3590606 - Section 194T: TDS on Payment by Partnership Firm to Partners

At present, the payments made by a firm (partnership firm or an LLP) to a partner are not subjected to TDS. Currently, the TDS is applicable only in the case where the payments are made to an employee of a firm. However, if you draw remuneration from firm as a partner or if you are taking payments in the form of interest, bonus or commission then the TDS provisions were not applicable on the said payments.

In the Union Budget of 2024, Finance Minister introduced Section 194T of the Income Tax Act, 1961. This section imposes a requirement for Tax Deducted at Source (TDS) on certain payments made to partners of a firm, including salary, bonus, commission, interest, or remuneration. At present no provision for TDS on such payments is there.

The proposed Section 194T is as follows:

“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 per cent.

(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 INR 20,000 during the financial year.”

TDS Rate: 10% is the applicable TDS rate.

TDS Threshold Limit: If the aggregate amount paid to the partner in a financial year surpasses Rs 20,000 then only the TDS shall be applicable.

Timing of TDS Deduction: Section 194T specifies that TDS should be deducted at the earlier of the following two events:

• At the Time of Credit: When the sum is credited to the partner’s account, including capital accounts.
• At the Time of Payment: When the payment is made to the partner, whether through cash, cheque, draft, or other modes.

SAP S/4HANA Cloud Public Edition

Find the below information on how to set up your system for TDS calculations as per sections 194T: 

To check if the aggregate payments cross Rs. 20,000 in a financial year and deduct TDS, refer the below mentioned customization steps:

1. Define Withholding Tax Key:

• • Access the "Define Withholding Tax Keys" configuration activity (ID: 104229)
  • Create a new entry for 194T with an appropriate description

     2. Define Withholding Tax Type:

• • • Use the "Define Withholding Tax Type for Invoice Posting" activity (ID: 104225)
    • Choose Configure for this activity. Choose the country/region key.
    • Create a withholding tax type for 194T. For this withholding tax type, set the "accumulation type" to "Per year starting with month: 4". This tells the system to track payments annual from April to March.

     3. Define Withholding Tax Code:

• • Create a new withholding tax code for 194T
  • Set the tax rate to 10%
  • Assign the withholding tax key and type created in steps 2

     4. Set Minimum Amount:

• • Open the Define Min/Max Amounts for Withholding Tax Codes (ID: 103915) activity.
  • Choose Configure for this activity. Choose the country/region key.
  • Look for withholding tax code for your 194T. For this withholding tax code, set the "minimum base amount" to INR 20,000 and set the "valid from date" to 01.04.2025.

     5. Similarly create withholding tax type and withholding tax code for payment posting.

     6. In Vendor Master, ensure the withholding tax code(s) are added to the vendor's record.

     7. Test Configuration:

1. • Perform test postings to verify correct calculation and timing of tax deduction
   • Validate that TDS is applied when the aggregate payments exceed INR 20,000 in a financial year

Note:

If you use down payments, the system treats them separately from invoices. You might need to manually adjust TDS if the total amount (invoices + down payments) crosses the limit. This aggregation check is available only for TAN based exemptions in India at vendor PAN level which is not the case here.

194T, 104225, Withholding Tax Type for Invoice Posting, Withholding Tax Type, Define Withholding Tax Keys, 104229, Accumulation type, Withholding Tax Codes, 103915, TDS, Section, Payment, Partnership, Partners, Union Budget, Form 26Q, 27Q, Invoice, Down payments

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