Key Takeaways
- Section 194T requires every partnership firm and LLP to deduct TDS at 10% on salary, remuneration, commission, bonus, and interest paid or credited to partners when the aggregate exceeds Rs 20,000 in a financial year.
- The section was introduced by the Finance (No. 2) Act, 2024 and took effect on 1 April 2025. Under the new Income Tax Act 2025, it maps to Section 393(3), Sl. No. 7 (effective 1 April 2026).
- Capital withdrawals (drawings) and profit share distributions (exempt under Section 10(2A)) are not covered. TDS applies only to payments in the nature of salary, remuneration, bonus, commission, and interest.
- TDS must be deducted at the earlier of crediting the partner's account (including capital account) or making the actual payment.
- Non-compliance triggers interest under Section 201(1A) (1% per month for non-deduction, 1.5% per month for late deposit), 30% expense disallowance under Section 40(a)(ia), and a penalty equal to the TDS amount under Section 271C.
Until 31 March 2025, payments by a partnership firm to its own partners existed entirely outside the TDS net. A firm could credit Rs 50 lakh in remuneration and Rs 8 lakh in interest to its partners' capital accounts without withholding a single rupee. The firm paid tax on its profits; the partners paid tax on their remuneration and interest income when they filed their ITRs. Whether they actually did so, and whether the amounts matched, was a matter of trust between the taxpayer and the department.
Section 194T changes that. From 1 April 2025, every firm and LLP must deduct 10% TDS before paying or crediting salary, remuneration, commission, bonus, or interest to any partner. The deduction creates a paper trail that the department can trace through Form 26AS, AIS, and TIS, making it significantly harder for partner income to fall through the cracks.
This guide covers the provision end to end: who it applies to, what payments are covered, what is excluded, how it interacts with Section 40(b) remuneration limits, and what happens if a firm fails to comply.
Who Must Deduct TDS Under Section 194T
The obligation falls on the firm. Under Section 2(23) of the Income Tax Act, 1961, "firm" includes:
- General partnership firms governed by the Indian Partnership Act, 1932
- Limited Liability Partnerships (LLPs) governed by the LLP Act, 2008
There is no turnover threshold. A two-partner consulting LLP earning Rs 15 lakh per year has the same obligation as a manufacturing firm earning Rs 500 crore. There is no exemption for MSMEs, no exemption for professional firms, and no exemption based on audit status.
The deductee is the partner of the firm. This includes both working partners and sleeping (dormant) partners, to the extent the firm pays or credits them any covered amount.
What About Sole Proprietorships and Companies?
Section 194T does not apply to sole proprietorships (a proprietor cannot pay salary to himself) or to companies (director remuneration is covered by Section 194J). It is specific to the firm-partner relationship.
Payments Covered by Section 194T
TDS must be deducted on five categories of payments to partners:
| Payment type | Common examples |
|---|---|
| Salary | Monthly or periodic salary drawn by working partners |
| Remuneration | Lump-sum remuneration credited at year-end based on book profits |
| Commission | Percentage-based commission for business development |
| Bonus | Performance-linked bonus paid to working partners |
| Interest | Interest on partner's capital contribution or loan to the firm |
These five categories overlap substantially with the payments governed by Section 40(b), which limits how much remuneration and interest a firm can claim as a deduction. But the overlap is not perfect, and the differences matter. More on this in the Section 40(b) interplay section below.
Payments NOT Covered
Two categories of partner payments fall outside Section 194T:
1. Capital withdrawals (drawings). When a partner withdraws money from their capital account, that withdrawal is not salary, remuneration, commission, bonus, or interest. It is a return of the partner's own capital. No TDS applies.
2. Profit share distributions. A partner's share of the firm's profits is exempt under Section 10(2A) of the Income Tax Act, 1961. Since the firm has already paid tax on its total income, the profit share in the partner's hands is not taxable, and there is no reason to withhold TDS on it.
The distinction between drawings and remuneration is critical. If a partner takes Rs 5 lakh out of the firm in April, and the firm books it as a drawing against the capital account, no TDS is required. If the same Rs 5 lakh is booked as remuneration, TDS at 10% (Rs 50,000) must be deducted before the credit.
Firms must ensure their partnership deeds and accounting entries clearly distinguish between these categories. Ambiguous entries invite scrutiny during assessments.
TDS Rate and Threshold
| Parameter | Detail |
|---|---|
| TDS rate | 10% (no surcharge, no cess on TDS) |
| Threshold | Rs 20,000 aggregate per partner per financial year |
| Higher rate (no PAN/Aadhaar) | 20% under Section 206AA |
| Non-filer higher rate | Applicable under Section 206AB if the partner has not filed ITR for two preceding years and aggregate TDS/TCS exceeded Rs 50,000 in each year |
The Rs 20,000 threshold applies to the aggregate of all covered payments in a financial year, not to each payment individually. If a firm pays a partner Rs 10,000 in remuneration in April and Rs 12,000 in interest in May, TDS must be deducted starting from the May payment because the aggregate (Rs 22,000) has crossed Rs 20,000.
Once the threshold is crossed, TDS applies to the entire amount from the first rupee, not just the excess over Rs 20,000.
Practical Example
A two-partner LLP credits the following to Partner A's capital account during FY 2026-27:
| Month | Payment type | Amount | Cumulative | TDS required? |
|---|---|---|---|---|
| April | Remuneration | Rs 15,000 | Rs 15,000 | No (below Rs 20,000) |
| May | Interest on capital | Rs 8,000 | Rs 23,000 | Yes. TDS on the full Rs 23,000 = Rs 2,300 |
| June | Remuneration | Rs 15,000 | Rs 38,000 | Yes. TDS on Rs 15,000 = Rs 1,500 |
| ... | ... | ... | ... | ... |
In the May entry, the firm must deduct Rs 2,300 (10% of Rs 23,000) to catch up on the April amount that was not subject to TDS because the threshold had not yet been crossed.
When to Deduct: Credit vs Payment
TDS must be deducted at the earlier of:
- Crediting the amount to the partner's account (including the partner's capital account, current account, or any other account in the firm's books), or
- Actually paying the amount to the partner in cash, cheque, or bank transfer.
This timing rule is especially important for firms that credit remuneration to capital accounts on 31 March but do not make the actual payout until April or later. TDS must be deducted on 31 March when the credit happens, not when the cash moves.
Example: A firm finalises its books on 31 March 2027 and credits Rs 18 lakh to Partner B's capital account as remuneration for FY 2026-27. The firm does not transfer the money to Partner B's bank account until 20 April 2027. TDS must be deducted on 31 March 2027, and the TDS must be deposited with the government by 30 April 2027 (extended deadline for March deductions).
TDS Deposit and Return Filing Deadlines
TDS Deposit via Challan ITNS 281
| Month of deduction | Deposit deadline |
|---|---|
| April through February | 7th of the following month |
| March | 30 April |
The deposit is made through Challan ITNS 281. Select "Company Deductees" or "Non-Company Deductees" as applicable, and use Section code 194T (or the updated code under the new system from April 2026).
Quarterly Return: Form 26Q
Section 194T deductions are reported in Form 26Q (TDS return for non-salary payments). The due dates:
| Quarter | Period | Due date |
|---|---|---|
| Q1 | April to June | 31 July |
| Q2 | July to September | 31 October |
| Q3 | October to December | 31 January |
| Q4 | January to March | 31 May |
After filing Form 26Q, the firm must issue Form 16A (TDS certificate) to each partner within 15 days of the due date for filing the TDS return.
Interplay With Section 40(b): Remuneration and Interest Limits
Section 40(b) caps how much remuneration and interest a firm can claim as a deduction from its business income. Section 194T does not care about those caps. The two sections operate independently, and their interaction creates a compliance gap that firms must manage carefully.
Section 40(b) Remuneration Limits (from AY 2025-26)
The Finance (No. 2) Act, 2024 revised the limits:
| Book profit slab | Maximum deductible remuneration |
|---|---|
| First Rs 6,00,000 of book profit | Higher of Rs 3,00,000 or 90% of book profit |
| Balance of book profit | 60% of the remaining book profit |
If the firm has a loss or nil book profit, the maximum deductible remuneration across all partners is Rs 3,00,000.
"Book profit" means net profit as per the profit and loss account, computed under Chapter IV-D, before deducting partner remuneration. You add back the remuneration to arrive at book profit, then apply the formula.
Section 40(b) Interest Limit
Interest on capital or loans provided by partners is deductible only up to 12% simple interest per annum. Any excess is disallowed as a deduction in the firm's hands, though it remains taxable in the partner's hands.
The Mismatch Problem
Section 194T requires the firm to deduct TDS on the entire amount of remuneration or interest paid or credited to the partner, regardless of whether the amount is allowable under Section 40(b).
Example: A firm with Rs 8,00,000 of book profit pays Partner C total remuneration of Rs 6,00,000.
Section 40(b) limit calculation:
- First Rs 6,00,000: 90% = Rs 5,40,000 (higher than Rs 3,00,000)
- Balance Rs 2,00,000: 60% = Rs 1,20,000
- Total deductible remuneration: Rs 5,40,000 + Rs 1,20,000 = Rs 6,60,000
Since Rs 6,00,000 is within the Rs 6,60,000 limit, the full amount is deductible. TDS under Section 194T: 10% of Rs 6,00,000 = Rs 60,000.
Now suppose the firm pays Rs 8,00,000 in remuneration instead:
- Section 40(b) allows only Rs 6,60,000 as a deduction. The remaining Rs 1,40,000 is disallowed.
- Section 194T still requires TDS on the full Rs 8,00,000 = Rs 80,000.
- The partner must report Rs 8,00,000 as income under "Profits and gains of business or profession" and claim credit for the Rs 80,000 TDS in their ITR.
The mismatch between the firm's deduction (Rs 6,60,000) and the partner's taxable income (Rs 8,00,000) is not an error. It is how the two sections are designed to work. Firms must ensure they do not cap TDS at the 40(b) limit.
Conditions for 40(b) Deduction
Remuneration is deductible under Section 40(b) only if:
- The partnership deed authorises the remuneration payment
- It is paid only to working partners (sleeping partners cannot receive remuneration; they can receive interest and profit share)
- The amount does not exceed the prescribed limits
If the partnership deed does not authorise remuneration, the entire amount is disallowed under Section 40(b), but TDS under Section 194T is still required on the payment.
Section 194T Under the New Income Tax Act 2025
The Income Tax Act 2025, which received Presidential assent on 29 March 2025, replaces the Income Tax Act 1961. For TDS purposes, the transition date is 1 April 2026.
Under the new Act:
- Section 194T maps to Section 393(3), Sl. No. 7
- The rate (10%), threshold (Rs 20,000), and covered payments remain the same
- The corresponding disallowance provision for non-deduction moves from Section 40(a)(ia) to Section 74(2)
For FY 2025-26 (April 2025 to March 2026), firms apply Section 194T under the old Act. For FY 2026-27 onwards, the reference is Section 393(3). The compliance obligation is identical in both.
Penalties for Non-Compliance
The consequences of failing to deduct, deposit, or report TDS under Section 194T are severe and multi-layered.
Interest Under Section 201(1A)
| Default | Interest rate | Period |
|---|---|---|
| Failure to deduct TDS | 1% per month or part of month | From the date TDS was deductible to the date of actual deduction |
| Failure to deposit TDS after deduction | 1.5% per month or part of month | From the date of deduction to the date of actual deposit |
Penalty Under Section 271C
If the Assessing Officer is satisfied that the firm has failed to deduct TDS, a penalty equal to the amount of TDS can be levied. This penalty is in addition to the interest under Section 201(1A).
Expense Disallowance Under Section 40(a)(ia)
If TDS is not deducted or, after deduction, is not deposited by the due date for filing the firm's ITR, 30% of the expenditure is disallowed as a deduction. This disallowance inflates the firm's taxable income and increases the firm's tax liability.
Late Filing Fee Under Section 234E
If the firm files Form 26Q after the due date, a late fee of Rs 200 per day is charged until the return is filed. The fee cannot exceed the TDS amount.
Prosecution Under Section 276B
If the firm deducts TDS but fails to deposit it with the government within the prescribed time, the firm can face prosecution with imprisonment up to 7 years and a fine. This provision exists for deterrence and is typically invoked in cases of large-scale or wilful default.
Step-by-Step Compliance Checklist
Here is the monthly and quarterly workflow for a partnership firm or LLP:
Monthly
- Identify covered payments: Check every payment or credit to partners. Separate drawings and profit distributions from salary, remuneration, commission, bonus, and interest.
- Check the threshold: Has the aggregate of covered payments to this partner crossed Rs 20,000 in the current financial year? If yes, deduct TDS on the full amount (including catching up on earlier months if the threshold was crossed mid-year).
- Verify PAN/Aadhaar: If the partner has not provided PAN or linked Aadhaar, deduct at 20% instead of 10%.
- Deduct TDS: Record the deduction in the firm's books. Credit the net amount (gross minus TDS) to the partner's account.
- Deposit TDS: File Challan ITNS 281 and deposit TDS by the 7th of the following month (30 April for March deductions).
Quarterly
- File Form 26Q: Compile all Section 194T deductions for the quarter and file Form 26Q by the due date (31 July, 31 October, 31 January, or 31 May).
- Issue Form 16A: Generate and issue Form 16A to each partner within 15 days of the Form 26Q due date.
Year-End
- Reconcile with Section 40(b): Verify that the remuneration and interest figures in the partnership deed, the firm's profit and loss account, the TDS deductions, and the partners' ITRs all align. Flag any mismatch early.
- Close books before April 30: Since many firms compute partner remuneration based on annual book profit, the books must be finalised before the March TDS deposit deadline of 30 April. If the firm finalises books on 31 March and credits remuneration to partners on that date, TDS must be deducted on 31 March and deposited by 30 April.
Common Questions
Does Section 194T apply to interest on a loan given by a partner to the firm?
Yes. Section 194T covers interest on both capital contributions and loans by partners to the firm. However, remember that interest on loans is not subject to the Section 40(b) interest cap of 12%. That cap applies only to interest on capital. Interest on partner loans is deductible in full (subject to reasonableness under Section 40A(2)), but TDS under Section 194T still applies.
If a partner's total income is below the taxable limit, can TDS be avoided?
No. Section 194T does not have a provision for the partner to submit Form 15G/15H to avoid TDS. The firm must deduct TDS regardless of the partner's income level. The partner can claim credit for the TDS in their ITR and obtain a refund if no tax is due.
What if the partnership deed does not authorise remuneration, but the firm still pays it?
TDS under Section 194T must still be deducted. Section 194T looks at the nature of the payment (salary, remuneration, etc.), not at whether the payment is authorised by the deed. The firm faces a separate problem: the entire remuneration is disallowed under Section 40(b) because the deed does not authorise it. But the TDS obligation exists independently.
Does this apply to a minor partner admitted to the benefits of the firm?
If the firm pays interest on the minor's capital contribution, TDS under Section 194T applies once the aggregate exceeds Rs 20,000. Minors admitted to the benefits of a partnership are partners for this purpose.
How does Section 194T interact with advance tax?
The TDS deducted under Section 194T reduces the partner's advance tax liability. Partners who were earlier paying advance tax on their expected remuneration and interest income can adjust the TDS credit and reduce their advance tax instalments accordingly.
Worked Example: Full-Year TDS Calculation
Facts: M/s ABC & Associates is a partnership firm with two working partners, A and B. The firm's book profit for FY 2026-27 is Rs 12,00,000. The partnership deed authorises remuneration and interest at 12% on capital.
| Partner | Capital balance | Interest at 12% | Remuneration credited | Total covered payments |
|---|---|---|---|---|
| A | Rs 10,00,000 | Rs 1,20,000 | Rs 4,00,000 | Rs 5,20,000 |
| B | Rs 5,00,000 | Rs 60,000 | Rs 3,00,000 | Rs 3,60,000 |
Step 1: Check threshold. Both partners receive more than Rs 20,000 in covered payments. TDS applies.
Step 2: Calculate TDS.
- Partner A: 10% of Rs 5,20,000 = Rs 52,000
- Partner B: 10% of Rs 3,60,000 = Rs 36,000
Step 3: Verify Section 40(b) limits (for the firm's deduction, not for TDS purposes).
Book profit = Rs 12,00,000 (after adding back remuneration of Rs 7,00,000, so the pre-remuneration book profit is Rs 19,00,000).
Wait, let us compute correctly. Book profit for Section 40(b) = Net profit before deducting remuneration. If the P&L shows Rs 12,00,000 after deducting remuneration, book profit = Rs 12,00,000 + Rs 7,00,000 (total remuneration) = Rs 19,00,000.
Applying the new limits:
- First Rs 6,00,000: 90% = Rs 5,40,000
- Balance Rs 13,00,000: 60% = Rs 7,80,000
- Maximum deductible remuneration: Rs 13,20,000
Total remuneration paid (Rs 7,00,000) is within the limit. Fully deductible.
Interest at 12% is within the 40(b) cap. Fully deductible.
Step 4: Deposit and report. The firm deposits TDS monthly via Challan ITNS 281 and files Form 26Q quarterly. Partners A and B claim credit for Rs 52,000 and Rs 36,000 respectively in their ITRs.
What Firms Should Do Right Now
If your partnership firm or LLP has not yet started deducting TDS under Section 194T, the gap is already accumulating interest. Every month of delay adds 1% interest on the un-deducted amount.
Immediate steps:
- Amend accounting procedures to deduct TDS before crediting any salary, remuneration, commission, bonus, or interest to a partner's account.
- Obtain or verify PAN for every partner. Without PAN, the TDS rate jumps to 20%.
- Register on TRACES if the firm has not already done so, for Form 26Q filing and Form 16A generation.
- Set up a TDS calendar with monthly deposit deadlines and quarterly return filing dates.
- Review the partnership deed to ensure remuneration clauses are current and authorised, so that the firm can claim the Section 40(b) deduction without disputes.
Section 194T is not optional and does not have a grace period. The obligation started on 1 April 2025, and the first quarterly return (Q1 FY 2025-26) was due on 31 July 2025. If your firm missed it, file the returns and deposit the TDS with interest to limit further damage.
The rates, thresholds, and section references in this article are based on the Finance (No. 2) Act, 2024 (inserting Section 194T into the Income Tax Act, 1961) and the Income Tax Act, 2025 (Section 393(3), Sl. No. 7). For the Section 40(b) remuneration limits, the revised schedule under the Finance (No. 2) Act, 2024 (effective AY 2025-26) applies. Verify current applicability with your CA before acting on any provision, as CBDT circulars or judicial precedent may modify the position.
