Section 194T: firms must deduct 10% TDS on partner salary, interest and bonus from 1 April 2025

For decades, a partnership firm could pay its partners salary, interest on capital and bonus without deducting a rupee of tax at source. That changed on 1 April 2025. Section 194T, inserted into the Income-tax Act, 1961 by the Finance (No. 2) Act 2024, now requires every firm and limited liability partnership to deduct 10% tax at source on remuneration, salary, commission, bonus and interest paid or credited to a partner once the yearly total crosses Rs 20,000. This is the first time in the statute's history that a partner-to-firm payment has been brought inside the withholding net, and the compliance burden lands on the firm, not the partner.

If you run a professional firm, a trading LLP or a family partnership, this single provision reshapes your quarterly compliance calendar for the financial year 2025-26 (assessment year 2026-27). Below is exactly what the section says, a rupee-level worked example, the mistakes that surface in Income Tax Department scrutiny, and answers to the questions partners are asking their chartered accountants right now.

What the Section Says

Section 194T reads in plain terms: any firm paying salary, remuneration, commission, bonus or interest to a partner must deduct income tax at 10% at the time of credit of the sum to the partner's account or at the time of payment, whichever is earlier. The phrase "credit to the partner's account" is explicitly stated to include a credit to the partner's capital account, which closes the old escape route of merely booking an entry and deferring cash. The moment the remuneration is credited in the firm's books, the 10% liability is triggered even if no money has left the bank.

The relief threshold sits at Rs 20,000. If the aggregate of all such sums paid or credited to a particular partner does not exceed Rs 20,000 during the financial year, no deduction is required. Read that carefully: it is an aggregate across salary, interest, bonus and commission for the whole year, not a per-payment test. A partner drawing Rs 5,000 a month in remuneration reaches Rs 60,000 by year-end and is squarely covered. Once the Rs 20,000 line is crossed, tax is deducted on the entire amount credited during the year, not only on the slice above Rs 20,000.

Three structural points follow from the wording. First, the deductor is the firm, which must hold a valid TAN and file quarterly TDS statements. Second, a limited liability partnership is a "firm" for income-tax purposes, so LLP partners are caught on identical terms. Third, and this is the point most partners miss, a partner's share of profit is not covered, because that share is exempt in the partner's hands under Section 10(2A) and is not remuneration or interest. Section 194T bites only on the taxable partner payments listed in the section. You can cross-check the statutory text on the Income Tax Department portal and the consolidated Act on India Code.

The interplay with Section 40(b) matters too. Section 40(b) already limits how much remuneration and interest a firm may claim as a deduction, and the Finance (No. 2) Act 2024 revised those book-profit limits from the same assessment year. Section 194T is a separate obligation: it governs withholding, not deductibility. A firm can therefore owe 10% TDS on remuneration even where part of that remuneration is disallowed under Section 40(b) in the firm's own computation.

Worked Example

Consider Meridian Associates, a three-partner firm, and its senior partner Kavita for the year to 31 March 2026. During FY 2025-26 the firm credits Kavita Rs 6,00,000 as remuneration (Rs 50,000 a month) and Rs 1,50,000 as interest at 12% on her capital of Rs 12,50,000. Her aggregate partner payment is Rs 7,50,000, comfortably above the Rs 20,000 threshold, so Section 194T applies.

The firm must deduct 10% of Rs 7,50,000, which is Rs 75,000, and deposit it against Kavita's PAN. Because the remuneration is credited monthly, the firm deducts as each credit is made rather than in one lump at year-end. The interest on capital, typically credited on 31 March 2026, attracts its own 10% deduction of Rs 15,000 at that credit date. You can model the withholding on any payout using the Oquilia TDS calculator, and estimate Kavita's own final liability on the income tax calculator.

The Rs 75,000 deducted is not a cost to Kavita; it is a prepayment of her own tax. She reports the full Rs 7,50,000 as business income under Section 28(v) in her ITR-3, claims the Rs 75,000 as TDS credit visible in her Form 26AS, and pays only the balance. If her final liability is lower, the excess is refunded. What the section does is convert a year-end lump-sum liability into a smoothed, tracked collection, which also reduces her exposure to advance tax interest under Sections 234B and 234C. Partners weighing regime choice for their overall return can compare outcomes on the old vs new regime tool.

Common Mistakes

The first and most common error is treating the Rs 20,000 threshold as a per-payment or per-quarter figure. It is an annual aggregate per partner across all five payment heads. A firm that pays a partner Rs 8,000 of interest and Rs 15,000 of bonus in the same year has crossed Rs 20,000 and must deduct on the full Rs 23,000, even though neither payment alone breached the line.

A second error is ignoring the "credit to capital account" trigger. Many firms historically credited remuneration to partners' capital accounts on 31 March and paid cash later. Under Section 194T the credit itself is the deduction event, so a 31 March 2026 book entry fixes the TDS liability on that date regardless of when the partner actually withdraws the money. Waiting for the cash to move is a defaulting position.

Third, firms wrongly deduct 10% on the exempt profit share. Section 10(2A) keeps a partner's share of the firm's total income exempt in the partner's hands, and Section 194T does not list profit share among covered payments. Deducting on it needlessly blocks the partner's cash and creates a mismatch between the firm's TDS return and the partner's exempt income. Only salary, remuneration, commission, bonus and interest are within scope.

Fourth, firms forget they now need a TAN and a live quarterly compliance routine. A firm that never previously deducted TDS on partner payouts must obtain a TAN, deposit the tax by the 7th of the following month (for a March credit, by 30 April), and file the quarterly TDS statement. Missing the deduction attracts interest at 1% per month under Section 201(1A), while deducting and failing to deposit attracts 1.5% per month, and the firm is treated as an assessee-in-default. Where a partner has not furnished a PAN, Section 206AA pushes the rate to 20%, so collecting and validating partner PANs before the first FY 2025-26 credit is essential. Reviewing our recent explainers on the advance tax instalment schedule under Section 211 and the updated return window under Section 139(8A) will help partners reconcile these credits at filing time.

FAQ

When did Section 194T become effective?

Section 194T was inserted by the Finance (No. 2) Act 2024 and applies from 1 April 2025. It therefore covers salary, remuneration, commission, bonus and interest paid or credited to partners during the financial year 2025-26 (assessment year 2026-27) and every year after.

What is the TDS rate and threshold?

The rate is a flat 10%. No tax is deducted if the aggregate of covered payments to a partner does not exceed Rs 20,000 in the financial year. Once that Rs 20,000 aggregate is crossed, the 10% applies to the whole amount credited or paid during the year, not just the portion above Rs 20,000.

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

No. A partner's share of profit is exempt under Section 10(2A) and is not among the payments listed in Section 194T. Only salary, remuneration, commission, bonus and interest are covered, so the exempt profit share stays outside the withholding.

When exactly must the firm deduct?

At the earlier of credit or payment. Crucially, credit to the partner's capital or current account is expressly treated as credit, so booking the remuneration in the firm's ledger triggers the 10% deduction even if the partner has not drawn the cash.

Does Section 194T apply to LLPs?

Yes. An LLP is a firm for income-tax purposes, so remuneration and interest it pays to designated or other partners fall under Section 194T on the identical 10% rate and Rs 20,000 threshold.

What if the firm does not deduct the tax?

Failure to deduct attracts interest at 1% per month under Section 201(1A) from the date the tax was deductible, and deducted-but-not-deposited tax attracts 1.5% per month. The firm becomes an assessee-in-default and may face penalty proceedings, so building the deduction into monthly payroll runs from April 2025 is the safe course.

Can a partner avoid the deduction if total income is below the exemption limit?

A partner expecting a low final tax can apply to the Assessing Officer for a lower or nil deduction certificate under Section 197. Until that certificate is issued, the firm must deduct at 10% and the partner recovers any excess as a refund after filing the return.