New Section 194T: Firms Must Deduct 10% TDS on Partner Remuneration, Interest and Salary from FY 2025-26

Until 31 March 2025, a partnership firm could pay its partners salary, interest on capital or a share of profit without ever touching the tax-deduction-at-source machinery. That ended on 1 April 2025. Section 194T, inserted by the Finance (No.2) Act 2024, now forces every firm and LLP to deduct 10% TDS on remuneration, salary, commission, bonus and interest paid to a partner. It is the first time in the history of the Income Tax Act 1961 that a firm must withhold tax on money it hands its own partners.

For the roughly 1.4 crore-plus partnership and LLP structures that file returns in India, this is a genuine compliance shift for FY 2025-26 (assessment year 2026-27). If your firm has never held a TAN or filed a Form 26Q, Section 194T is your cue to start. This morning's tip walks through exactly what the section says, a fully worked example at a 10% rate, the mistakes the department is already flagging, and the questions partners keep asking.

What the Section Says

Section 194T applies to any firm (including a limited liability partnership) that pays or credits a partner any salary, remuneration, commission, bonus or interest on the partner's account. The moment such a payment is credited to the partner's account — including the capital account or current account — or is actually paid, whichever is earlier, the firm must deduct tax at 10%.

The one relief is a threshold. No deduction is required where the aggregate of such payments to a partner does not exceed Rs 20,000 in the financial year. Cross that Rs 20,000 line and TDS applies to the whole amount for the year, not merely the excess over Rs 20,000. Because most working partners draw far more than Rs 20,000 a year in remuneration alone, the exemption realistically covers only dormant or sleeping partners with token payouts.

A critical feature separating Section 194T from ordinary vendor TDS is the phrase "credit to the capital account". A firm cannot escape deduction by merely book-crediting interest or remuneration and deferring the cash. The credit entry itself triggers the 10% withholding on the date it is passed. This closes the timing gap firms historically used, because remuneration is often only credited at year-end when the book profit is finalised.

One payment is deliberately outside the net. A partner's share of profit, which is exempt in the partner's hands under Section 10(2A) of the Income Tax Act 1961, is not liable to Section 194T. Only the deductible payouts — those a firm claims as expenditure under Section 40(b) — attract the 10% deduction. Firms must therefore separate the exempt profit share from taxable remuneration and interest before running the deduction.

Deducted tax must be deposited with the government by the 7th of the following month (with 30 April for tax deducted in March), and reported quarterly in Form 26Q. This is the same plumbing that already governs Section 194C contractor payments and Section 194J professional fees, so firms with existing TDS obligations simply add a new section code.

Worked Example

Consider Sharma & Associates, a partnership firm with two working partners, drawing up its accounts for FY 2025-26. The partnership deed authorises monthly remuneration and interest on capital at 12%, both within the Section 40(b) ceiling. Here is how Section 194T bites.

Partner A's covered payouts total Rs 20,40,000, comfortably above the Rs 20,000 threshold, so the whole amount is liable. The firm deducts Rs 2,04,000 (10% of Rs 20,40,000) across the year, ideally proportionately each month so that the monthly remuneration of Rs 1,50,000 is paid net of Rs 15,000 TDS. The Rs 5,00,000 profit share is left untouched because it is exempt under Section 10(2A).

Partner A now carries a Rs 2,04,000 TDS credit into their personal return. If Partner A is taxed under the new regime for AY 2026-27, the first Rs 4,00,000 of income is nil-rated and a Section 87A rebate of up to Rs 60,000 applies where total income stays within Rs 12,00,000. With Rs 20,40,000 of remuneration and interest, Partner A is well past the rebate ceiling, so the Rs 2,04,000 already withheld reduces the final self-assessment liability rupee for rupee. You can model the partner's own liability using our income tax calculator and compare regimes with the old vs new regime tool.

If instead the firm simply forgets to deduct, the consequences are mechanical. Under Section 201(1A), interest runs at 1% per month from the date the tax was deductible to the date it should have been deducted, and 1.5% per month where tax was deducted but not deposited. Worse, under Section 40(a)(ia), 30% of the expenditure on which TDS was not deducted can be disallowed, inflating the firm's own taxable profit. A missed Rs 2,04,000 deduction can therefore cost the firm both interest and a disallowance running into lakhs.

Common Mistakes

Section 194T is barely a year old, and the errors surfacing in early FY 2025-26 compliance reviews are predictable. Watch for these six.

1. Not obtaining a TAN. A firm that only ever paid partners has probably never needed a Tax Deduction Account Number. From 1 April 2025 it does. Deducting tax without quoting a valid TAN in Form 26Q invites a penalty of Rs 10,000 under Section 272BB. Apply for the TAN before the first covered payment of the year.

2. Treating the Rs 20,000 as a per-payment threshold. The Rs 20,000 ceiling is an annual aggregate per partner, not a per-transaction floor. A firm crediting Rs 15,000 of interest and Rs 12,000 of remuneration to the same partner has crossed Rs 20,000 in total and must deduct on the full Rs 27,000, not treat each entry as below the line.

3. Forgetting the capital-account credit. Firms that only pass a single year-end journal crediting remuneration to the partner's capital account still trigger Section 194T on the date of that credit. Read our explainer on how TDS attaches to a credit entry rather than a cash payout to avoid a year-end scramble.

4. Deducting on the exempt profit share. Over-deduction is the mirror error. Applying 10% to a partner's Section 10(2A) profit share wrongly withholds tax the partner must then reclaim as a refund. Keep the profit share ledger separate from the remuneration and interest ledgers.

5. Missing the deposit and return deadlines. Tax deducted must reach the government by the 7th of the next month, and Form 26Q for each quarter is due 31 July, 31 October, 31 January and 31 May respectively. A late return attracts a fee of Rs 200 per day under Section 234E, capped at the TDS amount. Check the withheld figure against the partner's Form 26AS before filing.

6. Ignoring the interplay with advance tax. Partners sometimes assume the new 10% TDS clears their whole liability. It rarely does, because remuneration is taxed at slab rates that can reach 30% plus surcharge and cess. The 10% withheld is a credit, not a final tax, so partners in higher brackets still owe advance tax in four instalments. Estimate the shortfall early with the TDS calculator.

FAQ

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

Yes. The definition of "firm" in the Income Tax Act 1961 includes a limited liability partnership registered under the LLP Act 2008. Any LLP paying salary, remuneration, interest or commission to a designated or ordinary partner above Rs 20,000 in FY 2025-26 must deduct 10% TDS under Section 194T from 1 April 2025.

Is a partner's share of profit subject to TDS under Section 194T?

No. A partner's share in the firm's total income is exempt under Section 10(2A) and is specifically outside Section 194T. Only deductible payments — remuneration, salary, bonus, commission and interest claimed by the firm under Section 40(b) — attract the 10% deduction.

What is the threshold below which no TDS is required?

If the aggregate of salary, remuneration, commission, bonus and interest paid or credited to a single partner does not exceed Rs 20,000 in the financial year, no deduction is required. Once the yearly total crosses Rs 20,000, TDS at 10% applies to the entire amount, not just the portion above Rs 20,000.

When exactly must the firm deduct the tax?

At the earlier of the date the amount is credited to the partner's account — including the capital or current account — or the date of actual payment. A pure book credit at year-end is enough to trigger the 10% deduction under Section 194T, even if no cash has moved.

Can a partner give Form 15G or 15H to avoid the deduction?

No. Forms 15G and 15H apply to specified incomes such as interest under Section 194A, not to Section 194T partner payments. There is no lower-deduction facility notified for Section 194T, so a partner with covered payouts above Rs 20,000 will see 10% withheld and must claim it as credit in their return.

How does a partner recover the tax deducted?

The 10% withheld appears in the partner's Form 26AS and Annual Information Statement, and is claimed as a TDS credit when filing the individual ITR for AY 2026-27. If the partner's final liability is lower than the tax withheld — for instance because of the new-regime rebate — the balance is refunded after processing.

What penalties does the firm face for non-compliance?

Interest under Section 201(1A) runs at 1% per month for failure to deduct and 1.5% per month for failure to deposit deducted tax. A late Form 26Q attracts Rs 200 per day under Section 234E, and 30% of the expenditure may be disallowed under Section 40(a)(ia). Obtaining a TAN and deducting on time from 1 April 2025 avoids all of these.