The Finance Act (No. 2) 2024 has introduced a new tax provision—Section 194T—that could significantly alter how partnerships manage partner payments. With a 10% tax deduction at source (TDS) now required on payments exceeding ₹20,000 annually, this update is stirring concern, especially for small and professional firms navigating India’s evolving tax landscape.
What Section 194T Means for Partnerships
Effective from the current financial year, Section 194T mandates firms to deduct TDS at 10% on payments such as salary, commission, bonus, interest, or remuneration made to partners once the ₹20,000 threshold is crossed. The move is positioned as a step toward broadening the tax base, but it introduces several compliance burdens and cash flow constraints for partnerships—particularly smaller firms with partners who may fall below the taxable income threshold.
Under the new regime, even partners who are not liable to pay income tax must endure upfront deductions, leading to unnecessary financial strain and delayed refunds. Notably, the provision for applying for a lower or nil TDS certificate under Section 197 has not been extended to Section 194T, leaving affected partners with limited recourse to mitigate the financial impact.
Key Tax and Compliance Implications
This development also intersects with existing tax provisions, raising fresh interpretational challenges. For instance, the applicability of Section 40(b)(v), which governs limits on allowable partner remuneration, and Section 40(a)(ia), which disallows 30% of certain expenses if TDS isn’t deducted, must be carefully analyzed. A grey area remains around whether the 30% disallowance applies to the entire partner payment or only to the portion exceeding limits prescribed under Section 40(b).
Meanwhile, firms that inadvertently skip TDS deduction under Section 194T may look to Section 201 for relief. If a partner satisfies the conditions under the first proviso to Section 201(1)—including filing a return, declaring relevant income, and paying taxes—the firm may avoid being classified as an “assessee in default.” To qualify, the partner must also furnish a certified Form 26A from an accountant affirming compliance.
That said, interest under Section 201(1A) remains applicable on the unpaid TDS amount up to the date the partner files their return. While some experts argue that interest should not apply if the partner has no taxable income, the law currently does not exempt such cases—adding another layer of complexity for firms.
Need for Policy Fine-Tuning
With market trends pointing toward rising formalization in the partnership space, the introduction of Section 194T may inadvertently penalize the very firms it seeks to regulate. The Central Board of Direct Taxes (CBDT) would do well to extend Section 197 benefits to Section 194T, offering genuine relief to small firms and ensuring smoother tax compliance without excessive cash flow disruptions.
For a detailed explanation, refer to the official Income Tax Department website.
Authored by Y Ramakrishnan, Executive Partner, Taxation, ASA and Associates LLP. The views expressed are personal and do not reflect the stance of this publication.