Section 194T: The New TDS on Partner Pay Every Firm Must Know

If you run or share ownership of a partnership firm or LLP, a quiet but far-reaching tax rule has just landed on your desk. Section 194T of the Income-tax Act, in force from 1 April 2025, requires firms to deduct 10% TDS on the money they pay their own partners — salary, remuneration, bonus, commission and interest. For decades, payments between a firm and its partners flowed freely without any tax deducted at source. That era is over, and FY 2025-26 was the very first year of compliance, with returns and reconciliations now coming due.

This is one of those changes that sounds technical but touches almost every small and mid-sized business in India, from a two-person CA practice to a family trading firm. Get it wrong and you face interest, late fees and — worse — disallowance of the very remuneration you paid. Here is the plain-English guide.

What Section 194T actually covers

The new section applies to any firm paying a partner, and crucially, the term "firm" expressly includes LLPs. So whether you operate as a traditional partnership or a Limited Liability Partnership, you are in scope.

The payments that trigger TDS are:

• Salary to a partner
• Remuneration (working-partner pay)
• Bonus
• Commission
• Interest on capital, loans or current accounts

The one big exclusion is the partner's share of profit. Because profit share is already exempt in a partner's hands under Section 10(2A), it stays outside 194T. So if you only draw your slice of the year's profit, no TDS arises. But the moment the firm pays you working remuneration or pays interest on the capital you've parked, the deduction kicks in.

The ₹20,000 trap that catches everyone

Here is the detail people misread. The threshold is ₹20,000 per partner for the whole financial year, totalled across all the covered categories. That sounds generous — until you understand how it behaves.

Once a partner's aggregate covered payments cross ₹20,000 in a year, TDS applies to the entire amount, not merely the slice above ₹20,000. There is no "first ₹20,000 is free" comfort. If a working partner is paid ₹6 lakh in remuneration over the year, the firm deducts 10% on the full ₹6 lakh, i.e. ₹60,000, not on ₹5,80,000.

For most active firms, ₹20,000 a year is trivially crossed — often in the very first month. In practice, that means nearly every firm paying any meaningful remuneration or interest is now a TDS deductor.

Why the timing rule bites

The deduction is triggered at the earlier of two events: when the amount is credited to the partner, or when it is actually paid. And the law specifically says crediting to a partner's capital account or current account counts as credit.

This is the part that quietly trips up traditional firms. Many partnerships never "pay" remuneration or interest in cash through the year — they simply book it into the partner's capital or current account at year-end and let it accumulate. Under 194T, that book entry is itself the trigger. So even a firm that hands over zero rupees during the year, but credits interest and remuneration in its accounts, must deduct and deposit TDS.

The deposit deadline follows the normal TDS calendar: by the 7th of the next month, except for March, where you get until 30 April.

You now need a TAN — and a routine

A large number of small firms have a PAN but have never needed a TAN (Tax Deduction and Collection Account Number), because they never deducted TDS on anything. Section 194T changes that. To deduct and deposit TDS, a firm must hold a valid TAN, file quarterly TDS returns and issue Form 16A to partners.

A clean compliance routine looks like this:

1. Apply for a TAN if you don't already have one.
2. Identify covered payments partner by partner — separate profit share (exempt) from remuneration and interest (covered).
3. Track the ₹20,000 line for each partner from the start of the year.
4. Deduct 10% at the time of credit or payment, whichever is earlier.
5. Deposit by the 7th of the following month.
6. File quarterly TDS returns and hand each partner their Form 16A so they can claim credit.

For resident partners there is no surcharge or cess loaded on top — it is a flat 10%. But if a partner has not linked PAN, or the PAN is inoperative, the deduction can shoot up to 20% under the higher-rate rules, so verifying partner PANs is worth doing before the first deduction.

How it interacts with the Section 40(b) cap

Working-partner remuneration has long been capped for deductibility under Section 40(b), with limits tied to the firm's book profit. Section 194T does not change those limits — it sits alongside them. The two now work as a pair: 40(b) decides how much remuneration the firm can claim as a business expense, while 194T governs the TDS the firm must withhold when it pays or credits that remuneration.

There is a sting in the tail. If a firm fails to deduct TDS where it should have, the usual disallowance machinery can apply, meaning a chunk of the partner remuneration could be disallowed as an expense — taxing the firm on income it effectively paid out. In other words, sloppiness here is not just a penalty risk; it can inflate the firm's taxable profit.

What partners should expect on their side

For partners, the cash flow changes but the ultimate tax does not. The 10% deducted is not an extra tax — it is an advance against your final liability, visible in your Form 26AS and AIS. When you file your return, you claim it as TDS credit and pay only the balance, or get a refund if too much was withheld.

The real adjustment is psychological and operational: partners used to receiving full remuneration will now see 10% routed to the government first. For partners whose total income is genuinely below the taxable threshold, the deduction can feel like a needless cash lock-up until refund. There is no general low-deduction relief baked into 194T the way Form 15G/15H works for some other payments, so planning drawings and capital interest sensibly through the year matters more than before.

Why this matters beyond compliance

Step back and the intent is clear. The tax department has long had limited visibility into the large, untaxed-at-source flow of money between firms and their partners. By bringing these payments into the TDS net, the system now captures a real-time digital trail of partner remuneration and interest — feeding straight into the AIS and pre-filled returns.

For honest firms, the practical message is simple: 194T adds paperwork, not extra tax. For firms that were under-reporting partner payouts, it closes a gap. Either way, the firms that come out cleanest are the ones that set up the TAN, the tracking sheet and the monthly deposit habit early — rather than discovering at year-end that a routine capital-account credit quietly created a TDS liability they never deducted.