Section 194T Explained: TDS on Partner Payments for Partnership Firms & LLPs from 1 April 2025
Section 194T has changed the compliance landscape for partnership firms and LLPs from 1 April 2025. If your firm pays or credits partner remuneration, interest on capital, bonus, or commission, TDS is now part of routine accounting discipline. The real shift is this: TDS can arise even before money is actually paid, because a credit entry to the partner’s account, including capital account, is enough to trigger deduction.
- What is Section 194T?
- Covered and Excluded Payments
- Threshold Limit and How It Works
- Time of Deduction: Credit or Payment
- Practical Examples
- Accounting Treatment
- Due Dates, Return Filing and Form 16A
- Compliance Checklist for Firms and LLPs
- Risks of Non-Compliance
- Related DN & CO. Guides
- Frequently Asked Questions
- Official References
What is Section 194T?
Section 194T requires a firm to deduct TDS at 10% on any sum paid or credited to a partner by way of:
- Salary or remuneration
- Commission
- Bonus
- Interest
This provision was inserted by the Finance (No. 2) Act, 2024 and applies from 1 April 2025. Although the section uses the word “firm”, LLPs are also relevant in practice because income-tax law includes LLPs within the meaning of firm/partnership for these purposes.
Covered and Excluded Payments
One of the biggest practical mistakes in books finalization is treating every partner withdrawal the same way. Under Section 194T, classification matters more than ever.
| Type of Payment | TDS Under Section 194T | Practical Position |
|---|---|---|
| Partner remuneration / salary | Yes | Specifically covered |
| Interest on capital | Yes | Specifically covered |
| Commission or bonus to partner | Yes | Specifically covered |
| Share of profit | No | Outside Section 194T and generally exempt under Section 10(2A) |
| Repayment of capital contribution | No | Not a covered income item by itself |
| Routine drawings | Usually No | No TDS if it is only capital/drawing withdrawal and not remuneration, interest, bonus or commission |
Threshold Limit and How It Works
TDS under Section 194T does not apply in every small case. The section gives a partner-wise financial year threshold of ₹20,000. The threshold is based on the aggregate of covered payments credited or paid or likely to be credited or paid during the year.
Example: Threshold Crossing
Suppose Partner A receives interest of ₹12,000 and later remuneration of ₹10,000 during the same financial year. Total covered amount becomes ₹22,000.
| Particulars | Amount |
|---|---|
| Interest on capital | ₹12,000 |
| Remuneration | ₹10,000 |
| Total covered amount | ₹22,000 |
| TDS under Section 194T @ 10% | ₹2,200 |
Practical reading of the law: because the threshold is an annual aggregate cap, once the limit is crossed, the firm should ensure TDS is recovered on the full covered amount for that year. In real books, this may require a catch-up deduction from the next partner payment if earlier credits were made without TDS.
Time of Deduction: Credit or Payment
The deduction point under Section 194T is very clear. TDS must be deducted at the earlier of:
- Credit of the amount to the partner’s account, including capital account
- Actual payment of the amount
This means firms cannot postpone TDS merely by delaying bank payment. If the remuneration or interest is booked in the accounts, the TDS event may already have happened.
Example: Year-End Provision
A firm credits partner remuneration of ₹1,00,000 on 31 March 2026 and actually pays it in June 2026. TDS must still be deducted in March 2026, because the credit happened first.
Practical Examples You Can Use in Real Accounting
1. Interest on Capital Below Threshold
Partner B is credited interest of ₹18,000 for the full year and no other covered amount is paid or credited. Since the aggregate covered payment does not exceed ₹20,000, no TDS is required.
2. Drawings by Partner
Partner C withdraws ₹50,000 from drawings during the year. If this is only a capital/drawing withdrawal and not remuneration or interest, Section 194T does not apply.
3. Remuneration with Cash Flow Impact
Partner D is entitled to remuneration of ₹2,00,000.
| Particulars | Amount |
|---|---|
| Remuneration credited | ₹2,00,000 |
| TDS @ 10% | ₹20,000 |
| Net amount receivable by partner | ₹1,80,000 |
The partner will normally claim the ₹20,000 as TDS credit in the income-tax return. Also remember that what many firms call “partner salary” is not employee salary in the usual sense; it is generally taxed in the partner’s hands under business income principles.
Accounting Treatment
Section 194T needs to be reflected cleanly in accounting entries, especially where firms credit partner current account or capital account instead of making immediate payment.
Partner Remuneration A/c Dr. ₹2,00,000
To Partner Capital / Current A/c ₹1,80,000
To TDS Payable u/s 194T A/c ₹20,000
TDS Payable u/s 194T A/c Dr. ₹20,000
To Bank A/c ₹20,000
Firms should ideally maintain separate ledgers for partner remuneration, interest on capital, partner commission, and partner bonus instead of mixing them with drawings.
Due Dates, Return Filing and Form 16A
Section 194T follows the normal TDS compliance framework. That means firms must not only deduct tax correctly, but also deposit it, file returns, and issue certificates within time.
| Compliance Item | Due Date / Form |
|---|---|
| TDS deposit for deductions from April to February | On or before 7th of the next month |
| TDS deposit for deductions in March | On or before 30 April |
| Quarterly TDS return | Form 26Q |
| Q1 return due date | 31 July |
| Q2 return due date | 31 October |
| Q3 return due date | 31 January |
| Q4 return due date | 31 May |
| TDS certificate to partner | Form 16A, generally within 15 days from the due date of the quarterly statement |
If you want a broader section-wise view of rates and standard timelines, keep this guide handy: TDS Rate Chart FY 2026-27 – Section Wise Latest TDS Rates.
Compliance Checklist for Firms and LLPs
Section 194T should be built into monthly compliance, not left for March adjustments.
- Track covered partner payments partner-wise from the first month of the year
- Separate remuneration, interest, commission and bonus from drawings
- Monitor the ₹20,000 annual threshold on aggregate basis
- Check entries before crediting partner capital/current account
- Ensure partner PAN details are correctly mapped in records
- Deposit TDS within the applicable due date
- File Form 26Q on time
- Issue Form 16A to partners on time
- Reconcile books, TDS returns, Form 26AS and AIS at year-end
For a practical risk-control approach, you can also review TDS Compliance Mistakes That Trigger Income-Tax Notices.
Risks of Non-Compliance
Ignoring Section 194T can create avoidable tax cost and compliance stress for both the firm and the partner.
- Interest for late deduction or late deposit under the normal TDS default framework
- Late fee for delayed filing of TDS statement
- Penalty exposure in serious or repeated default cases
- Mismatches in partner tax credit records
- Scrutiny during assessment or finalization review
- Cash flow stress where the firm has to recover missed TDS later
Practical Strategy for Firms
- Update accounting software and ledger structure for partner-wise tracking.
- Create a monthly Section 194T review before closing books.
- Inform partners that net receipts may now be lower due to TDS.
- Map Section 194T review with year-end finalization and tax audit processes.
If your firm is also reviewing audit applicability while closing books, this internal guide can help: Tax Audit FY 2025-26: Due Dates, Applicability, Section 63, Form 26 & 2026 Changes Explained.
Related DN & CO. Guides
- TDS Rate Chart FY 2026-27 – Section Wise Latest TDS Rates
- TDS Compliance Mistakes That Trigger Income-Tax Notices
- Tax Audit FY 2025-26: Due Dates, Applicability, Section 63, Form 26 & 2026 Changes Explained
- Bank Transaction Limits 2026 in India: PAN Requirements, TDS on Cash Withdrawals, Section 269ST Rules & How to Avoid Income Tax Notices
The last guide is especially useful where firms want stronger year-end reconciliation between TDS records, bank movement, and AIS/Form 26AS reporting.
Frequently Asked Questions
1. Is TDS applicable on partner’s share of profit?
No. Share of profit is not covered by Section 194T and is generally exempt in the partner’s hands under Section 10(2A), provided the firm is separately assessed as such.
2. Does Section 194T apply to LLPs also?
Yes, practically it applies to LLPs as well because income-tax law includes LLPs within the relevant firm/partnership framework.
3. Is TDS deducted only on the amount above ₹20,000?
No. Once the annual aggregate covered payment to a partner exceeds ₹20,000, TDS is applied on the full covered amount, not merely on the excess.
4. If the amount is only credited in books and not paid, is TDS still required?
Yes. Section 194T is triggered at the earlier of credit or payment. A partner-wise credit entry itself can trigger TDS.
5. Is TDS required on capital withdrawal or routine drawings?
Not merely because money is withdrawn. If the withdrawal is only against capital or drawings, Section 194T does not apply. However, if the amount represents remuneration, interest, bonus or commission already credited, TDS may already have been triggered earlier.
6. Which form should be used for quarterly reporting?
Section 194T deductions should generally be reported in Form 26Q, since this is part of the normal TDS return framework for non-salary deductions.
7. Does this change the taxability of partner remuneration?
No. Section 194T mainly introduces a withholding obligation on the firm. It does not convert exempt profit share into taxable income, and it does not replace the separate deduction conditions under Section 40(b).
8. What is the biggest practical mistake under Section 194T?
The most common mistake is assuming that no TDS arises until actual payment. In reality, the book entry itself can be enough.
Final Takeaway
Section 194T is more than a new TDS line item. It changes how partnership firms and LLPs should think about partner payouts, month-end entries, and year-end closing. The firms that handle it well will classify partner payments correctly, monitor thresholds early, deduct tax at the credit stage, and keep partner communication clear.
The firms that ignore it may face a familiar problem: books look closed, cash has moved, but the TDS obligation is still sitting unresolved.
Official References
- Income Tax Department – Section 194T
- Finance (No. 2) Act, 2024 – Insertion of Section 194T
- Income Tax Rules – Rule 30 for TDS deposit timelines
- Income Tax Department – Tax Deductor page for TDS return due dates
- TRACES – Form 16A issue timeline FAQ
- Income Tax Department – Section 10(2A) on share of profit exemption
- Income Tax Department – Firm / LLP overview
- Finance Act, 1992 Circular – share of profit exemption and taxation of remuneration/interest in partner’s hands
Disclaimer: This article is for general educational purposes and is based on the Income-tax Act, 1961, the Finance (No. 2) Act, 2024, and public guidance available up to 28 April 2026. Tax outcomes depend on facts, deed terms, accounting treatment, PAN compliance, and later amendments or clarifications. Professional advice should be taken before acting on any major partner payment or year-end provision.