Key TDS Amendments Effective from October 1, 2024

1. Reduced TDS Rates for Specific Transactions

• Life Insurance Payouts (Section 194DA): TDS rate reduced from 5% to 2% on payments from life insurance policies.

• Commission and Brokerage (Section 194H): TDS rate lowered from 5% to 2%.

• Rent Payments by Individuals/HUFs (Section 194-IB): TDS rate decreased from 5% to 2%.

• Payments by Specified Individuals/HUFs (Section 194M): TDS rate reduced from 5% to 2%.

• E-commerce Transactions (Section 194-O): TDS rate significantly reduced from 1% to 0.1% to align with offline transactions. ​

• 2. Clarification on TDS for Sale of Immovable Property (Section 194-IA)

• TDS at 1% is applicable on the total sale consideration or stamp duty value, whichever is higher, for properties exceeding ₹50 lakh.

• In cases with multiple buyers or sellers, the threshold applies to the aggregate transaction value, not individual shares. ​

3. Introduction of TDS on Government Securities

• A 10% TDS is introduced on interest income exceeding ₹10,000 from specified central and state government bonds, including floating rate bonds. ​

4. Increased TDS on Long-Term Capital Gains for Non-Residents (Section 195)

• TDS on long-term capital gains from the transfer of listed equity shares, equity-oriented mutual fund units, or business trusts by non-residents increased from 10% to 12.5%. ​

New TDS Provisions Effective from April 1, 2025

1. TDS on Payments to Partners by Partnership Firms (Section 194T)

• A new section mandates a 10% TDS on salary, remuneration, interest, bonus, or commission paid by partnership firms to their partners, applicable when the aggregate amount exceeds ₹20,000 in a financial year. ​

What is Section 194T?
Section 194T is a newly introduced TDS provision in the Finance Act, 2024, applicable from FY 2025–26. It mandates Tax Deducted at Source (TDS) on certain payments made by partnership firms (including LLPs) to their partners.

Applicability:

• Applies only to partnership firms and LLPs.

• TDS is required when making specific payments to partners, such as:

  • Interest on capital

  • Salary or remuneration

  • Bonus

  • Commission

  • Any other payments covered under Section 40(b)

TDS Rate:

• 10% TDS is applicable.

• TDS is required only if total payments exceed ₹20,000 per financial year to a partner.

Exception:

• Capital withdrawals and share of profit are not subject to TDS under this section.

• TDS does not apply where the payments are exempt under any other provision of the Income Tax Act.

Compliance Requirement:

• The firm must deduct TDS at the time of credit or payment, whichever is earlier.

• Deducted TDS must be deposited with the government within the applicable timeline.

• Form 26Q is to be used for filing TDS returns for such payments

Opinion: Section 194T – TDS on Partner Payments: Reform or Redundancy?

The introduction of Section 194T in the Finance Act 2024 marks a significant shift in how partnership firms and LLPs manage payouts to partners. Effective from April 1, 2025, this provision mandates a 10% TDS on salary, interest, bonus, and commissions paid to partners—if the total annual payment crosses ₹20,000. But is this move a tax reform masterstroke or just an added burden?

The Government’s Rationale

The government aims to:

Widen the tax base by plugging leakages in partnership firm structures.

• Ensure that partner compensation doesn’t go untaxed under the guise of profit sharing.

• Increase transparency in revenue recognition from firm-to-partner transactions.

Concerns & Complications

While the intent may be noble, Section 194T raises serious concerns:

1. Increased Compliance Burden:
   Partnership firms—especially small and family-run businesses—must now maintain detailed records, issue TDS certificates, and file returns for internal payments that were earlier seen as part of firm accounting.

2. Cash Flow Disruptions for Partners:
   Deducting 10% TDS on legitimate earnings like interest on capital or salary may delay liquidity for partners, particularly when refunds take time.

3. Double Taxation Risk:
   Without clear offset or credit mechanisms, partners may face TDS on earnings that are already taxable in their individual returns, leading to complexity and potential over-taxation.

4. Blurred Lines with Profit Sharing:
   Distinguishing between remuneration and profit could become legally contentious, requiring firms to reevaluate their partnership agreements and payment structures.

Disclaimer

This summary is intended for informational purposes only and does not constitute legal or financial advice. Tax laws are subject to change, and individual circumstances can vary. It is strongly recommended to consult with a qualified tax professional or legal advisor to understand how these changes may affect your specific situation. The author assumes no responsibility for any actions taken based on this information.