Section 194T: New TDS Rules For Payments To Partners In Firms And LLPs Effective April 2025

Section 194T of the Finance Act 2024 added new provisions in the Income Tax Act 1961, which require partnership firms and Limited Liability Partnerships to deduct taxes at source from payments going to their partners. Starting April 1, 2025, this law aims to increase financial document transparency while ensuring firms obey taxation rules. Companies and partnership members need to understand all aspects of Section 194T because it determines their proper compliance with new tax regulations.

Threshold Limit And TDS Rate

Section 194T requires TDS deductions at 10% when payments to partners exceed ₹20,000 during one financial year's total amount. After the threshold of ₹20,000 is reached, TDS duties are applied to all payments regardless of the excess amount.

Exemptions Under Section 194T

The Section 194T payment rules do not apply to selected types of payments.

• Profit Share: TDS rules do not apply to the share of profit, which deductibility code 10(2A) states is exempt from income tax.

• Capital Contributions and Withdrawals: The TDS law does not apply to capital account transactions of money transfer or withdrawal.

• Loan Repayments: The repayment of loans when partners obtain funds from the firm falls outside Section 194T's scope.

• Reimbursements: Partners who use firm funds for expenses do not trigger income tax deductions at source (TDS).

Also Read: Guide To Filing Taxes In May 2025

Compliance Requirements For Firms

Any firm or LLP that functions under Section 194T must:

• Obtain TAN: A Tax Deduction and Collection Account Number must be secured by entities to comply.

• Deduct TDS: The law requires firms to deduct 10% TDS on payments greater than ₹20,000 each year to partners.

• Deposit TDS: The company must transfer all deducted TDS payments to government accounts before the deadlines expire.

• File TDS Returns: Organisations need to prepare quarterly TDS statements, which must show all deduction and payment data.

• Issue TDS Certificates: Partners will receive TDS certificates (Form 16A) from the firm for demonstrating their tax deductions.

Also Read: Exploring The Benefits Of India's New Tax Regime For FY 2025-26

Challenges And Considerations

Implementing Section 194T may present challenges:

• Administrative Burden: The added compliance requirements represent a substantial strain on available resources, particularly within smaller firms.

• Cash Flow Management: Companies need to directly manage their cash resources to make space for performing both TDS deductions and payments to government branches.

• Clarification of Payment Nature: Such distinction between profit share and remuneration payments remains necessary to understand TDS tax regulations.

• System Updates: The TDS computation and reporting requirements demand system changes both in accounting platforms and payroll software.