It’s important for Limited Liability Partnerships (LLPs) and Partnership Firms in India to be aware of significant changes in Tax Deducted at Source (TDS) rules that will come into effect from April 1, 2025. These changes primarily relate to payments made by the firm to its partners and aim to increase tax compliance.

New TDS Rule Alert for LLPs & Firms!
From FY 2025–26, pay partners > ₹20,000 (as salary, bonus, etc)?
You’re liable for TDS @ 10% under Section 194T!

Save this crisp breakdown. No more last-minute tax errors!

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Here’s a detailed overview of the new TDS rule:

Introduction of Section 194T

A new Section, 194T, has been introduced in the Income Tax Act, 1961, by the Finance (No. 2) Act, 2024. This section mandates that partnership firms (including LLPs) must deduct TDS on certain payments made to their partners.

Applicability

Payments Covered Under Section 194T

TDS must be deducted on the following types of payments made by a firm to its partners:

  • Salary
  • Remuneration
  • Commission
  • Bonus
  • Interest on any account (including capital account and loan accounts)

Important Note: TDS is not applicable on drawings or repayment of capital account balances.

TDS Rate and Threshold Limit

Time of Deduction

TDS must be deducted at the earlier of the following:

  • The time of credit of such sum to the account of the partner (including the capital account) in the books of the firm.
  • The time of actual payment to the partner.

Compliance Requirements for Firms/LLPs

  • Obtain TAN: Firms/LLPs that do not have a Tax Deduction and Collection Account Number (TAN) must obtain one. This is a mandatory 10-digit alphanumeric number required for TDS compliance.
  • Deduct TDS: Deduct TDS at the rate of 10% on the specified payments to partners when the aggregate amount exceeds ₹20,000 in a financial year.
  • Deposit TDS: The deducted TDS must be deposited with the Central Government within the prescribed time limits. Typically, for TDS deducted in March, the due date for deposit is April 30th. For other months, the due date is the 7th of the following month.
  • Issue TDS Certificates: Firms/LLPs must issue TDS certificates (Form 16A) to their partners, providing details of the TDS deducted. These certificates are usually issued quarterly.
  • File TDS Returns: Quarterly TDS returns (Form 26Q for payments to residents) must be filed, providing details of the TDS deducted and deposited.

Implications for Partners

  • The TDS deducted will be reflected in the partner’s Form 26AS and can be claimed as a credit against their income tax liability when they file their individual income tax returns.
  • Partners cannot claim any exemptions or submit forms like 15G or 15H to avoid TDS under Section 194T. There is also no provision for a lower TDS rate under Section 197 in this case.
  • Partners whose total income is below the taxable limit or whose tax liability is less than the TDS deducted will need to file their income tax returns to claim a refund of the excess TDS.

Penalties for Non-Compliance

Failure to comply with Section 194T can result in significant financial and legal consequences for the firm/LLP, including:

  • Interest for Non-Deduction: 1% per month (or part of a month) on the amount of TDS not deducted.
  • Interest for Non-Payment: 1.5% per month (or part of a month) on the amount of TDS not deposited after deduction.
  • Late Filing Penalty: ₹200 per day for the period of delay in filing the TDS return, up to the amount of TDS.
  • Disallowance of Expenses: Under Section 40(a)(ia) of the Income Tax Act, if TDS is deductible but not deducted or not deposited, 30% of the expense on which TDS was deductible may be disallowed as a business expenditure.

Practical Considerations

  • Firms and LLPs need to update their accounting systems and processes to ensure timely deduction and deposit of TDS under Section 194T.
  • Partners may need to plan their finances considering the TDS deductions, which might impact their cash flows during the financial year.
  • For payments like interest on capital or remuneration that might be calculated at the end of the financial year, firms might need to ensure timely closure of accounts to comply with the TDS deposit deadlines for the last quarter.

Other Relevant Changes Effective from April 1, 2025

Besides the introduction of Section 194T, there are other changes related to partnership firms and LLPs:

  • Enhanced Threshold Limits for other TDS Sections: The threshold limits for TDS deduction under various other sections (e.g., Section 194A for interest, Section 194J for professional fees, Section 194I for rent) have been increased. Firms and LLPs should review these changes to ensure compliance with TDS on other types of payments as well. For instance, the threshold for deduction of TDS on rent paid has increased to ₹50,000 per month from ₹2,40,000 per annum. Similarly, the threshold for fees for professional or technical services under Section 194J has increased to ₹50,000 from ₹30,000.
  • Increased Partner Remuneration Limits: The permissible limits for deduction of partner remuneration have been doubled. For the first ₹6,00,000 of book profit (or in case of a loss), the limit is ₹3,00,000 or 90% of the book profit, whichever is higher. On the remaining book profit, the limit is 60%. This provides firms with greater flexibility in structuring partner compensation while maintaining tax benefits.
  • Omission of Sections 206AB & 206CCA: The provisions for higher TDS/TCS rates for non-filers of income tax returns (Sections 206AB and 206CCA) will be removed from April 1, 2025. This will simplify the TDS/TCS process for deductors and collectors as they will no longer need to identify non-filers for applying higher rates.
  • Removal of TCS on Sale of Goods: The Tax Collected at Source (TCS) provision under Section 206C(1H) on the sale of goods has been removed. This was introduced earlier and often overlapped with the TDS provisions on the purchase of goods under Section 194Q, leading to compliance complexities. Its removal aims to reduce these complexities.
  • Reduced TCS Rates for Forest Produce: The TCS rates for timber and other forest produce (except tendu leaves) under Section 206C(1) have been reduced to 2% from 2.5%.

Key Takeaways for LLPs and Firms

  • Be prepared for the implementation of Section 194T from April 1, 2025, and ensure TDS is deducted on payments to partners as per the new rules.
  • Review and update accounting systems to track aggregate payments to partners and ensure timely TDS deduction and deposit.
  • Obtain TAN if not already available.
  • Understand the enhanced threshold limits for other TDS sections to ensure compliance on all applicable payments.
  • Take note of the increased limits for partner remuneration, which can offer more flexibility in compensation structuring.
  • Be aware of the removal of Sections 206AB & 206CCA and TCS on the sale of goods, which will simplify certain compliance aspects.

It is advisable for LLPs and partnership firms to consult with tax professionals to fully understand the implications of these new rules and ensure compliance to avoid penalties and interest.