COMPLIANCE SECTION 194T OF INCOME TAX ACT 1961 -AY 2026-27

The Income Tax Act, 1961 continues to evolve with new compliance measures to improve transparency. One such important provision introduced by the Finance Act, 2024 is Section 194T, which becomes applicable from 1 April 2025. This section is highly relevant for partnership firms and LLPs, as it introduces TDS (Tax Deducted at Source) on payments made to partners. This new provision requires firms to deduct TDS at a rate of 10% on the aggregate amount of salary, remuneration, commission, bonus, or interest paid or credited to a partner within a financial year. The implementation of Section 194T will place an increased compliance burden on firms, requiring them to adhere to new procedures for tax deduction, deposit, and reporting, and may also have an impact on the liquidity of partners.

Example:

Suppose a partnership firm pays commission and bonus to a partner during a financial year as follows:

●       Commission: ₹25,000

●       Bonus: ₹15,000

         Total payment = ₹40,000

This exceeds ₹20,000, so Section 194T applies.

●       TDS @10% = ₹4,000

●       Amount paid to partner = ₹36,000

●       ₹4,000 is deposited with the government as TDS

What is Section 194T of Income Tax Act?

Section 194T, introduced in Budget 2024, marks a significant shift in partnership taxation. Effective from 1st April 2025, payments such as salary, remuneration, interest, commission, or bonus made by firms and LLPs to their partners will be subject to TDS  at the rate of 10%. Earlier, such payments were outside the scope of TDS, which applied only to employee salaries. Section 194T plays a crucial role in reducing tax evasion and improving compliance, as it ensures that income received by partners is properly recorded and taxed. Overall, it brings partnership firms and LLPs into a stricter TDS compliance framework.

Applicability of Section 194T

●       Section 194T is a provision under the Income Tax Act, 1961.

●       It applies to all partnership firms and LLPs.

●       It is triggered when payments are made or credited in the books to partners.

●       Applicable only for resident partners (not non-residents).

Threshold Limit & Rate

➢      Applicable when total payment to a partner exceeds ₹20,000 in a financial year.

➢      The standard TDS rate is 10%.

➢      If the partner does not provide a PAN, the deduction rate jumps to 20% under Section 206AA.

➢      Applies to all firms and LLPs, regardless of size, turnover, or audit status.

➢      Covers both actual payments and book entries (credits to partner’s account).

➢      Effective from 1 April 2025.

➢      Applicable from Assessment Year 2026–27.

Deadline for TDS Payment under Section 194T

The due date for depositing TDS under Section 194T follows the general TDS rules (Rule 30):

●       Normal case:
  7th of the next month after deduction

●       For March deductions:
  30th April of the next financial year

Example

●       TDS deducted in June 2025 → Deposit by 7 July 2025

●       TDS deducted in March 2026 → Deposit by 30 April 2026

When to Deduct TDS

Under Section 194T of the Income Tax Act, 1961, TDS must be deducted at the earlier of two events, ensuring timely tax collection and proper reporting of partner income.

1. At the Time of Credit

TDS is required when the amount is credited to the partner’s account in the books of the firm or LLP.

●       This includes credit to the capital account, current account, or any other account of the partner.

●       Even if the payment is not actually made, a mere accounting entry triggers TDS.

2. At the Time of Payment

If the payment is made before recording it in the books, TDS must be deducted at the time of actual payment.

●       Payment may be in cash, cheque, bank transfer, or any other mode.

●       Deduct TDS @ 10% on eligible payments exceeding ₹20,000

●       Deposit TDS with the government within prescribed due dates

●       File quarterly TDS returns (Form 26Q)

●       Issue TDS certificates (Form 16A) to partners

●       Maintain proper records of all transactions

Firms must ensure timely deduction, deposit, filing, and documentation to stay compliant with Section 194T for AY 2026–27

Penalties for Non-Compliance

Non-compliance with Section 194T of the Income Tax Act, 1961 can lead to multiple financial and legal consequences for partnership firms and LLPs.

●       Interest Liability: Interest is charged at 1.5% per month and triggers disallowance of 30% of expenses under Section 40(a)(ia) of Income-tax Act. for delay in deduction or late deposit of TDS under Section 201(1A).

●       Penalty: A penalty equal to the amount of TDS not deducted or not paid may be imposed under Section 271C.

●       Disallowance of Expenses: Related expenses may be disallowed under Section 40(a)(ia), increasing taxable income.

●       Late Filing Fees: ₹200 per day for delay in filing TDS returns under Section 234E (subject to limits).

Impact of Section 194T

Section 194T of the Income Tax Act, 1961 has a significant impact on partnership firms, LLPs, and their partners by introducing TDS on partner payments.

Positive Impact

●       Improved Tax Transparency: Ensures proper reporting of partner income

●       Better Compliance: Reduces chances of tax evasion

●       Systematic Tracking: Helps the government track income through TDS returns

Challenges

●       Increased Compliance Burden: Firms must handle TDS deduction, filing, and documentation

●       Cash Flow Impact: Partners receive payments after TDS deduction

●       Administrative Effort: Requires proper accounting systems and regular monitoring

Conclusion:

Section 194T strengthens tax transparency by introducing TDS on partner payments. Although it increases compliance for firms, it helps ensure accurate income reporting and reduces tax evasion. Proper adherence to TDS rules will be essential to avoid penalties.