INTRODUCTION:
TDS is a system of tax collection at source whereby the payer retains the tax before the payment is made to the assessee and then the deducted amount is paid to the Government, which will be reflected in the Income tax portal of the assessee, who could later on claim the same while filing his Income tax return. This system was implemented with the intention to reduce evasion of Tax. TDS are collected on different payments like salary, rent, professional fees, etc. As we all know, any payments made to partners from the partnership firm were not liable to TDS, but currently, a new provision has been inserted in the budget 2024, which mandates that TDS shall be attracted on payments made by a firm to its partners. Read along to know all the details about Section 194T.
WORDINGS OF SECTION 194T AS IN INCOME-TAX ACT:
Payments to partners of firms.
194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus, or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten percent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.
Analysis of Section 194T:
Section 194T, is a provision that introduces Tax deduction to be made on payment of any sum of money to the partner of the firm. Any sum of money includes any amount paid to the partner in the name of Salary, Commission, Remuneration, Bonus, or Interest. Here the deductor ie the person who makes the deduction and remits to the Government shall be the Firm in which the assessee is a partner.
It is to be noted that the provisions of Section 194T are attracted only when the aggregate payment to a partner by the firm in a financial year exceeds Rs 20,000/-
When should a Deduction be made:
TDS Deduction for the payment to the partner by the Firm under Sec 194T shall be made by the firm at the Earliest of the following dates:
- Credit entry in the books of account of the firm
- Actual payment to the partner
To make it more clear, the same can be illustrated through an example: A company say SSP & Co:, a Partnership firm, makes an entry for provision of Interest to a partner in the books of account of the firm at the end of every month but makes the payment only at the end of the year. In the given example earliest credit entry in the books and actual payment is the entry in the books of account which is done at the end of every month. Hence the TDS needs to be deducted and paid every month by SSP and Co:.
Rate of Deduction and Filing of TDS:
A partnership firm must deduct TDS @10% according to the conditions specified ie: when aggregate payment exceeds Rs 20,000. The TDS Deducted should then be deposited with the income tax Department by generating a challan on traces or the NSDL website.
The due date of the deposit of TDS shall be the 7th of the following month for every month other than March and for March, the due date shall be the 30th of April.
The firm must also file quarterly returns in Form 26Q, the Due date of which shall be the 31st of next month after the end of the quarter for 1st three quarters and the 31st of May for the fourth quarter ending 31st March.
Once the TDS return filing is done, the firm shall issue TDS certificates to the partners, which enables the partners to claim credit while filing their Income Tax Returns. TDS Certificate enables the partners to know the details of deductions and deposits made by the firm.
Records to be maintained by Firm:
- TDS Challan
- TDS Returns (Form 26Q Acknowledgement)
- TDS Certificates issued to Partners
Penalties For Non Filing of TDS:
If the firm makes a delay in depositing TDS, an interest @1.5% per month on the amount due will be applicable and a penalty of Rs 200/- per day will be applicable for delayed filing of Return. Timely compliance will ensure the firm from avoidance of Interest and Penalties being attracted.
Frequently Asked Questions:
Q1: Does the liability for taxation of income shift from Partner to partnership firm with the introduction of Sec 194T?
No, the Nature of income remains the same ie it is treated as Business income both before and after the introduction of Sec 194T.
Q2: When can the partners claim the amount Deducted as Tax?
The Partners can claim the TDS when the person files the Income Tax Return, the person could either set off the TDS with his tax liability and pay off the remaining, or else the person could claim the refund of such amount if he has no tax liability.
Q3: How are Sec 192 and 194T different?
Section 192 is applicable only for Employers/ Employees paying/receiving salary and not applicable for salary paid to partners.
Q4: Will there be any increase or decrease in the taxable income with the introduction of Sec 194T?
The only difference is that earlier the partner was responsible for self-assessing the tax liability and paying Advance Tax but now the partner is receiving an amount which is net of Tax.
