS deposits
- Set up automated tracking for partner payments crossing ₹20,000
2. Partner Compensation Structuring
To minimize TDS liabilities, partnership & LLP firms should consider:
- Restructuring payment methods before the new rule takes effect
- Assessing the tax efficiency of different forms of partner payments
- Spreading out payments strategically to stay within the threshold
Final Thoughts
With Section 194T coming into effect on April 1, 2025, partnership & LLP firms must prepare for increased TDS compliance obligations. The new provisions will require careful financial planning to manage tax deductions while ensuring efficient partner payments. Consulting a tax expert can help navigate these regulatory changes effectively and minimize financial risks.
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