Contents
- Introduction: Section 194T Explained
- Overview of Section 194T for FY 2025-26
- [What is Section 194T and Why Was It Introduced?]
- [Applicability and Scope]
- [TDS Rate, Threshold, and Calculation]
- [Compliance and Filing Requirements]
- [Practical Impacts and Business Implications]
- [Interaction with Section 40(b) Restrictions]
- Impacted Categories of Taxpayers
- Timeline of Changes and Events
- Frequently Asked Questions (FAQs)
- Conclusion
Introduction: Section 194T Explained
Section 194T represents a landmark reform in India's tax compliance framework, introducing Tax Deducted at Source (TDS) on payments made by partnership firms and Limited Liability Partnerships (LLPs) to their partners. Effective from April 1, 2025, this provision mandates that firms deduct 10% TDS on aggregate payments to partners exceeding ₹20,000 in a financial year.
This historic amendment transforms partnership taxation by bringing partner remuneration, interest, bonus, commission, and salary under the TDS umbrella for the first time—closing a significant compliance gap that existed for decades.
For decades, partnership firms operated outside the TDS framework when making payments to partners, unlike employees who faced mandatory TDS under Section 192. Section 194T corrects this asymmetry and enhances tax compliance across the partnership business ecosystem.
Click to reveal a quick tip!
Quick Tip: Mark April 30, 2025, on your calendar. This is the deadline for depositing TDS deducted in March 2025 (the quarter-end). Missing this deadline triggers interest at 1.5% per month and potential penalties.
Overview of Section 194T for FY 2025-26
The Finance (No. 2) Act, 2024, introduced Section 194T to harmonize tax treatment of partner payments with employee salary deductions. Here's a snapshot of the key changes:
Note: Section 194T applies universally to all partnership firms and LLPs, regardless of turnover, audit status, or business size. No exemptions exist based on firm revenue.
Important: Unlike previous tax years (FY 2024-25 and earlier), firms can no longer avoid TDS on partner payments. Non-compliance from April 1, 2025, attracts penalties under Sections 271H (₹10,000 to ₹100,000) and 272A (₹500 per day).
| Aspect | Before April 1, 2025 | From April 1, 2025 Onwards |
|---|---|---|
| TDS on Partner Payments | None. Payments were outside TDS framework. | Mandatory 10% TDS on aggregate payments exceeding ₹20,000. |
| Applicability | N/A | All partnership firms and LLPs (no exemptions). |
| Rate | N/A | 10% (without surcharge or health & education cess). |
| Threshold | N/A | Aggregate payments to partner exceeding ₹20,000 per FY. |
| Deductible Payments | Salary, interest, commission, bonus allowed as expense. | Same, but subject to TDS and Section 40(b) restrictions. |
The amendment aims to enhance tax compliance, prevent revenue leakage, and create transparency in partner remuneration structures across India's partnership business sector.
What is Section 194T and Why Was It Introduced?
Legislative Background and Intent
Section 194T was inserted via Clause 62 of the Finance (No. 2) Bill, 2024, which was passed by Parliament during the Budget 2024 session. The Budget announcement (July 23, 2024) signaled the government's intent to broaden the TDS net and plug compliance loopholes in the partnership taxation regime. The Notes on Clauses to the Finance Bill explicitly state that the provision aims to bring partner remuneration under the TDS framework, mirroring salary deductions under Section 192.
The Tax Compliance Gap It Addresses
Historically, the Income Tax Act distinguished between employee compensation and partner remuneration. Section 192 mandates TDS on employee salaries, but Section 15 of the Act explicitly excluded partner payments from the definition of "salary." This created an unintended loophole: partnership firms could make substantial payments to partners—salary, interest, commission, bonus—without any TDS deduction.
The government observed that this gap resulted in underreporting of partner income and reduced tax compliance. With Section 194T, the government now enforces uniform TDS treatment for partner remuneration, similar to employee taxation, strengthening the overall tax collection mechanism.
Applicability and Scope of Section 194T
Who is Responsible for TDS Deduction?
Under Section 194T, any person being a firm is responsible for deducting TDS. The term "firm" is defined in Section 2(23) of the Income Tax Act and includes all partnership firms registered under the Partnership Act, 1932, and Limited Liability Partnerships (LLPs) formed under the Limited Liability Partnership Act, 2008.
This means the liability to deduct TDS rests with the partnership firm or LLP as an entity, not with individual partners or designated personnel. However, practically, the firm's accounting or finance team must implement the deduction mechanism.
Payments Covered Under Section 194T
Section 194T applies to the following categories of payments made by a firm to its partners:
- Salary: Fixed or variable salary, whether monthly, quarterly, or annual.
- Remuneration: Payments for services, management fees, or performance-based compensation.
- Commission: Commission on business generation, sales, or other agreed metrics.
- Bonus: Annual bonus, discretionary bonus, or performance incentives.
- Interest: Interest on capital account, loan account, or any other account maintained by the firm for the partner. This includes even imputed interest if not explicitly paid but credited to the capital account.
Note: As per the Explanation to Section 194T, the term "consideration for payments" includes all incidental charges such as club membership fees, car parking fees, electricity and water facility charges, maintenance fees, or similar charges that are subsidiary to the primary remuneration.
Payments Explicitly Excluded from Section 194T
The following payments are NOT subject to Section 194T:
- Capital Repayments: Repayment of capital contribution or withdrawal of capital from the partnership. If a partner withdraws their capital contribution, no TDS applies.
- Profit Share: Profit distributions to partners remain outside the TDS ambit. Profits are tax-exempt under Section 10(2A) in the partner's hands and are already taxed at the firm level.
- Loan Repayment: Repayment of loans advanced by the partner to the firm (separate from interest on such loans, which is covered).
- Non-Resident Partners: As per a reasonable interpretation, TDS on non-resident partners should be deducted under Section 195 (TDS on payments to non-residents) rather than Section 194T. However, the exact position on this is awaiting official clarification from the tax department.
TDS Rate, Threshold, and Calculation Mechanics
Rate Structure: 10% Without Surcharge or Education Cess
The TDS rate under Section 194T is flat 10%, regardless of the partner's income level, age, or residency status (for resident partners). Importantly, the 10% rate is not further increased by surcharge or health & education cess, unlike other TDS provisions. This makes Section 194T relatively straightforward to calculate compared to other sections.
| Parameter | Details |
|---|---|
| TDS Rate | 10% (flat) |
| Surcharge Applicable? | No |
| Health & Education Cess? | No |
| Higher Rate (if PAN not furnished)? | Yes, 20% under Section 206AA |
Threshold Limit: ₹20,000 Per Financial Year (Aggregate Basis)
Section 194T contains a threshold protection: TDS deduction is required only if the aggregate payments to a partner exceed ₹20,000 in a financial year. This threshold is checked on a cumulative or aggregate basis, not on individual payment basis.
Key Point: The threshold is calculated across ALL covered payments combined. If a partner receives ₹12,000 as salary, ₹5,000 as interest, and ₹3,500 as commission in a FY, the total is ₹20,500. Since this exceeds ₹20,000, TDS applies on the entire amount, including the portions below ₹20,000.
Example: Suppose Partner A receives the following from XYZ Associates in FY 2025-26:
- Monthly salary: ₹10,000 × 12 months = ₹1,20,000
- Annual interest on capital account: ₹24,000
- Year-end bonus: ₹15,000
Aggregate payment = ₹1,59,000, which exceeds ₹20,000. TDS of 10% (₹15,900) is deducted on the entire amount.
Timing of TDS Deduction
Section 194T specifies that TDS must be deducted at the earlier of two events:
- Credit to the partner's account: When the amount is credited to the partner's account in the firm's books. This includes credit to the capital account, loan account, or any other account.
- Actual payment: When the amount is actually paid to the partner in cash, cheque, bank transfer, or any other mode.
Practical Implication: If a firm credits partner remuneration to the partner's capital account on March 31, 2025 (without actual payment), TDS must be deducted immediately on March 31, 2025, even if the cash payment is delayed to April. This is a critical compliance point for year-end reconciliation.
Compliance and Filing Requirements
TDS Deposit Timeline and Procedure
Once TDS is deducted, the firm must deposit it with the government within specific timelines. The deposit procedure mirrors standard TDS deposits:
- Monthly Deposit: TDS deducted during a calendar month must be deposited by the 7th of the following month.
- Quarter-End (March): TDS deducted in March (the last month of FY) must be deposited by April 30, 2025. This is a critical deadline for FY 2025-26 compliance.
- Deposit Mode: Deposits are made through NEFT/RTGS or at designated banks using Challan No. 280 for Section 194T deductions. Firms must have a TAN (Tax Deduction and Collection Account Number) to process deposits.
- Late Deposit Interest: If TDS is deposited late, interest accrues at 1.5% per month (or part thereof) from the due date until the actual deposit date.
Warning: Late TDS deposit triggers not only interest but also potential penalties under Sections 271H and 276B. Firms must prioritize timely deposits to avoid cascading financial and legal consequences.
TDS Return Filing: Form 26Q
After depositing TDS, the firm must file quarterly TDS statements in Form 26Q (TDS statement for tax deducted on payments made to partners). The filing timeline is:
- Quarter 1 (April-June): Due by July 31
- Quarter 2 (July-September): Due by October 31
- Quarter 3 (October-December): Due by January 31
- Quarter 4 (January-March): Due by May 31 of the following FY
Form 26Q must contain partner-wise details of payments, TDS deducted, and PAN/Aadhaar of the partner. Filing is done electronically through the NSDL or UTIITSL portals.
TDS Certificate Issuance: Form 16A
Within 15 days of the due date of filing the TDS return (Form 26Q), the firm must issue a Form 16A (TDS certificate) to each partner from whom TDS was deducted. Form 16A serves as proof of TDS deduction and is required by the partner for filing their income tax return and claiming TDS credit.
Note: Failure to issue Form 16A within the stipulated timeframe attracts penalties under Section 272A (₹500 per day of delay) and potential prosecution under Section 276B.
Practical Impacts and Business Implications of Section 194T
Impact on Partner Cash Flow
The most immediate impact of Section 194T is a reduction in partner take-home from remuneration. If a partner previously received ₹1,00,000 annually in salary, they will now receive ₹90,000 (after 10% TDS) if the aggregate threshold is crossed. The deducted ₹10,000 is held in escrow with the government until the partner files their income tax return and claims TDS credit.
In cases where the partner's total income falls below the taxable slab, the TDS amount becomes a refund claim, requiring filing of an income tax return. Partners must plan for this reduced cash inflow when determining drawings or managing personal expenses.
Accounting System Updates Required
Firms must update their accounting software and internal processes to:
- Track TDS deductions by partner and payment type.
- Maintain a TDS deduction register showing partner-wise calculations.
- Generate quarterly deposit challans and TDS return schedules.
- Generate Form 16A for each partner with partner-wise breakup.
- Reconcile deposited TDS with deducted TDS in statutory records.
Firms without robust accounting systems may struggle with compliance. It's advisable to consult a CA (Chartered Accountant) or tax consultant to implement compliant accounting procedures.
Partnership Deed Amendments
Many existing partnership deeds do not contemplate TDS deductions. Firms may need to amend their partnership deeds to clarify:
- How remuneration is calculated and when it becomes due.
- When TDS is deducted (on credit or payment, as applicable).
- How the TDS amount is treated in the partner's capital/loan account.
- Partner obligation to furnish PAN/Aadhaar for TDS purposes.
Year-End Closure and Timely TDS Compliance
Historically, partner remuneration was calculated and credited after the financial year-end, sometimes 3-4 months later (by June or July). However, Section 194T requires TDS to be deducted on or before the payment/credit date, and the Q4 (March) TDS must be deposited by April 30.
This creates a practical challenge: If a firm finalizes partner remuneration on May 31 (post-year-end), it must still deposit the corresponding TDS by April 30 of the same year. To comply, firms may need to:
- Close their books and calculate partner remuneration before March 31 or by early April.
- Make provisional TDS deposits and adjust later if the final amount differs.
- Use accounting entries to credit remuneration in the FY it was earned, even if payment is delayed.
Interaction with Section 40(b): Restrictions on Deductibility
An important nuance exists in the interplay between Section 194T and Section 40(b) of the Income Tax Act. Section 40(b) restricts the deductibility of partner remuneration if TDS is not deducted and deposited on time. Here's the relationship:
| Scenario | Section 40(b) Consequence |
|---|---|
| TDS deducted and deposited on time (by due date) | Remuneration remains fully deductible under PGBP head. |
| TDS deducted but deposited late (after due date) | Deduction disallowed up to 30% of the payment under Section 40(a)(ia). |
| TDS not deducted when required | Remuneration is not deductible at all under Section 40(b). |
Critical Point: If a firm deducts TDS but deposits it after the due date, it loses 30% of the deductibility. If it doesn't deduct TDS at all on amounts exceeding ₹20,000, the entire remuneration is disallowed. This creates a strong compliance incentive for firms.
Additionally, if partner remuneration exceeds the limits prescribed under Section 40(b) (currently 30% of profits for designated partners and 20% for other partners), the excess is disallowed regardless of TDS. However, Section 194T applies to the remuneration as prescribed, and it's unclear whether TDS applies to the disallowed portion. Until official clarification, firms should deduct TDS on the entire remuneration amount and address the Section 40(b) disallowance separately in the tax return.
Impacted Categories of Taxpayers
Section 194T's impact varies across different categories:
1. Partnership Firms with Multiple Partners
Firms with diverse partner groups face administrative complexity in tracking partner-wise payments, calculating aggregate amounts, and managing quarter-end deadlines. Large partnerships (e.g., law firms, accounting firms, consulting firms) must implement robust TDS tracking systems.
2. LLPs (Limited Liability Partnerships)
The section explicitly covers LLPs under the definition of "firm." LLPs that have not previously dealt with TDS deductions must establish TAN-based deposit mechanisms and quarterly filing routines.
3. Professional Partnerships (Law Firms, CA Firms, Consulting Firms)
These entities are particularly impacted because they typically operate with high partner remuneration, often exceeding the ₹20,000 aggregate threshold within the first 1-2 months of the FY. They must implement compliant TDS processes immediately.
4. Sole Proprietors and HUFs
These entities are NOT affected by Section 194T, as the section applies only to firms and LLPs. Sole proprietors continue to operate without TDS on drawings.
5. Small Family Partnerships
Family-owned partnerships operating with lower remuneration may not cross the ₹20,000 threshold immediately. However, once the threshold is crossed, compliance becomes mandatory.
6. Partners (as Individual Taxpayers)
All partners, regardless of their income level or tax residency, are affected as recipients of deducted TDS. Partners must:
- Provide PAN/Aadhaar to the firm to avoid higher TDS rates (20% under Section 206AA).
- Retain Form 16A for TDS credit claims in income tax returns.
- File income tax returns timely to claim TDS refunds if total income is below taxable slab.
Timeline of Changes and Events: FY 2024-25 to 2025-26
Understanding the timeline of Section 194T's evolution helps clarify its implementation:
| Date / Period | Event | Impact |
|---|---|---|
| July 23, 2024 | Union Budget 2024: Finance (No. 2) Bill introduced Section 194T | Public announcement of the new TDS provision. Parliament debates ensued. |
| July 23 – December 2024 | Finance Bill passage and Act assent | The Finance (No. 2) Act, 2024, received Presidential assent in December 2024. |
| January 2025 | Tax authorities release draft FAQs and guidance (partial) | Some clarity on implementation, but many gray areas remain. |
| April 1, 2025 | EFFECTIVE DATE: Section 194T becomes operational | All partnership firms and LLPs must start deducting TDS on eligible partner payments. |
| April 30, 2025 | CRITICAL DEADLINE: Q4 TDS deposit due (for March deductions) | Firms must deposit all TDS deducted in March 2025 by this date. |
| May 31, 2025 | Q4 TDS return (Form 26Q) filing due | Firms file TDS statements covering January–March 2025. |
| FY 2025-26 (April 2025 onwards) | Full compliance year | All firms operating under Section 194T framework. Multiple quarters to manage. |
Note: The Finance Bill 2024 explicitly states that Section 194T applies from April 1, 2025. However, if any payments were made to partners between July 23, 2024 (Budget date) and March 31, 2025, there is ambiguity on whether TDS is retroactively applicable. Most tax authorities interpret the provision as non-retroactive, applying only from April 1, 2025 onwards. However, until official guidance is issued, firms should consult their CA.
Frequently Asked Questions (FAQs) on Section 194T
Q1. What is the exact effective date of Section 194T?
Section 194T is effective from April 1, 2025, as per the Finance (No. 2) Act, 2024. This means any payment made to a partner on or after April 1, 2025, is subject to Section 194T. For FY 2024-25 (April 2024 – March 2025), the old regime (no TDS) continues.
Q2. Does Section 194T apply to all partnership firms?
Yes, Section 194T applies universally to all partnership firms and LLPs registered in India. There are no exemptions based on firm size, turnover, audit status, or business type. Even micro partnerships and sole proprietorships that become partnerships are covered.
Q3. What is the TDS rate under Section 194T?
The TDS rate is flat 10% on aggregate partner payments exceeding ₹20,000 per financial year. The rate does not increase with surcharge or health & education cess. However, if a partner does not furnish PAN, the rate increases to 20% under Section 206AA.
Q4. What is the ₹20,000 threshold? How is it calculated?
The ₹20,000 threshold is the aggregate amount of all covered payments to a partner in a financial year. It combines salary, interest, commission, bonus, and remuneration. For example, if a partner receives ₹12,000 salary + ₹5,000 interest + ₹3,500 commission = ₹20,500, the threshold is crossed, and TDS applies on the entire ₹20,500. The threshold is checked once per FY per partner, not per payment.
Q5. Does TDS apply to profit-sharing by partners?
No. TDS under Section 194T does not apply to profit-sharing distributions. Partnership profits are taxed at the firm level and are exempt in the partner's hands under Section 10(2A). Profit distributions remain outside the TDS framework.
Q6. When must TDS be deducted: on credit or payment?
TDS must be deducted at the earlier of credit or payment. If a partner's salary is credited to their capital account on March 31 but not paid in cash until April 15, TDS must be deducted on March 31 (the credit date). This is critical for year-end financial planning.
Q7. What are the TDS deposit deadlines for FY 2025-26?
TDS deducted during each calendar month must be deposited by the 7th of the following month. For March 2025 deductions (Q4), the deadline is April 30, 2025. Late deposits attract interest at 1.5% per month and penalties. Form 26Q (TDS return) is filed quarterly by July 31, October 31, January 31, and May 31 of the following year.
Q8. What happens if a firm does not deduct TDS on eligible payments?
If TDS is not deducted on eligible payments under Section 194T, Section 40(b) denies the firm the right to deduct that payment as an expense. Additionally, the firm is liable for:
- Penalty under Section 271H (₹10,000 to ₹100,000).
- Penalty under Section 272A (₹500 per day of non-deduction).
- Interest at 1.5% per month on the tax amount not deducted.
- Potential prosecution under Section 276B (for willful non-deduction).
Q9. Does a partner need to have PAN for TDS purposes? What if PAN is not provided?
Yes, partners should provide their PAN to the firm. If a partner does not furnish PAN, the TDS rate jumps from 10% to 20% under Section 206AA. Additionally, the firm should make best-effort attempts to obtain PAN; failure to do so and deducting TDS at 20% when the partner has PAN creates compliance risks for both the firm and partner.
Q10. Can a partner claim TDS credit in their income tax return?
Yes. The firm issues a Form 16A (TDS certificate) to the partner, which shows TDS deducted. The partner can claim this TDS as a credit while filing their income tax return under Section 87A or Section 89(1). If the partner's total income is below the taxable slab, they can claim a refund of the TDS amount.
Q11. How does Section 194T interact with Section 40(b) deductibility limits?
Section 40(b) restricts partner remuneration deductibility to certain percentages of profit (e.g., 30% for designated partners, 20% for others). Additionally, under Section 40(a)(ia), if TDS is deducted but deposited late, 30% of the payment is disallowed. Thus, timely TDS deposit is essential to maintain full deductibility of partner remuneration.
Q12. What should partnership deeds be amended to include regarding Section 194T?
Partnership deeds should be amended to clarify:
- Partner obligation to furnish PAN/Aadhaar for TDS purposes.
- When remuneration becomes due and eligible for TDS (on credit vs. payment).
- How TDS-deducted amounts are credited back to the partner's account.
- Responsibility of the firm to deposit TDS timely.
- Consequences of non-compliance (penalties, disallowance).
Conclusion: Preparing for Section 194T Compliance
Section 194T marks a paradigm shift in partnership taxation, bringing partner remuneration under the TDS umbrella for the first time. While the intent is to enhance tax compliance and fairness, the practical implementation requires immediate action by firms and careful planning by partners.
Key Takeaways:
- Effective from April 1, 2025: All partnership firms and LLPs must deduct 10% TDS on aggregate partner payments exceeding ₹20,000.
- No exemptions: The provision applies universally; size, turnover, or audit status do not matter.
- Critical deadlines: Q4 TDS deposits are due by April 30, 2025. Missing deadlines triggers interest and penalties.
- Compliance is mandatory: Non-deduction of TDS disallows the remuneration expense entirely under Section 40(b).
- Accounting systems must be updated: Firms need robust tracking and quarterly filing routines.
- Partner communication is essential: Partners must understand the TDS impact on cash flow and provide PAN details to avoid 20% TDS rates.
Firms should engage with their Chartered Accountants or tax consultants immediately to:
- Audit their current accounting systems for Section 194T readiness.
- Amend partnership deeds to include TDS-related clauses.
- Communicate with all partners about TDS impacts and deadlines.
- Establish TAN-based deposit and quarterly filing routines.
- Train accounting staff on Form 26Q and Form 16A filing.
As this is a new provision with minimal official guidance, firms should remain vigilant for updates from the tax authorities, FAQs from the Income Tax Department, and judicial pronouncements clarifying gray areas. Until then, following a conservative interpretation—deducting TDS on all covered payments and depositing timely—ensures compliance and shields firms from penalties.
Final Note: Partners are encouraged to retain all Form 16A certificates issued by their firms. These are essential documents for claiming TDS credit in income tax returns and for maintaining proof of tax paid to the government. Firms should maintain TDS deduction registers for audit trail and compliance documentation.