Section 194T of Income Tax Act: New TDS Rule on Partner Payments Explained
Keywords: Section 194T, Income Tax Act, TDS on partner payments, TDS for LLPs, tax compliance for firms, Income Tax 2025, TDS on interest to partners, partnership firm tax rules
The Finance Act 2024 has brought in a new compliance requirement for partnership firms and LLPs by inserting Section 194T in the Income Tax Act, 1961. Effective from 1st April 2025, this section mandates Tax Deduction at Source (TDS) at 10% on certain payments made by firms or LLPs to their partners. If you are a practicing professional, a managing partner, or a finance executive handling taxation matters for a firm or LLP, this is a development you cannot afford to ignore.
What is Section 194T of the Income Tax Act?
Section 194T imposes a 10% TDS obligation on specific payments made to partners by partnership firms or LLPs. The types of payments covered include:
- Remuneration or salary
- Interest on capital
- Bonus or commission
- Other income-based payments
Important: If the partner does not furnish a valid PAN, TDS must be deducted at 20%.
Applicability and Threshold Limit
- TDS is required only if total payments to a partner exceed ₹20,000in a financial year.
- Once this ₹20,000 threshold is breached, TDS is applicable on the entire amount, not just the excess over ₹20,000.
When to Deduct TDS Under Section 194T?
TDS is to be deducted at the earlier of the following two events:
1. When the amount is creditedto the partner’s account (even if not yet paid), or
2. When the payment is actually made.
Example: If ₹25,000 interest is credited to a partner’s account in March 2026 but paid in April 2026, the TDS must be deducted in March 2026 itself.
Frequently Asked Questions (FAQs)
Q1. Is profit share to partners also subject to TDS?
No. Share of profit is exempt under Section 10(2A) and hence, not covered under Section 194T.
Q2. If interest is paid to partners, is TDS under Section 194A or Section 194T applicable?
From 1st April 2025, TDS on such interest will be governed by Section 194T, overriding 194A for payments to partners.
Q3. Does Section 194T apply to all types of partners?
Yes, whether the partner is an individual, company, or another firm, Section 194T applies.
Q4. Is TDS applicable even if the payment is only credited, not paid?
Yes. As per the Income Tax Act, TDS must be deducted at the earlier of credit or payment.
Q5. Can Form 15G/15H or Section 197 be used to avoid TDS?
No. Partners cannot use Form 15G/15H to avoid TDS, nor can they apply for a lower/nil TDS certificate under Section 197 for payments under 194T.
Q6. Does 194T apply to repayment of capital or loan to partners?
No. Only income-type payments (salary, interest, etc.) attract TDS under Section 194T. Capital withdrawals or loan repayments are outside its scope.
Q7. Are professional firms like CA or law firms covered?
Yes. If the firm is structured as a Partnership Firm or LLP, Section 194T is applicable.
Q8. What if the firm fails to deduct TDS under Section 194T?
The consequences include:
- Disallowance of expenseunder Section 40(a)(ia)
- Interest, penalty, and even prosecution
- Potential mismatch in Form 26ASor TDS credit for partners
Compliance Checklist for Firms and LLPs
To ensure smooth compliance with Section 194T, firms should:
– Register for TAN (Tax Deduction Account Number) if not already done
– Maintain separate ledgers for profit share and taxable payments
– Deduct and deposit TDS within due dates
– File TDS returns (Form 26Q) quarterly
– Educate partners about the credit of TDS in their income tax filings
– Consider adopting TDS software for automation and timely alerts
Why This Change Matters
The implementation of Section 194T enhances the transparency and traceability of transactions between firms and partners. It also aligns the tax deduction framework with digital reporting tools like AIS (Annual Information Statement) and Form 26AS, strengthening income tax compliance under the Indian tax system.
Final Takeaway
Section 194T is not merely a new TDS provision-it’s a shift towards a more compliant and structured tax reporting regime for firms and LLPs. While it adds an additional compliance layer, with proper planning and timely action, partnership entities can smoothly integrate it into their routine accounting systems.
Firms must proactively update their accounting practices, inform their partners, and stay ahead of deadlines to avoid penalties and maintain tax compliance under the Income Tax Act.
