In a significant amendment brought through the Finance (No. 2) Act, 2024, a new tax deduction at source (TDS) provision has been introduced under the Income Tax Act, 1961. With effect from 01st April 2025, partnership firms and LLPs are now mandated to deduct TDS on certain payments made to their partners. This marks a departure from the earlier position where no TDS was applicable on such payments under Section 40(b).
Let’s understand the implications, applicability, and compliance requirements arising from this amendment.
The Pre-Amendment Position
Under the existing law till 31.03.2025:
- Any payment of interest, salary, bonus, commission, or remuneration to a partner by a firm, though allowed under Section 40(b), was not subject to TDS.
- The rationale was that the firm and the partners are not separate legal entities (except under tax law), and any payment to a partner is considered appropriation of profit.
However, with the Finance Act, 2024, this position has been revisited to enhance transparency and plug tax leakage.
New Provision Introduced – Effective 01.04.2025
A new section, Section 194T, has been inserted by the Finance (No. 2) Act 2024.
Key Highlights:
- Applicability: To all partnership firms and LLPs (excluding sole proprietorships and AOPs).
- Persons Covered: Resident individual partners of the firm or LLP.
- Nature of Payments Covered:
- Remuneration or salary to partners.
- Interest on capital payable to partners.
- Commission, bonus, or any other form of payment to partners.
- Rate of TDS: 10% under the new section (as generally applicable for professional payments), unless the partner fails to furnish PAN, in which case higher TDS under Section 206AA may apply.
- Threshold: No TDS if the total payment to a partner does not exceed Rs. 20,000 in a financial year.
- Time of Deduction: At the time of credit to partner’s account (including capital account) or actual payment, whichever is earlier
Important Considerations
- Capital Withdrawal Not Covered: Pure capital withdrawal or repayment of capital by the partner is not subject to TDS.
- Remuneration under Tax Audit Limit: Firms below the tax audit threshold are still required to deduct TDS under this provision.
- Credit vs. Payment: TDS is to be deducted at the time of credit of such income to the partner’s capital/current account or at the time of payment, whichever is earlier.
Important Compliance Note
This new TDS provision is applicable from 1st April 2025 itself. So, if your firm has made any such payments to partners in April 2025, do not forget to deduct TDS this month itself. Delayed deduction may attract interest, disallowance of expenses, and penalties under the Income Tax Act.
Conclusion
The new TDS requirement on payments to partners by a firm is a compliance-heavy move, and partnership firms must begin preparing now to avoid penalties. Partners, too, should reconcile their Form 26AS and ensure accurate disclosure in their ITRs.
At Taxunplug, we help partnership firms and LLPs ensure full TDS compliance and correct tax treatment for partner payments. Reach out to us today to make your transition to FY 2025-26 smooth and compliant.
The information provided in above blog is for general informational only and should not be considered as legal or tax advice. Request you to please follow latest updated in reference to above details. We advise to consult with a qualified tax professional such as “Taxunplug” for all your tax needs.