Sec 194T — the new firm-to-partner TDS starts 1-April-2025
From 1 April 2025, Sec 194T makes partnership firms and LLPs deduct 10% TDS on salary, remuneration, commission, bonus and interest paid to a partner once the year's total exceeds ₹20,000 — and then on the whole amount. Profit share, exempt under Sec 10(2A), is outside it. Many small firms now need a TAN for the first time.
What Sec 194T says — in two sentences
Section 194T requires a partnership firm or LLP to deduct income-tax at the rate of 10% on any sum paid or credited to a partner by way of salary, remuneration, commission, bonus or interest on capital or loan — if the aggregate of such sums in a financial year exceeds ₹20,000 for that partner. Share of profit remains outside Sec 194T because it continues to be exempt in the partner's hands under Sec 10(2A).
Effective date: TDS to be deducted from any payment / credit on or after 1-April-2025. The first quarterly TDS return filing window is therefore July 2025 (Q1 of FY 2025-26).
Five things this changes for your firm
1. You probably need a TAN now
Most professional firms (CA, lawyer, architect) and small LLPs never deducted TDS — they were rarely covered under Sec 194C / Sec 194J / Sec 194I if not under audit. Now every firm with a partner remuneration / interest cheque exceeding ₹20K/yr per partner is a TDS deductor. Apply for TAN via Form 49B at the NSDL site if you don't have one. ~10-15 working days.
2. The ₹20,000 limit is per-partner, aggregate, all-bucket
Sum across all payment categories — salary plus interest plus commission plus bonus — for a given partner over the financial year. Crossing ₹20,000 in any single payment OR cumulatively triggers TDS. Once triggered, deduction is on the entire payment, not just the excess.
Example: partner A receives ₹15,000 remuneration in April + ₹8,000 interest credit in October. The October credit takes aggregate to ₹23,000 — TDS @ 10% on ₹8,000 (or on the cumulative gross-up, depending on how the firm structures it) is required.
3. Profit share is NOT in scope
Share of profit distributed to partners remains exempt under Sec 10(2A) and stays outside Sec 194T. The bright line: profit share is a residual distribution post-firm-tax, fixed payments aren't. Make sure your books cleanly separate "share of profit" from "remuneration / interest / commission". Co-mingling will create Sec 194T trouble.
4. Quarterly Form 26Q + Form 16A workflow
Standard TDS process. Each quarter, file Form 26Q on the TIN-NSDL portal by the 31st of the next month following the quarter. Deposit TDS to the central government account via challan 281 by the 7th of next month (30 April for March deposits). Issue Form 16A to each partner within 15 days of the Form 26Q due date.
5. Missing PAN → Sec 206AA 20%
If a partner hasn't furnished their PAN to the firm (rare, but happens with NRI partners with inactive PAN-Aadhaar), the rate jumps to 20% under Sec 206AA. Linkage check before April 2025 payments is essential.
Worked example — small CA firm
A three-partner CA firm pays remuneration ₹6,00,000 per partner per year (₹50K/month) plus 12% interest on capital balances of ₹5L each (₹60K/yr per partner).
Scroll horizontally to see all five columns.
| Partner | Remuneration | Interest | Aggregate | TDS @10% |
|---|---|---|---|---|
| A | ₹6,00,000 | ₹60,000 | ₹6,60,000 | ₹66,000 |
| B | ₹6,00,000 | ₹60,000 | ₹6,60,000 | ₹66,000 |
| C | ₹6,00,000 | ₹60,000 | ₹6,60,000 | ₹66,000 |
| Total | ₹18,00,000 | ₹1,80,000 | ₹19,80,000 | ₹1,98,000 |
Firm deposits ~₹2L of TDS to govt over the year. Each partner reports ₹6.6L in their personal ITR-3 (Schedule PGBP) and claims ₹66K TDS credit. Net cash flow timing only — but compliance is real.
The Sec 40(b) interaction
Sec 40(b) of the IT Act caps the firm's deduction for partner remuneration (90% of first ₹6L book profit + 60% of balance, post FA 2024 revised limits) and interest (12% simple per annum). Sec 194T sits separately — TDS applies on the actual payment, even if part of it would be disallowed under Sec 40(b).
So a firm paying 15% interest on capital (when 12% is the Sec 40(b) cap) deducts 10% TDS on the full 15%, but only 12% will be deductible from book profit when computing firm tax.
Common mistakes already showing up
- Aggregating across financial years. The ₹20K test is per FY, not per quarter. Don't reset mid-year.
- Treating drawings as "advance". If partners are drawing against their remuneration entitlement, the credit when remuneration is booked is the Sec 194T trigger. Drawings themselves aren't.
- Missing on interest credits. Interest on capital is often credited automatically by the accounting system at year-end. That year-end credit is a Sec 194T event — TDS must be deducted at the time of credit, not at the time of cheque issue.
- Forgetting LLPs. Sec 194T applies to LLPs equally — even if the LLP has only one designated partner taking remuneration. The 20K threshold + 10% rate applies as-is.
- Working partners' salary structured as "professional fees". Some firms historically paid working partners under a Sec 194J fee invoice (10% TDS) to dodge Sec 40(b) caps. From AY 2026-27 this faces both Sec 194T (because they're partners) AND Sec 194J — pick one, but the substance must be defensible.
Step-by-step compliance checklist
- Get TAN. Apply via Form 49B if not already obtained. Print of TAN allotment letter goes into your engagement file.
- Collect partner PAN. Verify each partner's PAN is operative (PAN-Aadhaar linked). Inoperative PAN → 20% TDS.
- Identify all in-scope payments. Salary, remuneration, commission, bonus, interest. Profit share OUT. Drawings are not credits — they're disbursements against an existing credit.
- Map your accounting events. Year-end interest credit is the most common missed trigger. Set up a payroll-style monthly remuneration entry to space out the TDS load.
- Deposit TDS by 7th of next month. Challan 281. Same-day verification on TIN-NSDL.
- Quarterly Form 26Q. July 31, October 31, January 31, May 31 (Q4). E-filing via TIN-FC or directly on the portal.
- Issue Form 16A. Within 15 days of Form 26Q due date. Generates via TRACES download.
- Document partner-receipt acknowledgement. Email Form 16A to each partner; keep delivery receipt.
What if you missed deducting TDS in Q1 FY 2025-26?
If you've been paying partner remuneration / interest since 1-April-2025 without deducting Sec 194T, the position to take depends on whether assessment has commenced:
- Within the year: deduct now from the next payment to "catch up" the missed TDS for past months, deposit immediately. Pay 1% interest u/s 201 per month for late deduction + 1.5% for late deposit.
- Post-year: Sec 40(a)(ia) disallows 30% of the expense in computing firm tax until TDS is deposited. Re-allowed in the year of actual deposit. Pay TDS + interest, file Form 26A relief if partner has already taxed the receipt in their ITR.
Bottom line
Sec 194T is a low-rate, high-friction change. The 10% TDS is reclaimable by the partner against final tax liability — no economic loss. But the compliance overhead — TAN, quarterly returns, Form 16A, partner reconciliation — is real for the tens of thousands of small Indian firms that have never been TDS deductors. Get TAN now. Build the monthly process before your next payment falls due.