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

Section 194T of the Income Tax Act 1961 is a new TDS provision introduced by the Finance (No. 2) Act 2024, operative from 1 April 2025. It addresses a long-standing anomaly: partnership firms paying salary, commission, bonus, remuneration, or interest to their own partners were not required to deduct TDS, even though such payments are deductible business expenses for the firm under Section 40(b). This created a significant tax collection gap — the firm claimed the deduction while the partner received income without any source-level tax deduction, relying entirely on voluntary advance tax payments.nnSection 194T closes this gap definitively. By treating partner remuneration like employee salary for TDS purposes, the provision ensures that the partners' income is brought into the advance tax collection net at the firm level. The provision applies to all partnership firms registered under the Indian Partnership Act 1932 and all Limited Liability Partnerships registered under the LLP Act 2008 — regardless of their size, turnover, sector, or the number of partners. There is no exemption for small firms, professional partnerships, or family-owned trading firms.nnThe only threshold under Section 194T operates at the individual partner level. TDS is triggered when total covered payments — salary, bonus, commission, remuneration, and interest — to any one partner aggregate more than Rs.20,000 in the financial year. This threshold is per partner and not aggregate across all partners. A firm with 10 partners must independently assess each partner's threshold position and deduct TDS only when that specific partner's covered payments cross Rs.20,000.

The TDS rate under Section 194T is a flat 10% with no distinction based on the legal status of the partner — whether the partner is an individual, HUF, or corporate entity, the rate remains 10%. The threshold is Rs.20,000 per partner per financial year aggregating all covered payment categories to that partner.nnThe payments covered under Section 194T are specifically defined: salary paid to a working partner, bonus on salary, commission on sales or business receipts, remuneration for specific services rendered by the partner to the firm, and interest on capital or loans contributed by the partner. Share of profit distributed to partners from the firm's net profit is expressly excluded from Section 194T — profit share continues to be exempt in the partner's hands under Section 10(2A) and does not attract TDS.nnTDS is deductible at the earlier of two events: when the payment amount is credited to the partner's capital account or current account in the books of the firm, or when actual payment is made in cash or via bank transfer. For many professional firms that credit partner salary monthly but pay it quarterly, TDS is triggered at the time of monthly credit — not at the time of actual quarterly disbursement. Firms must update their accounting systems to generate TDS alerts at the time of ledger credit entries.

For partnership firms that had no previous TDS obligations or had TDS only for third-party vendor payments, Section 194T requires immediate first-year compliance action beginning 1 April 2025. The most urgent first step is obtaining TAN if the firm does not already have one. TAN is applied for by filing Form 49B online through the NSDL portal at tin.tin.nsdl.com. Processing takes 7 to 10 working days and TAN is delivered by post and is also available digitally through the portal.nnStep 2 is reviewing the partnership deed to identify all payments to partners that fall within the Section 194T definition — salary clauses, remuneration formulas linked to turnover or profit, commission structures, and interest on capital at specified rates. Step 3 is computing the projected annual payment to each partner under these clauses to determine whether any partner will cross the Rs.20,000 threshold. For most operating firms with active partners drawing salary or remuneration, this threshold will almost certainly be crossed.nnStep 4 is configuring the accounting system to deduct 10% TDS at the time of crediting partner accounts. Step 5 is setting up the monthly deposit process using Challan ITNS 281 on incometax.gov.in by the 7th of each month. Step 6 is preparing for quarterly Form 26Q filing — either through a CA firm or directly on the income tax e-filing portal. Step 7 is generating Form 16A from TRACES after each quarterly filing and distributing it to each partner within 15 days of the return due date. Partners will use these Form 16A certificates to claim TDS credit in their personal ITR-3 filings.

Section 40(b) of the Income Tax Act limits the deductibility of working partner remuneration as a business expense based on the firm's book profit. For a firm with book profit up to Rs.3 lakh, the deductible remuneration is Rs.1,50,000 or 90% of book profit, whichever is higher. For book profit above Rs.3 lakh, the limit is Rs.1,50,000 plus 60% of book profit exceeding Rs.3 lakh. Remuneration paid in excess of Section 40(b) limits is disallowed as a business expense for the firm.nnSection 194T TDS applies to the actual payment made to the partner — not only the deductible portion. If a firm pays Rs.12 lakh in remuneration to a partner but only Rs.9 lakh is deductible under Section 40(b), TDS at 10% is computed on the full Rs.12 lakh actual payment. The partner declares the full Rs.12 lakh as income and claims TDS credit on the full Rs.1.2 lakh deducted. The firm claims only Rs.9 lakh as a deductible expense, with the Rs.3 lakh excess treated as non-deductible and effectively taxed in the firm's own hands.nnThis interaction makes accurate Section 40(b) computation critically important for firms where partner remuneration approaches the permissible limits. Overpaying partners beyond 40(b) limits creates a cascading tax effect — TDS on the excess amount, non-deductibility at the firm level, and income tax on the excess in the partner's hands with no compensating firm deduction. CA guidance on structuring partner remuneration within Section 40(b) limits is strongly recommended for all professional and trading partnerships.

Section 194T is a new provision and enforcement is expected to be active from FY 2025-26 itself, given that the Income Tax Department has the data infrastructure to cross-reference firm returns against individual partner ITRs. The standard TDS penalty framework applies in full.nnInterest under Section 201(1A) at 1% per month for non-deduction from the payment date to the date of actual deduction, and 1.5% per month from deduction date to deposit date for delayed deposits. The most severe consequence is the disallowance under Section 40(a)(ia) — 30% of the partner remuneration paid without TDS deduction is disallowed as a deductible expense for the firm. For a firm paying Rs.60 lakh in annual partner remuneration and missing Section 194T TDS entirely, the 30% disallowance of Rs.18 lakh at a 30% firm tax rate creates Rs.5.4 lakh of additional tax — far exceeding the original TDS obligation of Rs.6 lakh at 10%.nnA penalty equal to the TDS amount not deducted may additionally be imposed under Section 271C. Firms that proactively comply from 1 April 2025, even if imperfectly, signal good faith to the AO and reduce the risk of maximum penalties. Firms that entirely ignore Section 194T through FY 2025-26 face compounding interest for the full year, a potential 30% disallowance demand, and audit scrutiny in subsequent years as well.