Section 194T: TDS on Certain Payments Made to Partners by Firm

Earlier, there was no TDS provision covering payments made by a firm to its partners. Existing sections did not cover TDS on such transactions — for example, Section 192 (TDS on Salary) does not apply to salary paid by a firm to its partners. Because, explanation 2 to Section 15, the term “salary” does not include any salary, bonus, commission, or remuneration, by whatever name called, that is due to or received by a partner of a firm from the firm. By extending TDS provisions to payments made to partners, Section 194T aims to improve tax compliance, reduce the risk of tax evasion, and encourage the timely maintenance and finalization of accounts, thereby enhancing the overall transparency and reliability of the tax system.

In this article, we will cover and analyze the provisions of Section 194T in detail with the help of chart.

Introduction: New Section 194T has been inserted after Section 194S by the Finance (No. 2) Act, 2024, to mandate a 10% tax deduction on payments of any sum in the nature of salary, remuneration, commission, bonus, or interest made to a partner of a firm, if such sum or the aggregate of such sums exceeds ₹20,000 during a financial year. TDS will be deducted at the time of credit of such sum to the partner’s account or at the time of payment, whichever is earlier.

Following section 194T shall be inserted after section 194S by the Finance (No. 2) Act, 2024, w.e.f. 1-4-2025:

“Payments to partners of firms.

194T. (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.”

(Source: https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx )

Chart (Prepared by Author)

Key points:

Applicability: This provision is applicable w.e.f. 01-04-2025.

Provision: TDS is required to be deducted on certain specified types of payments made by a firm to its partners.

Payments: TDS needs to be deducted on the following sums paid by a firm to its partners:

• Salary
• Remuneration
• Commission
• Bonus
• Interest (Including Interest on capital/drawing)

This means that the provision covers only the specified types of payments listed above. Other types of payments are excluded, such as:

• Repayment of loan (principal) to partner by firm: TDS is required only on the interest portion. Since repayment of the principal amount is not covered under Section 194T, there is no TDS liability on principal repayment.
• Reimbursement of expenses to the partners of the firm: For example, Mr. A partner of ABC & Co pays Rs. 50,000 on behalf of firm to a third party from his own pocket and the firm later reimburses him. No TDS should be deducted as it is not included in the specified nature of payments.
• Capital withdrawn by partner from firm (Drawing): No TDS is required on drawings, as they are not covered under the specified nature of payments.
• Share of profit withdrawn by partner from firm: No TDS is required on the share of profit withdrawn by a partner, as it is not included in the specified nature of payments.

Payer: The payer is a partnership firm, including an Indian LLP. This provision is not applicable to foreign LLPs.

Payee: The payee refers to a partner in a partnership firm or LLP.

Rate: 10% (on specified nature of payments)

Threshold: No deduction shall be made under section 194T 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.

• Single payment: If a single payment to a partner by fi exceeds Rs. 20,000 TDS is to be deducted.

EX: Mr. A is a partner in the firm ABC & Co. He receives interest on capital amounting to Rs. 50,000 during the financial year 2025–26. Since the interest paid exceeds Rs. 20,000, as per Section 194T, TDS at 10% must be deducted.

Thus, TDS of Rs. 5,000 (i.e., 10% of Rs. 50,000) is required to be deducted.

• Aggregate Payments: In case where the firm is making multiple payments to a single partner, each less than Rs. 20,000 then TDS needs to be deducted on total payment made during the financial year if the total of such payment exceeds Rs. 20,000 in a financial year.

Ex: Mr. A is a partner in the firm ABC & Co. During the financial year 2025–26, he receives:

• • Interest of ₹10,000,
  • Salary of ₹15,000, and
  • Bonus of ₹5,000.

The total of these payments is ₹30,000, which exceeds the ₹20,000 threshold.

Therefore, TDS should be deducted at 10% on the entire ₹30,000.

Timing: TDS must be deducted at the earlier of the following two events:

• • At the time of credit of the amount (including credit to the partner’s capital account in the firm’s books of accounts), or
  • At the time of actual payment.

Some Examples Based on FAQs:

• During the financial year, Mr. A (a partner in a partnership firm) receives total remuneration of Rs. 20,000. Additionally, the firm reimburses Mr. A Rs. 30,000 for expenses incurred by him on behalf of the firm. TDS under Section 194T should not be deducted, as the specified nature of payment (i.e., remuneration) is only Rs. 20,000, which does not exceed the threshold limit. Reimbursement of expenses is not covered under Section 194T.
• Is TDS on salary paid to partners to be deducted under Section 192 or Section 194T? As clarified earlier, Section 192 applies only where an employer-employee relationship exists. In the case of payments to partners, Section 194T will be applicable, not Section 192.

Conclusion:

Section 194T represents a significant amendment to the Income Tax Act. It aims to ensure that income is taxed at source and to enhance tax compliance.

However, it may also introduce new compliance challenges and potential liquidity issues for firms. Firms should plan in advance, obtain a TAN (Tax Deduction and Collection Account Number), and ensure timely deduction and deposit of TDS to avoid penalties and interest.

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Disclaimer: The examples and interpretations shared in this article reflect my personal understanding and experience.