TDS Under Section 194T of Income Tax Act

If you’ve ever deal with tax deductions, you know how complicated things can get. But don’t worry! Let’s break down section 194t of the income tax act in a way that makes sense.

Introduction

The Honorable Finance Minister Smt. Nirmala Sitharaman introduced finance bill, 2024 in the august house on 23rd July 2024. Further the bill has been passed in Lok Sabha on 7th August 2024 with 45 amendments in the finance bill and pending with Rajya Sabha. The budget 2024 is a welcoming budget in all sectors and aims to reduce the conflicts and complexities in the Income Tax Act, 1961 in the upcoming time.

What is Section 194t?

Section 194T, introduced in the Finance (No. 2) Bill, 2024 mandates a 10% Tax Deduction at Source (TDS) on payments made to partners by firms, including LLPs, starting from FY 2024-25. This includes payments such as salary, remuneration, bonuses, commissions, or interest, with no TDS required for profit shares or if payments don’t exceed ₹20,000 annually. The introduction of this section aims to address gaps in tax legislation and promote timely account finalization.

However, it presents challenges, including the need for firms to revise partnership deeds, increased compliance with TDS returns, and potential penalties for late TDS payments. The section also raises practical concerns regarding the timing and amount of TDS on periodic partner withdrawals, creating uncertainties about its implementation. Firms must carefully draft partnership deeds to navigate these challenges. The section may require further amendments to enhance its effectiveness before becoming mandatory.

Who Need to Deduct TDS Under Section 194t?

The provision applies to specific entities making payments. While the exact nature of payments covered under Section 194t is still evolving. It mainly focuses on ensuring tax compliance on transaction where TDS was previously not deducted.

When is TDS Deducted Under Section 194t?

• If a person or entity makes certain payments exceeding a prescribed limit, they must deduct TDS before making the payments.

• The TDS rate depends on the types of payment and the recipient’s tax status.

Key Point:

• TDS Rate: 10% on the total payments made to partners, including salary, remuneration, bonus, commission, or interest.

• Timing: Deduction is required at the time of crediting the amount (including in the capital account maintained by the firm in the books of accounts) or actual payment, whichever is earlier.

• Threshold: No deduction if the total payments do not exceed in aggregate ₹20,000 in the financial year.

• Exclusion: Share of profit is not subject to this deduction.

How Does Section 194t Impact you?

• If you receive payments falling under this section, you might see TDS deduction before you get the full amount.

• If you are an organization making payments, you need to ensure you comply with TDS deduction before you get the full amount.

Final thoughts:

Therefore, the section introduced by the Government demands more amendments to make it more efficient and effective and the Government will have to re-look into it before making it mandatory.