Section 194T: New 10% TDS on Partnership Firm Payments to Partners

Summary: Section 194T, introduced by the Finance (No. 2) Act, 2024 effective from April 1, 2025, mandates a 10% TDS on payments made by a partnership firm or LLP to its partners when the total exceeds ₹20,000 in a financial year. The provision applies to salary, remuneration, commission, bonus, and interest (including on capital or loans), but excludes drawings, capital repayment, and profit share. TDS must be deducted at the time of credit or payment, whichever is earlier, and standard compliance procedures under Rules 30, 31, and 31A—such as depositing tax, issuing certificates, and filing Form 26Q/27Q—apply. The provision covers both resident and non-resident partners, though its interaction with Section 195 (applicable to non-residents) remains contentious, potentially requiring CBDT clarification. Partners cannot submit Form 15G/15H for non-deduction, nor seek relief under Section 197. Section 194T extends TDS coverage to payments earlier excluded from Sections 192 and 194A. Practical challenges include determining remuneration before year-end, reconciling allowable deductions under Section 40(b), and ensuring accurate timing of TDS deposits. The rule may complicate compliance for firms finalizing book profits late, and partners must carefully claim TDS credit even where part of remuneration or interest is disallowed.

The following section is being inserted by the Finance (No. 2) Act, 2024, w.e.f. 1-4-2025:

“194T. Payments to partners of firms.—(1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.

(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.”

1. Introduction

The Finance (No. 2) Act, 2024 has inserted Section 194T of the Income Tax Act, effective from April 1, 2025, mandates a 10% Tax Deducted at Source (TDS) on payments exceeding Rs. 20,000 annually made by partnership firms or Limited Liability Partnerships (LLPs) to their partners. This includes payments such as salary, remuneration, commission, bonus, or interest. It means the TDS is to be deducted on any payment which is provided for the financial year 2025-26 or payment made relating to financial year 2025-26, whichever is earlier. Any payment which is relating to the financial year prior to 1^st April 2025, even though payments were made on or after 1^st April 2025, are not subject to TDS under this section.

The remaining compliance provisions, viz., depositing TDS to the Government Account as per Rule 30 of the Income Tax Rules, 1961 (‘the Rules’), furnishing the Certificate of TDS as per Rule 31 of the Rules, and filing a Statement of TDS in Form No. 26Q (for resident partners) or Form No. 27Q (for non-resident partners) as per Rule 31A of the Rules, will remain applicable even for TDS made under section 194T of the Act.

The Central Board of Direct Taxes (‘CBDT’) has notified the Income Tax (Seventh Amendment) Rules, 2025 on 27th March 2025 through which Form No. 26Q and Form No. 27Q have been amended to capture the details of amounts paid to partners and TDS made by the firm.

It should also be noted that self-declaration by the partner for non-deduction of TDS in Form No. 15G or 15H is not applicable for TDS under section 194T of the Act. The provisions of filing an application to the income tax officer for a nil/lower deduction certificate under section 197 of the Act are also not applicable. Therefore, the firm has to deduct the TDS if the amount of remuneration exceeds Rs 20,000 per FY.

2. Whether TDS under section 194T applicable on an LLP?

Yes, Section 194T is applicable to firms, including partnership firms and LLPs. As per Section 2(23)(i) the Income Tax Act, 1961, “firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009). As per Section 2(23)(ii) the Income Tax Act, 1961, “partner” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include,— (a) any person who, being a minor, has been admitted to the benefits of partnership; and (b) a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009)

3. Threshold Limit

1. Salary

2. Remuneration

3. Commission

4. Bonus and

5. Interest on any account.

It may be noted that no TDS is applicable on the drawings or capital repayment or on share of profit to the partner of the firm. But TDS applicable on interest on capital or loan from partner. Firms are required to deduct TDS at a rate of 10% on payments made to partners if the aggregate amount exceeds `20,000 in a financial year.

4. Time to Deduct TDS

The TDS is to be deducted at the earliest of the following dates:

Credit to the account (including capital account) of partner in the books of the firm or Payment to the partner.

5. Whether Sec.194T is applicable to non-resident partner: 

As per the plain language of section 194T, it applies to all Partners, irrespective of their residential status (ie, resident or non-resident).  However, section 195 is a special TDS section that applies to all payments made to a non-resident.  Also, unlike some other TDS sections, where it clearly specifies that it applies only to payments to residents , section 194T is silent about this aspect.  The new Section 194T does not exclude non-resident recipients from its scope, which creates potential controversies regarding the applicability of both sections. Therefore, this ambiguity arises, for example, when an LLP in India is paying remuneration to its partner who is a non-resident, which TDS section should the LLP apply? A better position would be to say that section 195 will apply, since section 195 is more specific to non-resident recipients and section 194T is a more generic section.  Also, if the position is otherwise (ie, that section 194T applies), then the benefit of applying the taxation under relevant Double Tax Avoidance Agreement (DTAA) for the purposes of TDS may not be available under section 194T, since this is available only under section 195 (DTAA can be accessed only for TDS under section 195, since the definition of “rates in force” used in section 195, includes DTAA rates).  This also allows the recipient to then seek a lower TDS rate under section 197 (if required), since section 195 is covered under section 197, but not section 194T as aforesaid. Currently, there is some ambiguity around this aspect (viz, section 194T Vs section 195 for payment to non-resident partners by an Indian firm/LLP).

It is to be noted that , the provisions of section 195 place the responsibility on the resident payer to deduct tax on any sum chargeable to tax in the hands of a non-resident recipient at the applicable rates in force. The new Section 194T does not exclude non-resident recipients from its scope, which creates potential controversies regarding the applicability of both sections. Moreover, neither provision overrides the other; both sections hold equal weight and must be interpreted and applied in conjunction. It implies that when there is a conflict between a general rule and a specific rule, the specific rule will take precedence over the general one. In the current context, this principle of generalibus specialia derogant (special things take precedence over general things) could be applied in two ways:

(a) Qua Residential Status of Assessee: If a general provision applies to all assessees (both residents and non-residents) but a specific provision applies only to non-residents, the specific provision will prevail over the general one.

(b) Qua Income (with respect to the nature of income): If specific provisions apply to a particular stream of income, the specific rule will override the general provisions that apply to income in general. Section 195 appears to be qua residential status, as it applies specifically to non-resident payees. In contrast, Section 194T can be seen as qua income-specific, as it pertains to interest, remuneration, and similar income.

This controversy has further increased with the amendment made by the Central Board of Direct Taxes (‘CBDT’) in the Income Tax (Seventh Amendment) Rules, 2025 on 27th March 2025 through which  Form No. 27Q has been amended to capture the details of amounts paid to  non resident partners  u/s 194T of the Act. It mandates that the provisions of sec 194T are applicable in case of a non resident partner.

It is better that the CBDT clarifies this aspect, to avoid any disputes around this.

6. Withdrawal of funds by the partner

In the partnership firm, it generally happens that the partner withdraws the funds throughout the year and at the year end, they decide how much is to be treated as remuneration and how much amount would be adjusted with capital account. In such situation, it would be very difficult for the firm to determine, whether at the time of making payment, the said sum is remuneration or not. If the partner withdraws the funds from his capital, it would not be subjected to TDS u/s 194T.

7 Interplay between section 194T and 192/194A

Section 192 deals with tax deduction at source on income chargeable under the head salary. Further, explanation 2 to section 15 of the Act specifically states that any salary, bonus, commission, or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary.

Likewise, section 194A which deals with tax deduction at source on income by way of interest other than income by way of interest on securities, specifically excludes interest income which is credited or paid by a firm to a partner of the firm.

Thus, salary and interest paid/ payable to a partner which were never covered within the ambit of section 192 and section 194A respectively, have now been brought within the ambit of TDS under the new section 194T.

8. Challenges in complying with the TDS provision under section 194T

The primary challenges that can be anticipated with the introduction of Section 194T are as follows:

(a) The liability to deduct TDS in most of the cases would arise on the last day of the financial year as the relevant entry has to be passed in the books on or before 31^st March. It is often done by making a back dated entry as computation of remuneration is dependent on “Book Profit” which may not be finalized until the time of filing the ITR. It can be worked out after verifying expenses including deduction under section 43B, 40(a)(ia) disallowance, etc. Due to such expenses, the amount of remuneration in majority of the cases gets crystallized only at the time of filing the ITR. In short, computation of exact amount of remuneration may not be feasible as on 31^st March even by strong efforts.

(b) The above quagmire is further complicated on account of a specified date for TDS deposit for a financial year falling prior to the finalization of the P&L Account and filing of returns of income by a Partnership Firm. To determine the amount of TDS, deducted from the specified sums payable to a partner and deposit it without attracting any penalty and interest, a partnership firm would have to determine its book profits and finalize its P&L accounts much prior to the statutory time limit prescribed for filing of annual returns of income.

(c) The practical aspect of collating all information from various sources like AIS-TIS, TDS Returns, etc and arriving at profits to determine sums payable to a partner cannot be ignored.

(d) Another issue that might arise is how to determine the amount on which TDS has to be levied on. For instance, if a partnership deed states the Partner to withdraw a salary of `40,000 per month subject to the final profits then how to compute the TDS liability in such a scenario as the sum might change in the year end.

(e) Deduction on entire amount paid or credited & not on allowable amount:
Section 194T provides for TDS on the actual amount paid or credited to the partners account and not on the remuneration/interest deductible in the hands of the firm. It may happen that the entire amount credited to the partner capital account may not be deductible U/s 40(b). For example, deduction U/s 40(b) towards interest is admissible at the rate not exceeding 12% even if the firm is paying interest @15%. Strict interpretation of section 194T would require TDS on the entire interest calculated @15% whereas the amount deductible in the hands of the firms and thereafter taxable in the hands of the partner shall be @ 12% only. For example, if a firm pays interest to a partner @ 15% amounting to `1,50,000/- during the year. In such a case, interest @12% will be allowed i.e. `1,20,000/ and balance interest of `30000/- will not be allowed to the firm. In such a situation, the firm will have to deduct TDS on `1,50,000/ and not on allowed interest of `1,20,000/.

(f) Assessees being partners of a firm while filing their ITR will have to be extremely cautious about the disallowance of excess remuneration and credit of the TDS deducted.