A partner in a partnership firm earns various types of Income: Remuneration/ salary, commission, interest on capital or profit share.
Now, partnership firms pays tax on its profit and then distribute same to their partners and hence the same has been treated as exempt income u/s 10(2A) of the Income Tax act. However the other two major and common income from partnership firm i.e. remuneration and interest on capital invested are not tax free and hence let’s see why TDS is not deducted on such remuneration and interest.
TDS on salary is covered under 192 and TDS on interest other than securities is covered under section 194A. So let’s see why remuneration or salary and interest paid to partners are not covered under these sections when both are liable to tax.
Relevant extracts of Section 192 are as follows:
“(1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.”
Relevant extracts of Section 194A are as follows:
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
(2) [Omitted by the Finance Act, 1992, w.e.f. 1-6-1992.]
(3) The provisions of sub-section (1) shall not apply—
(iii) to such income credited or paid to—
(iv) to such income credited or paid by a firm to a partner of the firm;
Thus, section 194A specifically removes interest paid to partner outside the ambit of TDS. Further interest, remuneration paid to partners are covered under section 28 of the Income Tax act and hence covered under Income from business and profession and not Income from salary. Therefore, TDS on such remuneration won’t be chargeable u/s 192.
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