TaxTMI 
TaxTMI 
Ensure the tax compliance and transparency regarding the income distributed by partnership firms to their partners : Clause 393(3)[Table: S.No. 7] of the Income Tax Bill, 2025 Vs. Section 194T of the Income-tax Act, 1961
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....ent, aligning with the broader overhaul proposed in the Income Tax Bill, 2025. This commentary undertakes a comprehensive analysis of Clause 393(3)[Table: S.No. 7] of the new Bill, followed by a comparative study with Section 194T as inserted by the Finance (No. 2) Act, 2024. The discussion explores the legislative intent, the mechanics of the provisions, interpretative issues, practical implications, and their place within the evolving Indian tax landscape. Objective and Purpose The primary objective behind both Clause 393(3)[Table: S.No. 7] and Section 194T is to ensure tax compliance and transparency regarding the income distributed by partnership firms to their partners. Historically, such payments-particularly interest, salary, commi....
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....count ensures that even non-cash or book entries are within the TDS net, preventing avoidance through mere accounting entries. The phrase "including capital account" is significant, as partners are often credited their share of interest or remuneration directly to their capital accounts, rather than being paid out. Timing of Deduction TDS is required to be deducted at the earlier of two events: (i) credit of such sum to the partner's account (including the capital account), or (ii) actual payment. This "whichever is earlier" rule is consistent with other TDS provisions and is designed to prevent deferral of TDS by delaying payment. Threshold Limit No TDS is required if the aggregate of such sums credited or paid to a partner doe....
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....by the recipient. Exemptions and Exclusions Clause 393(4) (Table: S.No. 7) provides for certain exemptions from TDS under this provision. For instance, payments made by the firm to a partner may be exempt from TDS if the partner furnishes a declaration that their estimated total income is below the taxable limit, in the prescribed form and manner, and subject to the aggregate payments not exceeding the basic exemption limit. Ambiguities and Potential Issues * Aggregation Across Multiple Firms: The threshold applies per firm, per partner. There is no aggregation across firms, which may allow a partner with interests in multiple firms to receive amounts below the threshold from each without TDS. * Nature of Payment: Disputes may arise ....
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....to partners. * Plugging Revenue Leakages: The provision is expected to minimize tax evasion by ensuring that such payments are reported and taxed at the earliest instance. Detailed Analysis of Section 194T of the Income-tax Act, 1961 Text of the Provision Section 194T, inserted by the Finance (No. 2) Act, 2024, with effect from 1 April 2025, reads: * (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, deduct income-tax thereon at the rate of ten per cent. * (2) No deductio....
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....ing capital account credits) Same Rate of TDS 10% 10% Threshold Rs. 20,000 per partner per year Rs. 20,000 per partner per year Timing At credit or payment, whichever is earlier Same Exemptions Declaration-based exemption available; also, certain payments to specified entities may be exempt under other sub-clauses Declaration-based exemption (Section 197A and corresponding rules may apply) Legislative Context Part of comprehensive new Code; replaces existing IT Act, 1961 Inserted as an amendment to the IT Act, 1961, effective 1 April 2025 Procedural Aspects Subject to general TDS procedures under the Bill Subject to general TDS procedures under the IT Act, 1961 Key Points of Convergence * Both provis....