A Complete Guide to Section 194T of Income Tax Act 1961: New TDS on Payments to Partners of partnership firms and LLPs

Published : 22-09-2025

Updated : 14-11-2025

Overview : The Finance (No. 2) Act, 2024, introduces a game-changing provision transforming tax compliance for partnership firms and LLPs across India. Section 194T, inserted into the Income Tax Act, 1961, establishes mandatory TDS for specified partner payments, marking a historic shift in partnership taxation. Effective April 1, 2025, this groundbreaking provision mandates 10% TDS on partner payments exceeding ₹20,000 annually, mirroring employee salary deduction mechanisms. Firms must navigate this compliance landscape carefully, as non-compliance triggers significant penalties and interest charges.

What is the New Section 194T of the Income Tax Act?

Section 194T marks India’s first-ever TDS requirement for partner payments through the Finance Act 2024, revolutionising tax compliance for all partnership firms. This provision mandates income tax deduction at source on specified partner payments, bridging a long-standing TDS framework gap. The CBDT formalised implementation through Notification No. 22/2025 dated March 27, 2025, incorporating Section 194T reporting into Forms 26Q and 27Q 📊. Unlike Section 192 for employee salaries, Section 194T targets payments characterised as partner remuneration under Section 40(b), ensuring comprehensive tax coverage.

Which Payments are Covered under Section 194T? 💼

Profit share distributions remain outside Section 194T’s purview, maintaining tax-exempt status under Section 10(2A). Section 194T covers all partner compensation qualifying for deduction under Section 40(b), while excluding profit distributions exempt under Section 10(2A):

Payments triggering TDS obligations:

Salary to working or designated partners per partnership deed
Remuneration, including monthly drawings or performance-based payments
Bonus, whether discretionary or contractual
Commission calculated on sales, profits, or on a specified basis
Interest credited to any partner account, including the capital account
Interest on partner loans where partners act as lenders

Who is Responsible for Deducting TDS under Section 194T?

The TDS obligation applies universally to all partnership firms and Indian LLPs under Section 2(23), regardless of turnover, audit status, or business type. Every partnership entity must implement TDS deduction before crediting or paying specified amounts to partners. This universal applicability eliminates distinctions between audit-mandated and non-audit firms, creating uniform compliance across all partnership structures. The responsibility extends to firms assessed as such (PFAS) and firms assessed as AOP, with no size or revenue exemptions.

What is the TDS Rate and Threshold Limit

No	Parameter	Specification	Important Notes
1	TDS Rate (Resident)	10% flat rate	No surcharge or cess for resident partners
2	TDS Rate (Non-Resident)	10% + surcharge + 4% cess	Applicable surcharge and cess for non-residents
3	Threshold	₹20,000 per partner annually	Aggregate of all payments
4	Calculation	Entire payment amount	TDS on the full amount when the threshold is crossed
5	Effective Date	April 1, 2025	FY 2025-26 onwards
6	No PAN/Aadhaar Rate	20% under Section 206AA	Double the standard rate

Example: Partner A receives ₹15,000 monthly from April 2025. No TDS in April, but May’s payment totalling ₹30,000 triggers 10% TDS on the entire ₹30,000, not just the excess.

When Should the TDS be Deducted and Deposited?

TDS deduction triggers at the earlier event: when crediting the partner’s account (including capital account) or making actual payment, ensuring timely tax collection 📅. This dual trigger prevents timing manipulations. Deducted TDS must reach the government by the 7th of the subsequent month, except March deductions due April 30th, per Rule 30. Quarterly Form 26Q returns are due July 31st, October 31st, January 31st, and May 31st.

What are the Consequences of Non-Compliance?

Non-compliance attracts severe penalties: Section 201(1A) interest at 1% monthly for non-deduction, 1.5% for non-deposit, plus 30% expense disallowance under Section 40(a)(ia) ⚠️. Section 271C enables penalties equal to the TDS amount for deduction failures. Late filing attracts a ₹200 daily fee under Section 234E, with potential Section 276B prosecution. These consequences emphasise the need to establish robust compliance by April 2025.

Conclusion

Section 194T fundamentally transforms partnership taxation, effective from April 1, 2025, and closes historical TDS gaps. This provision brings partner payments under withholding requirements, ensuring timely tax collection and transparency. Firms must immediately obtain TAN, update accounting systems, revise partnership deeds, and establish processes for accurate TDS calculation and deposits. Understanding the ₹20,000 threshold, 10% rate, and scope covering salary, remuneration, interest, bonus, and commission forms the foundation for seamless compliance.

FAQ’s

Does Section 194T apply to the partner’s share of profit?

No, Section 194T excludes profit distributions. Profit distributions remain tax-exempt under Section 10(2A) for partners, as firms already pay tax on total profits. TDS applies exclusively to Section 40(b) deductible expenses—salary, remuneration, bonus, commission, and interest.

What happens if a partner does not provide their PAN?

Without PAN/Aadhaar, Section 206AA mandates a 20% TDS rate—double the standard 10%—significantly increasing partners’ tax burden. This enhanced rate applies regardless of the payment amount, emphasising the importance of PAN compliance.

Is TDS under Section 194T applicable from FY 2024-25 or FY 2025-26?

Section 194T operates from April 1, 2025, applying to FY 2025-26 onwards. Payments until March 31, 2025, remain outside this provision. Tax auditors need not report non-deduction in Form 3CD for FY 2024-25.

Can a partner claim credit for the TDS deducted under Section 194T?

Yes, partners receive complete TDS credit when filing ITR. The amount reflects in Form 26AS and AIS through the e-filing portal, enabling adjustment against the final tax liability 💰. Accurate PAN linkage prevents reconciliation issues.

Does the ₹20,000 threshold apply to each type of payment separately?

No, the threshold operates aggregately, covering all Section 194T payments annually. Once the total crosses ₹20,000, TDS applies to the entire amount, not just the excess, ensuring comprehensive tax collection.

How does Section 194T interact with Section 40(b) remuneration limits?

TDS under Section 194T applies to the full payment amount even if part exceeds Section 40(b) limits and is disallowed as the firm’s expense. This creates a mismatch where TDS applies to amounts not deductible for the firm.

Can partners obtain a lower TDS certificate under Section 197?

No, the facility of securing a certificate for no deduction or lower deduction under Section 197 is not available for Section 194T payments. Partners cannot apply for reduced TDS rates.

Can partners submit Form 15G/15H to avoid TDS?

No, partners cannot submit Form 15G or 15H self-declarations to avoid TDS under Section 194T. These exemption forms do not apply to partner payments.

Does Section 206AB (higher TDS for non-filers) apply to Section 194T?

No, Section 206AB provisions for higher TDS rates on ITR non-filers do not apply to Section 194T. The maximum rate remains 20% for partners without PAN/Aadhaar.

How should firms handle payments to non-resident partners?

For non-resident partners, the TDS rate is 10% plus applicable surcharge plus 4% health and education cess. Firms must consider tax treaty benefits where appropriate and follow specific non-resident taxation procedures.

Author Bio

Editorial Team

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.