Section 194T, TDS on partner payments.

Section 194T applies to any Indian partnership firm or LLP that pays:

• Salary or remuneration to a partner,
• Commission to a partner,
• Bonus to a partner,
• Interest to a partner on their capital balance or on partner loans to the firm.

Where the aggregate payment to a partner in a financial year exceeds INR 20,000, the firm must deduct 10% TDS at the time of credit (whichever is earlier) or payment.

Threshold mechanics: INR 20,000 is per partner per FY, cumulative across all 194T-covered payment types. TDS applies on the entire amount above the threshold.

Effective date: 1 April 2025 (FY 2025-26 onwards).

Historically, partnership firms paid salary, interest, remuneration to partners under Section 40(b) deductibility rules. The firm's book income was reduced by these payments; the partner reported them as taxable income. But there was no TDS mechanism — firms paid partners gross, and partners declared on their individual ITRs.

The compliance gap: some partners underreported or filed inconsistently, and the Income Tax Department had no automated matching between firm's book entries and partners' ITR disclosures.

Section 194T closes this by introducing TDS at the firm level. The firm deducts, deposits, files Form 26Q, issues Form 16A to the partner. The partner's receipts appear in their Form 26AS. Automated matching.

Section 40(b) deductibility rules (maximum allowable remuneration slabs) continue separately. 194T is purely compliance / TDS, not a change in deductibility.

Traditional partnership firms (Partnership Act 1932): directly in scope. All partner payments above INR 20K per partner per FY now TDS-liable.

LLPs (Limited Liability Partnership Act 2008): in scope. LLPs with designated partner remuneration, interest on capital, and profit shares (profit share is specifically excluded from 194T, but salary / interest / remuneration are covered).

Professional firms (CA, legal, consulting): significantly affected. Most partnership firms pay salary + interest on capital + profit-share to partners. Salary and interest are 194T-covered.

Small LLPs with 2-3 partners: unavoidable compliance workload. TAN registration + Form 26Q quarterly + Form 16A to each partner now mandatory.

Family partnerships / HUF-style structures: in scope. No exemption for intra-family partnerships.

Profit share only: NOT in scope. Profit distribution out of firm's post-tax profits is not covered under 194T. Pure profit-share partnerships (no salary / interest) escape 194T.

1. Obtain TAN (Tax Deduction Account Number) if not already held.
2. Set up withholding workflow: at the point of each partner payment (salary / interest / remuneration), deduct 10% TDS from the amount above INR 20K cumulative threshold.
3. Deposit TDS with government by 7th of the following month (for March: by 30 April).
4. File Form 26Q quarterly (Q1: by 31 July, Q2: by 31 October, Q3: by 31 January, Q4: by 31 May). Form 26Q is TDS on non-salary payments to resident recipients.
5. Issue Form 16A to each partner within 15 days of 26Q filing. Partner uses this to claim TDS credit on their individual ITR.
6. Reconcile with Section 40(b): 194T TDS is compliance-level; Section 40(b) continues to govern deductibility of partner remuneration at the firm level.
7. Interest on partner capital: FM-prescribed rate (currently 12% simple) continues under Section 40(b)(iv). TDS on interest is covered under 194T, not under 194A (bank interest) — 194T is the specific partnership rule.

Does 194T apply to all partnership firms regardless of size? Yes. There is no small-firm exemption. Even a 2-partner LLP with INR 5 lakh annual revenue is covered if partners draw salary/interest/remuneration above INR 20K per year.

What about profit share? Profit distribution out of firm's post-tax income is NOT in scope. Only salary, remuneration, commission, bonus, and interest are 194T-covered. Partnership firms moving entirely to profit-share model (no salary) escape 194T.

Does 194T interact with Section 192 (salary TDS)? Partners are not employees of the firm; Section 192 does not apply to partner payments. Section 194T is the specific partner-payment TDS section.

Can the firm claim the TDS as its own tax credit? No. TDS deducted and deposited is credit for the partner, not the firm. The firm merely acts as deductor.

What if the firm fails to deduct? Section 201 interest at 1% per month on under-deducted amount, plus Section 271C penalty for failure to deduct TDS (up to equal to tax amount).

Last updated: 2026-10-09.