Section 194T: The New TDS Every Partnership Now Has to Cut

If your business is run as a partnership firm or an LLP, the way money moves from the firm to you and your partners changed quietly on 1 April 2025. A new provision, Section 194T, now forces the firm to withhold tax before it pays a partner. For decades partner salary and interest flowed out gross, with the partner sorting out tax later. That era is over, and the first full year of compliance is playing out right now in FY 2025-26.

This is not a new tax. Nothing extra has been levied on partners. What has changed is the timing and the paperwork: tax is collected at source, the firm becomes responsible for cutting and depositing it, and a missed deduction can cost the firm its expense deduction. For the lakhs of small and mid-sized firms that never had a TDS habit, that is a meaningful shift.

What Section 194T actually covers

Under the rule, a firm or LLP must deduct 10% TDS on any of the following paid or credited to a partner:

• Salary
• Remuneration
• Bonus
• Commission
• Interest (on capital or loan)

These are exactly the payments a firm claims as a business expense under Section 40(b). The logic is neat: if the firm is deducting it as an expense, the tax authorities want a trail that the partner is offering it as income.

The deduction kicks in once total such payments to a single partner cross ₹20,000 in a financial year. Note the wording carefully. The threshold is per partner, and it pools all five categories together. So ₹12,000 of interest plus ₹10,000 of commission already breaches the line, even though neither alone does.

The ₹20,000 trap that catches people out

Here is the part firms keep getting wrong. The ₹20,000 is not an exemption slab. The moment the yearly total crosses it, TDS applies to the entire amount, not merely the slice above ₹20,000.

A partner drawing ₹50,000 in remuneration for the year does not face TDS on ₹30,000. The firm deducts 10% on the full ₹50,000, which is ₹5,000. Treating the first ₹20,000 as tax-free is a common error that leaves a short deduction and a compliance gap.

Timing matters too. TDS must be cut at the time of credit or payment, whichever is earlier. Crucially, crediting the amount to the partner's capital account counts as credit. Many firms book remuneration and interest to the capital account at year-end and pay it out later. That year-end entry is the trigger, so the deduction cannot wait for the actual cash transfer.

What is left out

Two big items sit outside Section 194T, and knowing this prevents needless deductions.

First, a partner's share of profit is untouched. It is already exempt in the partner's hands under Section 10(2A), because the firm has paid tax on its total profit. The lawmakers deliberately kept profit distribution out of 194T.

Second, withdrawal from the capital account is not covered. If a partner pulls out capital they had contributed, that is a return of their own money, not income, and no TDS arises. The line to remember: 194T bites on what the firm expenses under 40(b), nothing else.

The compliance checklist for firms

If you have never deducted TDS before, the operational lift is real. Here is the practical sequence:

1. Get a TAN. A firm cannot deposit TDS without a Tax Deduction and Collection Account Number. Apply early if you don't have one.
2. Collect every partner's PAN. No PAN means the rate jumps from 10% to 20%, and the partner loses smooth credit.
3. Track each partner's running total across salary, interest, bonus and commission so you catch the ₹20,000 crossover on the right date.
4. Deposit the TDS by the 7th of the following month (the deduction for March gets a later cut-off).
5. File Form 26Q every quarter, with partner-wise PAN and amount details. Due dates are 31 July, 31 October, 31 January and 31 May.
6. Issue Form 16A to each partner within 15 days of the return due date, so they can claim the credit.

There is one comfort missing here. Unlike many TDS sections, 194T offers no escape valve. A partner cannot file Form 15G or 15H to avoid deduction, and a Section 197 lower-deduction certificate is not available for it. The 10% is effectively hard-wired, whatever the partner's eventual tax slab.

Why this matters more than the rate suggests

The 10% itself is a cash-flow timing issue; the partner adjusts it against final liability and may even get a refund. The sharper risk sits with the firm. If the firm fails to deduct or deposit, it can lose part of the expense deduction it claimed under 40(b), face interest at 1% to 1.5% a month, and attract a late-filing fee of ₹200 a day under Section 234E. A small administrative slip turns into a tax cost the firm itself bears.

There is also a structural reason behind the move. Partner remuneration and interest were a blind spot in the tax net, easy to under-report. By pulling these payments into TDS reporting, the AIS and the partner's own return now line up automatically, leaving far less room for mismatch.

How to handle it cleanly this year

For practical purposes, treat your partners the way you already treat a salaried employee or a professional vendor for TDS. Map out the year's expected remuneration and interest per partner at the start, decide a monthly or quarterly deduction rhythm, and avoid the year-end scramble where a single capital-account entry suddenly triggers months of back-dated deductions.

Firms running on accounting software should switch on partner-level TDS tracking now rather than reconstructing it in March. And since the new Income-tax Act, 2025 re-codifies these provisions from the next cycle, building the discipline this year means you are not relearning the process when the section numbers change. The rule is settled, the rate is fixed, and the cost of ignoring it falls squarely on the firm — which is exactly why it deserves a place on every partner's compliance calendar.