Partner Payments & TDS: Navigating the New Tax Landscape for Firms & LLPs from FY 2025-26

For a long time, payments made by a firm to its partners, such as salary, commission, or interest, did not have TDS deducted. Only payments to employees had TDS withheld. However, changes are coming to make the tax system more transparent and efficient.

What's New with Section 194T?

The main change is the new Section in the Income Tax Act, called Section 194T. This section specifically addresses TDS on payments made to partners by partnership firms and LLPs.

Here's what you need to know:

What kind of payments are covered?

• Salary
• Remuneration
• Commission
• Bonus
• Interest (this includes interest on your capital account or any other account with the firm)

Who needs to deduct TDS?
Any partnership firm or Limited Liability Partnership (LLP) that makes these payments to its partners.

What's the TDS rate?
A flat 10% will be deducted as TDS. If the partner does not have a valid PAN (Permanent Account Number), the TDS rate will increase to 20%. So make sure all your partners have their PAN!

Is there a limit?
Yes! TDS will only be deducted if the total amount of payments (salary, remuneration, interest, etc.) to a partner in a financial year exceeds ₹20,000.

Important: If the total exceeds ₹20,000, TDS will be deducted on the entire amount, not just on the amount above ₹20,000.

Example: If a partner receives ₹15,000 in April and ₹10,000 in July, the total is ₹25,000. Since this is more than ₹20,000, TDS will be deducted on the full ₹25,000.

When does the TDS need to be deducted?
TDS must be deducted at the earlier of these two times:

1. When the amount is credited to the partner's account (even if it's their capital account) in the firm's books.
2. When the actual payment is made to the partner.

What's Not Covered by Section 194T?

It’s also important to know what this new rule does not apply to:

1. Withdrawal of Capital: If a partner withdraws their capital from the firm, no TDS under Section 194T is required.
2. Share of Profit: The distribution of profit among partners is generally exempt from tax in the partners' hands because the firm pays tax on its profits. Therefore, there is no TDS on profit distribution.
3. Reimbursement of Expenses: If the firm reimburses a partner for expenses incurred on behalf of the firm, this is not subject to TDS.

Why is this happening?

The government wants to include more transactions under the tax net and ensure better compliance. By deducting tax at the source, it becomes easier to track income and ensure that partners pay their fair share of taxes. This change also increases transparency in how firms compensate their partners.

What Should Firms and Partners Do Now?

This change means you need to be prepared! Here’s a quick checklist:

1. Get your TAN (Tax Deduction and Collection Account Number): If your firm does not have one already, you will need to get it.
2. Update your accounting systems: Ensure your accounting software and processes are ready to deduct TDS on partner payments starting April 1, 2025.
3. Understand the threshold: Monitor the total payments made to each partner throughout the financial year.
4. Timely TDS Deduction and Deposit: Deduct TDS on time and deposit it with the government within the specified deadlines to avoid penalties and interest.
5. Issue TDS Certificates: Firms must issue Form 16A (TDS certificate) to their partners, showing the tax deducted.
6. Partners, Plan Your Finances: As a partner, be aware that 10% of your remuneration, interest, and other amounts will be deducted as TDS. This will affect your immediate cash flow, so plan your withdrawals accordingly. You can adjust this TDS against your overall tax liability when you file your Income Tax Return.
7. Consult a Tax Advisor: If you have specific or complex situations, it’s best to talk to a tax professional or Chartered Accountant. They can help clarify details and ensure you're compliant.

What if you don't follow the new rules?

Failing to deduct or deposit TDS on time can result in penalties, interest charges, and disallowance of expenses for the firm. So, it’s very important to take these new rules seriously.

The introduction of Section 194T is a major change for partnership firms and LLPs in India. While it increases compliance work, it moves us toward a more transparent and efficient tax system. By understanding these new rules and preparing ahead, both firms and partners can navigate this change smoothly for FY 2025-26 and beyond. Get ready and stay compliant!

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