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Your Firm Must Now Cut TDS on Partners' Own Pay: 194T
For decades a partner drawing money out of their own firm was one of the simplest transactions in Indian business. The firm credited the salary or interest, the partner declared it in a personal return, and that was the end of it. From 1 April 2025, that quiet routine carries a new obligation: the firm must now deduct tax at source before the money reaches the partner. This is Section 194T, and it has pulled roughly every partnership firm and LLP in the country into the TDS net for the first time.
The rule was slipped into the Finance (No. 2) Act, 2024 and took effect for FY 2025-26. That first full year has just closed, and many firms are only now realising — while filing their final quarterly return — that they got the mechanics wrong. If you are a partner, or you run the accounts of a firm, this is worth getting right because the penalties for missing it are heavier than the tax itself.
What Section 194T actually covers
The section requires a firm to deduct 10% TDS on a fixed list of payments to its partners. Five categories are caught:
- Salary paid to a working partner
- Remuneration of any kind
- Commission
- Bonus
- Interest — on capital or on a loan the partner gave the firm
What is striking is how ordinary these payments are. A working partner's monthly drawing against remuneration, or the 12% interest a firm pays on a partner's capital account, are routine entries in almost every partnership and LLP. Until last year none of them attracted TDS. Now all of them do, once a threshold is crossed.
The ₹20,000 line, and why it traps small firms
TDS applies only when the total of these payments to a single partner exceeds ₹20,000 in a financial year. The number sounds generous until you read it correctly. It is an aggregate figure — you add up salary, interest, commission and bonus together — and it is annual. A partner drawing even a modest ₹2,000 a month as remuneration crosses the line well within the year.
In practice this means almost no active partner stays below ₹20,000. The threshold filters out only dormant or nominal partners. The moment it is breached, TDS applies to the entire amount, not just the slice above ₹20,000. There is no graded relief.
When the clock starts: the credit trap
The single biggest mistake firms made in year one was assuming TDS is due only when cash physically moves. Section 194T follows the standard TDS logic: tax must be deducted at the time of credit to the partner's account or payment, whichever is earlier.
The phrase "credit to the account" is doing heavy lifting here. Most firms book a partner's full-year remuneration and interest as a single journal entry at year-end, crediting it to the partner's capital or current account even if no money is withdrawn. That credit itself triggers the deduction. A firm that waited for an actual bank transfer before deducting has technically already defaulted. The safest practice now is to deduct at the point of the accounting credit, regardless of whether the partner has taken the money.
What stays outside the net
Not everything a partner receives is touched, and this is where panic tends to set in unnecessarily. Two important flows are completely exempt:
- Share of profit. A partner's profit share is already tax-free in their hands under Section 10(2A), since the firm has paid tax on those profits. No TDS applies to it.
- Withdrawal of capital and drawings. Pulling out money you already contributed, or routine drawings against capital, is not income. It carries no TDS.
So the dividing line is clean. Payments that are a business expense for the firm and taxable income for the partner — salary, interest, remuneration — get TDS. Returns of the partner's own money and their share of taxed profit do not. If your accountant is deducting TDS on capital withdrawals, that is an error in the wrong direction.
The compliance load that came with it
The tax rate is the easy part. The real change is the paperwork that now sits on firms that may never have deducted a rupee of TDS in their lives. To comply, a firm has to:
- Obtain a TAN (Tax Deduction and Collection Account Number) if it does not already have one
- Deposit the deducted tax with the government, generally by the 7th of the following month
- File a quarterly TDS return in Form 26Q
- Issue Form 16A to each partner as proof of the tax deducted
For the partner, the upside is straightforward: the TDS shows up in their Form 26AS and AIS, and they claim full credit for it when filing their personal return. It is not an extra tax, just an advance collection. If a partner's overall liability is lower than the 10% deducted, the balance comes back as a refund.
The friction lands on the firm. A small two-partner business that always treated itself as a single tax unit now runs a monthly deposit-and-return cycle. Miss a deduction and the firm can lose the deduction for that expense and face interest at 1% to 1.5% a month, plus a late-filing fee for the return. The cost of forgetting dwarfs the cost of complying.
What partners and firms should do now
With the first compliance year behind us, the practical checklist is short but non-negotiable.
- Firms: confirm you hold a valid TAN, reconcile every partner credit made during FY 2025-26 against the TDS actually deducted, and fix any shortfall before it compounds. Build the year-end remuneration and interest entries into your TDS calendar, not just the monthly payouts.
- Partners: check that the TDS deducted against your name appears correctly in your AIS before filing your return, and claim the credit. Do not double-count profit share as something that should have been deducted — it should not have been.
- Both: if your partnership deed fixes remuneration and interest figures, this is a good moment to revisit how and when those amounts are credited, so the TDS timing is clean rather than a year-end scramble.
Section 194T does not raise anyone's tax. It simply drags a large, previously untouched slice of Indian business into the same withholding discipline that companies have lived with for years. The firms that treat it as a routine monthly chore will barely feel it. The ones that keep crediting partners and sorting out the tax later are the ones who will pay for the lesson.
