Section 194T — TDS on Partner Remuneration in Partnership Firms + LLPs (FY 2025-26)

What Section 194T is — and why it was introduced

Historically, the Income Tax Act contained a glaring compliance gap regarding partnership firms. While companies were required to deduct TDS on salaries paid to their directors and employees under Section 192, partnership firms had no statutory obligation to withhold tax on the remuneration, bonuses, and interest payouts they made to their working partners.

This meant the tax department lacked a real-time tracking mechanism for partner income, leading to potential tax deferment at the individual partner level.

To bridge this reporting gap, the Government introduced Section 194T via the Finance (No. 2) Act 2024, effective 1 April 2025. It aligns the treatment of partner compensation with standard corporate payroll and professional fees, ensuring tax is collected at source before money reaches the partner’s hands.

Effective date + scope (firms + LLPs)

• Effective date: Section 194T applies to all specified payments made or credited on or after 1 April 2025 (FY 2025-26 onwards). Payments made before this date are entirely outside its scope.
• Applicability (the deductor): the obligation to deduct tax falls universally upon:
  1. Traditional partnership firms (whether registered or unregistered under the Indian Partnership Act, 1932).
  2. Limited Liability Partnerships (LLPs) registered under the Limited Liability Partnership Act, 2008.

What payments trigger 194T

The wording of Section 194T is deliberately broad to prevent firms from re-characterising payouts to bypass the TDS net.

Payments subject to 10% TDS:

1. Salary: fixed monthly payouts to working partners.
2. Remuneration: any performance-linked or fixed managerial compensation.
3. Commission: sales- or revenue-based commissions paid to partners.
4. Bonus: annual or milestone-based bonus payments.
5. Interest on capital: interest paid on the capital balance maintained by the partner.
6. Interest on current account: interest paid on floating loan / current account balances provided by the partner to the firm.

Payments strictly EXCLUDED from 194T:

• Share of profit: the distribution of the firm’s post-tax profit is exempt in the partner’s hands under Section 10(2A). Because it is not a deductible expense for the firm, it does not trigger Section 194T.
• Capital withdrawals / drawings: withdrawing previously-introduced capital or drawing against expected profit share is a balance-sheet transaction, not an income payment. No TDS applies.

Threshold mechanics — the ₹20,000 trigger

To shield micro-firms from the compliance burden, Section 194T incorporates a monetary threshold.

TDS is only required to be deducted if the aggregate amount of all specified payments (salary + interest + bonus, etc.) paid or credited to a specific partner during the financial year exceeds ₹20,000.

How the threshold is computed:

• Calculated on an annual, per-partner basis.
• Aggregates all categories. If a partner receives ₹15,000 as salary and ₹10,000 as interest on capital, the aggregate is ₹25,000 — threshold breached.
• The catch: once the aggregate payments cross ₹20,000, TDS must be deducted on the entire amount, not just the portion exceeding ₹20,000.

Rate — 10% (and the PAN-missing 20% backup)

The statutory rate of deduction under Section 194T is a flat 10%.

Unlike payments to non-residents, no surcharge or Health & Education Cess is added to this 10% base rate for resident partners.

• The Section 206AA penalty: if a partner fails to furnish a valid PAN to the firm, the firm is legally required to deduct TDS at 20% (double the standard rate).
• Note on Section 206AB: the Finance Act 2025 removed the penal provisions of Section 206AB. Firms are no longer required to verify if the partner filed their previous years’ ITRs before applying the 10% rate.

When to deduct — credit vs payment, whichever is earlier

The timing of TDS deduction under Section 194T is the earlier of:

1. At the time of credit: when the firm credits the salary, commission, or interest to the partner’s capital or current account in its books.
2. At the time of payment: when the firm actually transfers cash, issues a cheque, or initiates a bank transfer to the partner.

The year-end interest trap: many firms wait until 31 March to calculate and credit “Interest on Capital” to their partners’ accounts. Even though no physical cash is paid out to the partner on 31 March, the credit entry in the books triggers the immediate obligation to deduct 10% TDS and deposit it by 30 April.

TAN requirement — most firms need a new one

The biggest operational shift caused by Section 194T is the TAN mandate.

Historically, thousands of family-run partnership firms operated without employees and relied solely on partners for labour. Because they had no payroll or contractor expenses, they never needed a Tax Deduction and Collection Account Number (TAN).

From 1 April 2025, if a firm pays remuneration exceeding ₹20,000 to a partner, it must possess a TAN. Firms should apply for a TAN via Form 49B immediately to ensure they can legally deposit their first TDS deduction.

Worked example — typical 2-partner firm

A partnership firm “Alpha Associates” has two equal working partners, Rahul and Priya.

Financials for FY 2025-26:

• Rahul receives ₹5,00,000 as annual salary and ₹40,000 as interest on capital.
• Priya receives ₹5,00,000 as annual salary and ₹60,000 as interest on capital.

Testing the threshold:

• Rahul’s total receipt: ₹5,40,000 (exceeds ₹20,000)
• Priya’s total receipt: ₹5,60,000 (exceeds ₹20,000)

TDS calculation (10% rate):

• TDS to be deducted from Rahul: ₹54,000 for the year.
• TDS to be deducted from Priya: ₹56,000 for the year.

Cash flow impact: instead of drawing ₹5,40,000 in cash, Rahul will only receive ₹4,86,000. The firm will deposit ₹54,000 to the Government against Rahul’s PAN. When Rahul files his personal ITR, he will claim the ₹54,000 as a tax credit against his final tax liability.

Reporting workflow — Form 26Q + Form 16A + Challan ITNS 281

Finance teams must integrate the following compliance cycle into their monthly workflow:

1. Deposit the tax: TDS deducted during any month must be paid to the Central Government using Challan ITNS 281 by the 7th of the following month (TDS deducted in May must be deposited by 7 June). Exception: TDS deducted in March can be deposited until 30 April.
2. File quarterly returns: the firm must file Form 26Q (return for non-salary TDS for residents) on a quarterly basis. Ensure the partner’s PAN and the exact breakdown of remuneration vs interest are accurately mapped.
3. Issue TDS certificates: after filing Form 26Q, the firm must download Form 16A from the TRACES portal and issue it to the partners quarterly.

For execution support, see the TDS Return Filing service.

Interaction with Section 40(b) (firm’s own deduction limits)

A frequent point of confusion is how Section 194T interacts with Section 40(b) of the Income Tax Act.

Section 40(b) places a strict ceiling on how much partner remuneration a firm can claim as a deductible business expense (on the first ₹6,00,000 of book profit, the firm can only deduct ₹3,00,000 or 90% of book profit, whichever is higher). Interest on capital is capped at a maximum of 12% per annum.

The rule: Section 194T is purely a withholding tax provision. It has zero impact on the computation of the firm’s allowable expenses under Section 40(b).

If a firm pays ₹15,00,000 as remuneration to a partner, but Section 40(b) only allows ₹10,00,000 as a deductible expense for the firm, the firm must still deduct 10% TDS on the entire ₹15,00,000 payout under Section 194T.

Common questions + edge cases

1. Does 194T apply to non-working (sleeping) partners? Usually, partnership deeds do not authorise salaries or remuneration for sleeping partners, restricting them to profit shares (which are exempt from 194T). However, if a sleeping partner receives interest on capital exceeding ₹20,000 in the year, the firm must deduct 10% TDS on that interest.

2. What if a partner joins mid-year? The ₹20,000 threshold applies to the financial year. Even if a partner joins in January, if their total specified payments from January to March exceed ₹20,000, 10% TDS applies to the entire amount.

3. Are LLPs treated differently? No. An LLP is taxed exactly as a traditional partnership firm under the Income Tax Act. Remuneration paid to Designated Partners in an LLP squarely attracts Section 194T.

Penalty for non-compliance + Section 40(a)(ia) disallowance risk

The introduction of Section 194T brings partnership firms into the harsh penal environment of standard TDS law:

• Interest on late payment: under Section 201(1A), failing to deduct tax attracts 1% interest per month. Deducting the tax but failing to deposit it with the Government attracts 1.5% interest per month.
• Late filing fees: delaying the filing of Form 26Q triggers a late fee of ₹200 per day under Section 234E, capped at the total TDS amount.
• The nuclear option — Section 40(a)(ia) disallowance: if the firm fails to deduct TDS under Section 194T, the assessing officer can invoke Section 40(a)(ia). This allows the tax department to disallow 30% of the partner’s remuneration and interest expense while computing the firm’s taxable business income. This artificially inflates the firm’s taxable profit, leading to a massive unexpected tax bill at the 30% firm tax rate.

Implementation checklist for firms (5-step rollout)

To ensure your firm is ready for the FY 2025-26 mandate:

1. Apply for a TAN: if your firm doesn’t have one, file Form 49B immediately.
2. Review the partnership deed: ensure clauses regarding remuneration and interest precisely dictate the amounts, aligning with Section 40(b) limits, so your finance team knows exactly what to provision for TDS.
3. Update accounting software: modify your ERP (Tally, Zoho, etc.) to automatically trigger a 10% TDS journal entry whenever a “Partner Salary” or “Interest on Partner Capital” ledger is credited.
4. Collect partner PANs: ensure you have copies of every partner’s PAN to avoid the 20% penal deduction.
5. Communicate cash-flow changes: warn partners that their monthly drawings / salary transfers will decrease by 10% starting April 2025, but they will receive this back as a tax credit (Form 26AS) during their personal ITR filing.

For a broader view of all TDS rates and limits applicable to your business, see the TDS rate chart for FY 2025-26. For the foundational framework, see the TDS overview pillar.