[Opinion] Section 194T – Challenges Ahead

CA Sachin Sinha – [2025] 172 taxmann.com 604 (Article)

Section 194T of the Income Tax Act, effective from April 1, 2025, mandates a 10% Tax Deducted at Source (TDS) on payments exceeding Rs. 20,000 annually made by partnership firms or Limited Liability Partnerships (LLPs) to their partners. This includes payments such as salary, remuneration, commission, bonus, or interest. It means the TDS is to be deducted on any payment which is provided for the financial year 2025-26 or payment made relating to financial year 2025-26, whichever is earlier. Any payment which is relating to the financial year prior to 1st April 2025, even though payments were made on or after 1st April 2025, are not subject to TDS under this section.

Section 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 @ 10%.

(2) No deduction shall be made under s/s (1) where such sum or the aggregate of such sum credited or paid or likely to be credited or paid to the partner of the firm does not exceed Rs. 20,000 during the financial year.

The terms used in this section are salary, remuneration, commission, bonus or interest. It is important to understand the meaning of these terms.

Meaning of the term “Salary”: In legal terms, as defined by Black’s Law Dictionary, “salary” generally refers to the fixed compensation paid to an employee or worker for their services, typically on a regular basis (e.g., weekly, monthly, or annually). Now the question arises, whether the partner is an employee or worker of the firm? The obvious answer is “No”, because no employer employee relationship exists between the firm and the partner. Further, the term salary is not defined in the Income tax Act. The definition which is given in sec 17(1) is for the purpose of section 15 and 16 only, which cannot be borrowed for the purposes of section 194T. Further question is whether this salary includes perquisites also or the perquisites shall be treated separately u/s 194R and not u/s 194T. The tax rate and the minimum exemption is same in both the sections. Explanation 2 to section 15 says, “Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.”

Meaning of term “remuneration”: In Black’s Law Dictionary, “remuneration” means reward, recompense, or salary; essentially, the compensation paid for services rendered. In legal contexts, “remuneration” refers to any form of payment or compensation received for services rendered, including salary, benefits, and other forms of compensation. Remuneration refers to any type of compensation or payment that an individual or employee receives as payment for their services or the work that they do for an organization or company.

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