Section 194T — New TDS on Partner Payments from FY 2025-26 Complete Guide

Section 194T — New TDS on Partner Payments from FY 2025-26 Complete Guide

Section 194T, inserted by the Finance Act 2024 and operative from 1 April 2025, requires every partnership firm and LLP to deduct TDS at 10% before crediting or paying salary, remuneration, commission, bonus, or interest on capital to a partner. The annual per-partner threshold is Rs. 20,000. No such TDS obligation existed on these payments before FY 2025-26 — making this one of the most operationally significant changes to hit the partnership sector in a generation. Every firm that has not yet built a 194T workflow is already in default for FY 2025-26.

What Section 194T Actually Covers — and What It Doesn't

Section 194T sits in Chapter XVII-B of the Income-tax Act, 1961, alongside the other TDS provisions. It applies to resident partnership firms and LLPs making the following payments to their partners:

Payments within scope:

• Remuneration — the standard monthly drawings of a working partner
• Salary — where the deed uses salary language rather than remuneration
• Commission — including percentage-based commission linked to firm turnover
• Bonus — year-end or performance-based amounts credited to a partner's account
• Interest on capital account, drawing account, or loan account — all three explicitly named

Payments outside scope:

• Profit share — a partner's portion of net profit is an appropriation, not remuneration; it is outside 194T entirely
• Repayment of loan principal by the firm to a partner
• Genuine expense reimbursements on actuals (not disguised remuneration)
• Payments to a person who is not a named partner in the firm

The profit-share boundary is the single most important distinction in practice. If the partnership deed describes an amount as remuneration and it is credited before computing net profit, it is inside 194T. If it is an allocation of post-tax profit, it is outside. Deeds that use hybrid language — "profit-linked remuneration" or "guaranteed payment out of profits" — need to be read carefully before deciding which side of the line the payment falls on.

TDS Rate, Threshold and the Deduction Trigger

Rate

The rate under Section 194T is a flat 10%. No surcharge or health-and-education cess is applied at the deduction stage; cess is accounted for in the partner's own tax computation at filing. For non-resident partners, Section 194T does not apply — Section 195 governs their payments, with the rate determined by the applicable DTAA and requiring a separate Form 15CA/15CB chain.

Threshold

TDS is not required if the aggregate of all 194T-covered payments to a partner during the financial year does not exceed Rs. 20,000. Three rules apply to this threshold:

• Per partner, not per firm — each partner has their own Rs. 20,000 limit independently of all other partners
• Per financial year — the counter resets on 1 April each year
• Applies to the entire amount — once the aggregate crosses Rs. 20,000, TDS applies to the full cumulative amount paid/credited, not just the excess over Rs. 20,000

Watch-out: A sleeping partner receiving only interest on capital of Rs. 18,000 in FY 2026-27 sits below the threshold — no TDS needed. But if the firm credits an additional commission of Rs. 5,000 in March 2027, the aggregate becomes Rs. 23,000. TDS now applies to the entire Rs. 23,000 (Rs. 2,300 to deduct). The earlier Rs. 18,000 credit that went through without deduction now has a shortfall. The fix is to track a running aggregate per partner from 1 April and deduct from the first payment that breaches Rs. 20,000.

Deduction Trigger

TDS must be deducted at the earlier of:

• The date the amount is credited to the partner's account in the books — including year-end journal entries dated 31 March, and
• The date of actual payment — cash, cheque, or bank transfer

A year-end journal entry that credits partner remuneration or interest as at 31 March carries a 31 March TDS obligation, even if the cheque is only written in April. This catches many firms off-guard in their first year of compliance.

Step-by-Step Compliance Workflow for Firms and LLPs

Work through this sequence at the start of FY 2026-27 if you have not already done so for FY 2025-26:

1. Obtain a TAN — Apply on Form 49B via the NSDL/TIN 2.0 portal if the firm does not already hold a Tax Deduction Account Number. A TAN is mandatory before you can deposit TDS or file Form 26Q.

1. Review and update the partnership/LLP deed — Verify that the deed quantifies or provides a formula for remuneration, commission, bonus and interest rates. Ambiguous deed language creates disputes about the correct TDS base and can attract scrutiny during assessment.

1. Set up a partner-wise TDS register — Maintain a running ledger per partner tracking: opening aggregate for the year, each credit/payment date and amount, TDS deducted, TDS deposited (with challan serial number), and Form 16A issued status.

1. Deduct TDS at the time of credit or payment — For monthly remuneration: deduct 10% each month on the credit date. For year-end interest or bonus: deduct on the date of the journal entry.

1. Deposit via Challan ITNS 281 on the NSDL TIN 2.0 portal, selecting Section 194T under Nature of Payment:
2. Deductions in April–February → deposit by the 7th of the following month
3. Deductions in March → deposit by 30 April

1. File Form 26Q (the quarterly TDS return for non-salary resident payments) with partner-wise details:
2. Q1 (April–June) → due 31 July
3. Q2 (July–September) → due 31 October
4. Q3 (October–December) → due 31 January
5. Q4 (January–March) → due 31 May

1. Issue Form 16A to each partner by downloading it from the TRACES portal within 15 days of the quarterly return due date — i.e., by 15 August, 15 November, 15 February, and 15 June respectively.

1. Year-end reconciliation — Match each partner's TDS credit visible in their Annual Information Statement (AIS) on the income tax e-filing portal with what the firm has deposited. Any mismatch must be resolved before the partner files their ITR-3. A mismatch triggers a notice to the partner; the firm faces a disallowance risk.

Worked Example: Calculating and Depositing TDS Under Section 194T

Firm: M/s Prakash & Co., a partnership firm with three partners for FY 2026-27.

Rajesh: Aggregate Rs. 15,000 is below the Rs. 20,000 threshold → No TDS. However, if the firm credits a supplementary interest of Rs. 7,000 in March 2027, the aggregate rises to Rs. 22,000. TDS on the full Rs. 22,000 = Rs. 2,200 must be deducted from the March credit and deposited by 30 April 2027.

Sunita: Annual TDS = Rs. 2,80,000 × 10% = Rs. 28,000.

• Monthly: Rs. 20,000 × 10% = Rs. 2,000 → deposit by the 7th of each following month.
• Year-end interest credit of Rs. 40,000 on 31 March 2027: TDS Rs. 4,000 → deposit by 30 April 2027.

Vikram: Annual TDS = Rs. 4,40,000 × 10% = Rs. 44,000.

• Monthly on remuneration: Rs. 30,000 × 10% = Rs. 3,000 per month.
• Bonus credit in October 2026: Rs. 20,000 × 10% = Rs. 2,000 → deposit by 7 November 2026.
• Year-end interest credit Rs. 60,000 on 31 March 2027: TDS Rs. 6,000 → deposit by 30 April 2027.

Penalty scenario: The firm forgets Vikram's April 2026 TDS of Rs. 3,000. The error is caught on 20 June 2026.

• Interest under Section 201(1A): Delay from 7 May to 20 June = 2 months (part months count as full). Rs. 3,000 × 1.5% × 2 = Rs. 90.

Modest in isolation — but if all partner salary TDS for the entire Q1 (April–June) is missed, total TDS unpaid might be Rs. 15,000. Filing Form 26Q 60 days late after the 31 July deadline triggers Section 234E late fees of Rs. 200 per day: Rs. 200 × 60 = Rs. 12,000 — almost as large as the TDS itself. Add Section 271H penalties of Rs. 10,000 to Rs. 1,00,000 for non-filing or incorrect filing, and a single missed quarter becomes a material cost event.

Section 194T and Section 40(b): The Interplay You Must Understand

Section 40(b) caps the deduction a firm can claim for remuneration paid to working partners:

• On the first Rs. 3,00,000 of book profit (or in a loss situation): Rs. 1,50,000 or 90% of book profits, whichever is higher
• On the balance book profit: 60%

Section 194T operates independently of Section 40(b). TDS is deducted on the gross amount credited to the partner — not on the 40(b)-deductible portion.

Illustration: A firm pays a working partner remuneration of Rs. 5,00,000. The 40(b) ceiling for this partner based on the firm's book profit works out to Rs. 3,60,000. The disallowed Rs. 1,40,000 is added back in the firm's tax computation. But the partner still receives a TDS credit for Rs. 50,000 (10% of Rs. 5,00,000). The TDS base is the gross payment, full stop.

Common error from this interplay: Firms deduct TDS only on the 40(b)-allowable portion, thinking that is the "taxable" remuneration. This is wrong. The partner's Form 26AS then understates the TDS, the firm's 26Q is incorrect, and the assessment of both the firm and the partner carries mismatch risk. Deduct on gross; let the partner handle the 40(b) excess in their own computation.

Lower Deduction and Nil TDS Certificates Under Section 197

A partner whose total projected income for the year falls below the basic exemption limit — or whose effective tax rate is below 10% — can apply to the jurisdictional Assessing Officer for a lower or nil TDS certificate under Section 197.

How to apply (online):

1. Log in to the income tax e-filing portal (incometax.gov.in)
2. Navigate to Services → TDS on Other than Salary → Lower/Nil Deduction
3. Select Section 194T as the applicable section
4. Submit the projected income computation, PAN details, and firm information
5. The Assessing Officer issues a certificate specifying a lower rate or nil rate for the financial year

Rules the firm must follow:

• Apply the certificate from the date it is presented to the firm — not retrospectively to already-deducted TDS
• The certificate is valid only for the financial year stated on it
• Retain a copy in the TDS records and quote the certificate number in Form 26Q
• If no certificate is presented before the first TDS-attracting credit, deduct at the standard 10%

This route is particularly valuable for elderly or non-active partners drawing modest interest on capital — say Rs. 80,000 per year — whose total income (all sources combined) falls below the exemption threshold. A nil certificate prevents a Rs. 8,000 TDS lock-up that would otherwise sit frozen until ITR-3 is filed in July or October. Apply by May each year to capture the benefit from the first credit.

Common Mistakes and How to Fix Them

1. Deducting TDS on profit share Profit distribution is outside Section 194T. Deducting TDS on it overstates the partner's advance tax, creates a refund at filing, and errors the firm's 26Q. Fix: Identify the exact amounts in the deed described as remuneration, salary, commission, bonus or interest. Profit share credited after computing net profit is outside scope.

2. Ignoring interest on loan accounts Firms often book interest on partner loan accounts (as distinct from capital accounts) without flagging it as a 194T payment. Fix: Section 194T explicitly covers interest on capital, drawing or loan account. Audit every partner-related interest entry in the books each quarter.

3. Deducting TDS only at payment, not at credit A year-end journal entry dated 31 March that credits remuneration or interest is a credit event — TDS must be deducted on 31 March. Fix: Configure accounting software to auto-generate a TDS payable entry simultaneously with every partner remuneration or interest credit entry.

4. Treating the Rs. 20,000 threshold as per-payment rather than per-year Small firms credit interest quarterly and may assume each quarterly credit below Rs. 20,000 escapes TDS. Fix: The limit is the annual aggregate per partner. Track the cumulative total from 1 April; deduct TDS the moment the running sum exceeds Rs. 20,000.

5. Not filing Form 26Q because the firm never filed it before Firms with no prior TDS obligations have no muscle memory for quarterly TDS returns. The system is unfamiliar. Fix: Register the TAN on TRACES, set up the 26Q filing workflow (via the income tax TDS filing portal or a compliance tool), and block the four quarterly due dates in your compliance calendar now.

6. Not issuing Form 16A Without Form 16A, the partner cannot easily reconcile TDS in their ITR-3. If Form 26Q was not filed, the TDS may not even appear in AIS, triggering notices. Fix: Download Form 16A from TRACES within 15 days of each quarterly return due date. Make it a post-filing checklist item.

Impact on Partner Cash Flow and ITR-3 Filing

Section 194T fundamentally front-loads the partner's income-tax outflow. Before FY 2025-26, a working partner could time most of their tax payments to advance-tax instalments (15 June, 15 September, 15 December, 15 March) or, in practice, to self-assessment at filing. Now, 10% leaves the partner's hands with every remuneration and interest credit throughout the year.

Partners in the 30% slab (income above Rs. 15,00,000 under the new tax regime for FY 2026-27): 10% TDS covers roughly one-third of actual liability. Advance tax payments remain mandatory for the shortfall — failure attracts interest under Sections 234B and 234C. Do not assume 10% TDS satisfies the advance-tax obligation.

Partners in lower slabs or with heavy deductions: TDS at 10% may exceed actual tax liability, creating a refund. That refund arrives only after filing ITR-3 — due 31 July 2027 for non-audit partners and 31 October 2027 for those under tax audit. Cashflow is locked for months.

Structural note on timing: Where a partner receives a large year-end bonus or interest credit in March, the resulting TDS deduction bunches into the last month of the year. Firms can smooth this by crediting interest quarterly rather than annually, distributing the TDS obligation — and the partner's cashflow impact — more evenly across the year. This also aligns TDS deposit obligations with monthly payroll cycles, reducing the administrative burden of a single large March deposit.

LLP-specific: LLPs with foreign-resident partners must apply Section 195 (TDS on payments to non-residents) for those partners instead of Section 194T. The applicable rate is determined by the relevant DTAA or the rates in force, and the transaction typically requires Form 15CA and Form 15CB from a chartered accountant before remittance. Section 194T applies only to resident partners.

Key Takeaways

• Section 194T is effective from 1 April 2025 (FY 2025-26) and applies to every partnership firm and LLP regardless of size or turnover — there is no exemption for small firms.
• Rate: 10% flat on salary, remuneration, commission, bonus, and interest on capital/drawing/loan accounts; threshold: Rs. 20,000 per partner per year, applied to the cumulative aggregate, not each individual payment.
• Deduct at credit or payment, whichever is earlier — a 31 March journal entry is a credit event and triggers TDS on 31 March, not when the cheque is issued in April.
• Profit share is outside Section 194T; interest on partner loan accounts is squarely inside it — know which side of the line each item in your books falls on.
• Deposit via Challan ITNS 281 by the 7th of the next month (30 April for March); file Form 26Q quarterly by 31 Jul / 31 Oct / 31 Jan / 31 May; issue Form 16A within 15 days of each return due date via TRACES.
• Section 234E late filing fees: Rs. 200 per day, capped at the TDS amount — a missed quarterly return on even a modest TDS liability can generate a five-figure penalty within two months.
• Section 197 lower/nil certificates are the cleanest cashflow protection tool for partners with low total income — apply on the e-filing portal by May each year, before the first TDS-attracting credit of the year.