As of right now, the partnership business is not allowed to deduct tax at source (TDS) from the salary, compensation, interest, bonus, or commission that it pays to partners.

In order to bring payments such as salary, remuneration, commission, bonus, and interest to any account (including capital account) of the firm’s partner under the jurisdiction of TDS for aggregate amounts more than Rs 20,000 in the financial year, it is proposed that a new TDS section 194T be inserted. The 10% TDS rate will be applicable.

The provisions of section 194T of the Income Tax Act will take effect from the 1st April, 2025.

Currently, in family-owned businesses, a partner’s pay withdrawal from the company is contingent upon a number of circumstances, including cash flow needs and potential tax ramifications. The withdrawal is often not scheduled, but rather occurs on an as-needed basis. The partners may need to explain their departure from the firms because the adoption of the rules will result in a 10% TDS deduction.

Additionally, there may be instances in which a partner’s compensation is contingent upon the firm’s profitability, which is often ascertained after the firm’s books are closed for the financial year. Therefore, the firm’s books of accounts may need to be closed before the specified period in order to deduct the TDS on partner compensation for the year that ended on March 31st.