ESOP Taxation Explained: Salary Perquisite to Capital Gains

📌 1. What is Section 194T?

Section 194T is a new TDS provision inserted by the Finance (No. 2) Act, 2024, effective from 1 April 2025. It requires a partnership firm or LLP to deduct tax at source on certain payments made to its partners.

📌 2. Meaning of Partners’ Remuneration

Partner’s remuneration refers to any payment made by a partnership firm or LLP to its partners in return for services rendered by them to the firm. Such payments are made in addition to the partner’s share of profit and are intended to compensate partners for their active involvement in the business.

🔹 Applicability of Section 194T of Income Tax Act
The following payments by a firm to a partner are covered in Section 194T:

✅ Salary
✅ Remuneration
✅ Commission
✅ Bonus or
✅ Interest on any account (It can be on a loan account or on a capital account).

🔹 Threshold Limit
₹20,000 per partner per financial year
If total payments exceed ₹20,000, TDS is required on the entire amount.

🔹 Rate of Deduction of TDS for Section 194T

The rate at which TDS is to be deducted is 10%. The TDS is to be deducted only in the cases where the aggregate payments to a partner exceeds Rs. 20,000 in a financial year.

🔹 Applicability Date

Section 194T is applicable from 1 April 2025 — meaning payments or credit to partners on or after this date are subject to these TDS rules

📌 Practical Impact of Section 194T on Firms & LLPs

1️⃣ New TDS Compliance Burden

Firms/LLPs must now deduct TDS @ 10% on payments like salary, remuneration, commission, bonus, and interest paid to partners.

Earlier, no TDS was required on such partner payments.
👉 This increases day-to-day compliance work.

2️⃣ Cash Flow Impact on Partners

Partners will receive net amount after TDS, not the full payment.

Although tax can be adjusted later while filing returns, it may cause short-term cash flow issues for partners.

3️⃣ Impact on Partnership Deeds

Existing deeds may need review or amendment to:

Clarify remuneration structure

Account for TDS deduction clauses
👉 Especially important where partners expect fixed take-home amounts.

4️⃣ No Impact on Profit Share

Share of profit to partners is not covered under Section 194T.Only specified payments are affected.
👉 Firms must clearly classify payments to avoid wrong deduction.

5️⃣ Increased Risk of Penalties

Failure to comply may result in:

Interest on late deduction/payment
Penalties
Disallowance under other sections

👉 Compliance discipline becomes crucial.