New Section 194T: 10% TDS on partner salary, interest and commission from firms effective 1 April 2025

From 1 April 2025, the tax law reaches inside the partnership firm for the first time. Section 194T, inserted by the Finance (No. 2) Act, 2024, requires every firm and LLP to deduct 10% TDS when it pays salary, remuneration, commission, bonus or interest to its own partners. Until 31 March 2025, a partner could draw remuneration of Rs 50 lakh in a year and the firm deducted nothing at source; the partner simply declared it in the personal return. That gap closes for all such payments credited or paid on or after 1 April 2025, and thousands of firms that have never held a TAN now have a withholding obligation to discharge.

The change matters because it is procedural, not a new tax. The partner was always taxable on remuneration and interest under the head "profits and gains of business or profession"; Section 194T only forces the collection forward to the point of payment, exactly as Section 192 does for an employee's salary. Get the mechanics wrong, though, and the firm faces interest at 1% to 1.5% per month plus disallowance, so the first quarter of FY 2025-26 is the time to fix the process.

What the Section Says

Section 194T applies to a "firm" paying "any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm". The deduction is 10% of the sum, made at the time of credit to the partner's account or at the time of payment, whichever is earlier. Crucially, the section expressly states that crediting the amount to the partner's capital account (or any other account in the firm's books) is treated as credit to the partner and triggers the deduction. A firm cannot escape Section 194T by routing the remuneration through the capital account instead of paying it out in cash.

There is one threshold. No tax is deducted where the aggregate of such sums credited or paid to a partner during the financial year does not exceed Rs 20,000. The Rs 20,000 limit is per partner, per financial year, and it tests the total of all covered heads taken together, not each head separately. Once the running total crosses Rs 20,000, the 10% deduction applies, and in practice firms apply it to the full sum because the section gives no exemption for the first Rs 20,000 once the ceiling is breached.

The "firm" in Section 194T includes a Limited Liability Partnership, because Section 2(23) of the Income Tax Act, 1961 reads "firm" to include an LLP. This is the first provision in the Act that operates entirely inside a partnership structure: the firm and the partner are the same business, yet the law now treats the internal payment like a payment to an outside vendor. The statutory text is available on the Income Tax Department's site at incometaxindia.gov.in and the enacting amendment in the Finance (No. 2) Act, 2024 is reproduced on indiacode.nic.in.

What Section 194T does not cover is just as important. The share of profit a partner receives is exempt in the partner's hands under Section 10(2A), and because it is not "salary, remuneration, commission, bonus or interest", it falls outside Section 194T entirely. A firm distributing its post-tax profit of Rs 40 lakh among three partners deducts no TDS on that distribution. Only the Section 40(b)-type working payments, the ones the firm claims as a deduction against its own income, attract the 10% withholding.

Worked Example

Take Meridian Associates, a firm of two working partners. For FY 2025-26 the partnership deed fixes Ms Kavya's remuneration at Rs 50,000 per month and interest on her capital balance of Rs 15,00,000 at 12% per annum. Her covered payments for the year therefore total Rs 6,00,000 of remuneration plus Rs 1,80,000 of interest, which is Rs 7,80,000. Because this far exceeds the Rs 20,000 threshold, Section 194T applies in full.

The firm deducts Rs 78,000 across the year. On the monthly remuneration of Rs 50,000, it withholds Rs 5,000 each month and pays Ms Kavya Rs 45,000. The interest, usually credited once at year-end on 31 March 2026, attracts Rs 18,000 of TDS at the point of that credit. The Rs 9,00,000 profit share carries no deduction because Section 10(2A) keeps it out of scope.

Ms Kavya does not lose this money. The Rs 78,000 appears in her Form 26AS and Annual Information Statement, and she claims full credit against her final tax liability when she files her return for assessment year 2026-27. If her total tax works out to less than the TDS collected across all sources, the excess is refunded. To see how the remuneration sits within her overall liability, she can model it on Oquilia's income tax calculator and compare regimes using the old vs new regime tool. The firm, in turn, can size each month's deduction with the TDS calculator.

The compliance calendar for the firm is fixed. TDS deducted in any month must be deposited by the 7th of the following month, except for tax deducted in March, which may be deposited up to 30 April 2026. The firm then files a quarterly TDS return in Form 26Q and issues Form 16A to each partner, the same paperwork a firm already files when it deducts TDS on rent or professional fees.

Common Mistakes

The first and costliest error is having no TAN. A firm that has only ever paid salaries below the deduction limit, or used contractors below the Section 194C threshold, may never have applied for a Tax Deduction and Collection Account Number. Section 194T gives it no choice: the firm must obtain a TAN before the first deduction is due, because TDS cannot be deposited without one. Apply early in April 2025 rather than discovering the gap when the 7 May 2025 deposit deadline arrives.

The second mistake is deducting on the profit share. Some accountants, nervous about the new section, withhold 10% on everything credited to a partner, including the Section 10(2A) profit distribution. That over-deduction shrinks the partner's cash flow and creates a refund situation that need never have existed. Only remuneration, interest, commission and bonus are covered; the profit share is not. Confirm what "profit and gains" means using Oquilia's TDS glossary entry before setting up the deduction logic.

The third pitfall is timing the interest credit. Many firms credit a full year's interest on capital in a single 31 March 2026 journal entry. Section 194T treats that book credit as the trigger, so the entire 10% on the year's interest falls due then, and the corresponding deposit is due by 30 April 2026. Firms that forget the credit-equals-payment rule deduct late and pay interest at 1.5% per month under Section 201(1A) for every month of delay.

The fourth error is ignoring the missing-PAN consequence. If a partner has not furnished a valid PAN, Section 206AA overrides the 10% rate and the firm must deduct at 20%. Every working partner should confirm their PAN is recorded in the firm's books before April 2025, because under-deduction here is a firm liability, not the partner's. The fifth and final mistake is disallowance: if the firm fails to deduct or deposit the TDS, the remuneration and interest it paid can be disallowed under Section 40(a)(ia) to the extent prescribed, raising the firm's own taxable income.

FAQ

Does Section 194T apply to LLPs as well as traditional partnership firms?

Yes. Section 2(23) of the Income Tax Act, 1961 defines "firm" to include a Limited Liability Partnership, so an LLP paying remuneration or interest to its designated or other partners must deduct 10% TDS from 1 April 2025 exactly as a registered firm does.

Is the Rs 20,000 threshold applied to each type of payment separately?

No. The Rs 20,000 limit tests the aggregate of all covered sums, remuneration, interest, commission and bonus, credited or paid to a single partner during the financial year. If a partner draws Rs 15,000 remuneration and Rs 10,000 interest, the total of Rs 25,000 crosses the threshold and the 10% deduction applies.

Does the firm deduct TDS on a partner's share of profit?

No. A partner's share of the firm's profit is exempt under Section 10(2A) and is not one of the heads listed in Section 194T. The firm deducts nothing on profit distribution; it deducts only on salary, remuneration, commission, bonus and interest paid to the partner.

When must the firm deposit the TDS deducted under Section 194T?

TDS deducted in any month from April 2025 to February 2026 must be deposited by the 7th of the following month. Tax deducted in March 2026 may be deposited up to 30 April 2026. Late deposit attracts interest at 1.5% per month under Section 201(1A).

Can a partner ask for a lower or nil deduction certificate?

A partner expecting a low total tax liability can apply to the assessing officer under Section 197 for a certificate authorising deduction at a lower or nil rate, and the firm then deducts at the certified rate. Until the certificate is issued, the firm must deduct at the full 10%. The partner can also adjust advance-tax instalments accordingly, as explained in Oquilia's advance tax glossary entry.

What happens if the partner has not given the firm a PAN?

Section 206AA applies. Without a valid PAN, the firm must deduct at 20% rather than 10%, and the higher deduction is the firm's responsibility to collect and deposit. Partners should confirm their PAN is on the firm's records before the first FY 2025-26 deduction.

Does the partner pay tax twice because of this TDS?

No. The 10% deducted is only an advance collection. The partner claims full credit for it against the final tax liability when filing the return for assessment year 2026-27, and any excess over the actual tax due is refunded with interest where applicable.