Knowledge Series | Direct Tax | June 2026
Executive Summary
Section 194T of the Income-tax Act, 1961, inserted by the Finance (No.2) Act, 2024, mandates tax deduction at source (TDS) at 10% on salary, remuneration, commission, bonus, and interest paid or credited by a partnership firm or LLP to its partners, effective 1 April 2025. This is the first-ever TDS obligation on partner payments — previously excluded by Explanation 2 to Section 15 (which bars treating partner remuneration as 'salary') and Section 194A(3)(iv) (which exempted interest paid by a firm to its partners). The Central Board of Direct Taxes (CBDT) formalised implementation through Notification No. 22/2025 dated 27 March 2025, amending Forms 26Q and 27Q to incorporate Section 194T reporting under deduction code '94T'.
1. Legal & Regulatory Background
Prior to Section 194T, no TDS mechanism existed for partner remuneration. Explanation 2 to Section 15 excluded partner salary from the definition of 'salary', making Section 192 inapplicable. Section 194A(3)(iv) explicitly exempted firm-to-partner interest. The result was a compliance gap: the firm's deduction under Section 40(b) was visible in its accounts, but no corresponding advance tax collection existed at source. Section 194T closes this gap by creating a dedicated withholding provision applicable to all partnership firms and LLPs, irrespective of turnover or tax-audit status.
| Provision | Authority | Relevance |
|---|---|---|
| Section 194T | ITA 1961 (FA (No.2) Act, 2024) | Core TDS obligation — 10% on partner salary, remuneration, commission, bonus, interest |
| Section 15 — Explanation 2 | ITA 1961 | Partner remuneration excluded from 'salary'; Section 192 not applicable — gap filled by Section 194T |
| Section 194A(3)(iv) | ITA 1961 | Previously exempted firm-to-partner interest; Section 194T now governs interest on capital/current accounts |
| Section 10(2A) | ITA 1961 | Profit share of partners from firm — fully exempt; outside Section 194T |
| Section 40(a)(ia) | ITA 1961 | 30% disallowance of partner payment if TDS not deducted or not deposited by ITR due date |
| Section 201(1A) | ITA 1961 | Interest: 1% per month for late deduction; 1.5% per month for late deposit |
| Section 271C / 276B | ITA 1961 | Penalty equal to TDS for non-deduction; prosecution for wilful non-deposit |
| CBDT Notification 22/2025 (27.03.2025) | CBDT | Forms 26Q and 27Q amended; Section 194T added under deduction code '94T' |
| Rule 30 / Rule 31A | IT Rules 1962 | Deposit deadlines; quarterly TDS return filing obligations |
2. Key TDS Provisions — Section 194T
2.1 Scope of Section 194T
Section 194T applies to any person being a firm (including an LLP, as defined under Section 2(23) of the Act) paying or crediting the following to a partner:
| Covered Payments (TDS Applies) | Excluded Payments (No TDS) | Grey Area / Requires Analysis |
|---|---|---|
| Salary / Remuneration | Share of profit — exempt under Section 10(2A) | Interest on loans from partner (as lender, not as partner) — may fall under Section 194A |
| Commission | Repayment of capital contribution | Non-resident partner payments — Section 194T vs. Section 195 / DTAA (unresolved — see 2.5) |
| Bonus | Genuine expense reimbursements (documented) | Partner drawings later crystallised as remuneration — TDS timing depends on when credit entry passed |
| Interest on capital account / current account | — | — |
2.2 Rate, Threshold and Trigger
| Parameter | Rule |
|---|---|
| TDS Rate | 10% (flat) on the gross amount — no surcharge or cess deducted at source by the firm |
| Rate — No / Invalid PAN | 20% under Section 206AA. Partners must furnish valid PAN to avoid higher deduction. |
| Threshold | ₹20,000 per financial year per partner — aggregate of ALL covered payments (salary + bonus + commission + interest). Once crossed, TDS applies on the ENTIRE amount, not just the excess. |
| Trigger — Earlier Of | (a) Credit to the partner's account, including the CAPITAL ACCOUNT (book entry alone suffices); OR (b) Actual cash/bank payment. Whichever occurs first. |
| Form 15G / 15H | NOT available. Partners cannot self-certify for nil/lower deduction. |
| Section 197 Certificate | NOT available. No lower-deduction certificate can be obtained by the partner or firm. |
| Section 206AB — Non-Filer | NOT applicable. Maximum rate for resident partner remains 20% (no PAN surcharge scenario). |
| Applicability | ALL partnership firms and LLPs — regardless of turnover, scale, or whether subject to tax audit under Section 44AB. |
Capital Account Credit = Immediate TDS Trigger
A book entry crediting a partner's capital account on 31 March triggers TDS on that date — even if no cash is paid. TDS on March credits must be deposited by 30 April. Failure attracts interest under Section 201(1A) from 31 March onward.
2.3 Compliance Procedure
| Step | Action |
|---|---|
| 1. TAN | Obtain Tax Deduction Account Number (Form 49B / NSDL portal) if not already held. TAN is mandatory before any TDS deduction. |
| 2. Compute | Maintain a partner-wise register of all covered payments. Monitor aggregate against ₹20,000 threshold during the year. |
| 3. Deduct | At the time of credit (including capital account) or payment — whichever is earlier. If threshold crosses mid-year, deduct catch-up TDS on the entire year-to-date amount in that month. |
| 4. Deposit | Challan ITNS 281 — by 7th of the following month. Exception: TDS deducted in March → deposit by 30 April. |
| 5. File Return | Form 26Q (resident partners) — quarterly. Deduction code '94T'. Form 27Q (non-resident partners). Due dates: Q1 → 31 Jul | Q2 → 31 Oct | Q3 → 31 Jan | Q4 → 31 May. |
| 6. Issue Certificate | Form 16A to each partner within 15 days from TDS return due date — generated from TRACES portal. |
| 7. Reconcile | Verify TDS credits appear in partner's Form 26AS / AIS. Partner claims credit in ITR under PGBP head (not salary). |
2.4 Taxability of Partner Payments — Head of Income
Remuneration, bonus, commission, and interest received by a partner from the firm is taxable in the partner's hands as 'Profits and Gains of Business or Profession' (PGBP) under Section 28(v) — not as salary. The standard deduction under Section 16 (₹75,000 for AY 2026-27) is not available. The TDS credit under Section 194T is available against the partner's final tax liability in the year of deduction.
2.5 Non-Resident Partners — Unresolved Overlap
Section 194T does not distinguish between resident and non-resident partners. However, Section 195 governs TDS on payments to non-residents chargeable to tax in India, and DTAA provisions may reduce or eliminate the applicable rate. A strict reading of Section 194T suggests it applies to all partners universally; the prevailing practitioner view is that Section 195 (being the more specific non-resident provision) should govern, with DTAA rates applied where eligible. No CBDT clarification has been issued on this overlap. Firms with non-resident partners should obtain a written tax opinion and consider an application under Section 195(2) for a nil/lower deduction order before making payments.
3. Consequences of Non-Compliance
| Default | Section | Consequence |
|---|---|---|
| Failure to deduct TDS | Section 201(1A)(a) | Interest @ 1% per month from date TDS was deductible to date of actual deduction |
| TDS deducted but not deposited | Section 201(1A)(b) | Interest @ 1.5% per month from date of deduction to date of deposit |
| TDS not deducted / not deposited — expense disallowance | Section 40(a)(ia) | 30% of payment to resident partner disallowed from firm's taxable income |
| Penalty for failure to deduct | Section 271C | Penalty equal to the amount of TDS not deducted |
| Delayed TDS return filing | Section 234E | ₹200 per day of delay (maximum = TDS amount) |
| Wilful non-deposit after deduction | Section 276B | Rigorous imprisonment: 3 months to 7 years, with fine |
| Incorrect TDS return | Section 271H | Penalty ₹10,000 to ₹1,00,000 |
4. Compliance Checklist — Section 194T
Setup
- Obtain / verify TAN — apply Form 49B if not held (Section 203A)
- Collect valid PAN from all partners; verify PAN-Aadhaar linkage (Section 206AA)
- Update accounting software to capture Section 194T with code '94T' (CBDT Notif. 22/2025)
- Create a partner-wise payment register — track salary, bonus, commission, interest separately (Section 194T)
Deduction & Deposit
- Compute aggregate per partner; confirm if ₹20,000 threshold is crossed (Section 194T(2))
- Deduct TDS @ 10% at time of credit (including capital account) or payment, whichever earlier (Section 194T(1))
- Apply catch-up TDS on full year-to-date amount when threshold first crossed
- Deposit via Challan ITNS 281 by 7th of next month (30 April for March) (Rule 30)
Returns & Certificates
- File Form 26Q quarterly (resident partners) under deduction code '94T' (Rule 31A)
- File Form 27Q for non-resident partners; assess 194T vs. 195 (Rule 31A)
- Issue Form 16A to each partner within 15 days of TDS return due date (Rule 31)
- Verify TDS credit appears in partner's Form 26AS / AIS via TRACES (Section 199)
- Confirm no Section 40(a)(ia) exposure — TDS deposited before ITR due date
5. Common Mistakes & Risk Areas
Risk 1 — Threshold Applied Per-Category, Not in Aggregate
The ₹20,000 ceiling under Section 194T(2) is the AGGREGATE of all covered payments to one partner — salary, commission, interest combined. Treating each payment type separately and concluding no single item exceeds ₹20,000 is legally incorrect. Once the aggregate crosses the threshold, TDS applies on the full cumulative amount.
Risk 2 — No TDS on Capital Account Credits at Year-End
Firms crediting remuneration or interest to partner capital accounts on 31 March without deducting TDS are in default. A journal entry is a 'credit' under Section 194T — cash payment is not required to trigger deduction. TDS must be deducted on 31 March and deposited by 30 April.
Risk 3 — Section 40(a)(ia) Disallowance Overlooked
If TDS is not deducted or not deposited to the government by the ITR due date, 30% of the partner remuneration paid is disallowed under Section 40(a)(ia) from the firm's taxable income. This results in additional tax at 30% on the disallowed amount — over and above interest and penalties under Section 201/271C.
Risk 4 — Partner Files Remuneration as Salary Income
By operation of Explanation 2 to Section 15, partner remuneration is not 'salary'. It must be declared under PGBP (Section 28(v)) in the partner's ITR. Filing under the salary head is incorrect and attracts the Section 16 standard deduction wrongly, causing a mismatch with the firm's Form 26Q return.
Risk 5 — Non-Resident Partner Compliance Gap
Deducting at 10% (Section 194T rate) for a non-resident partner without considering applicable DTAA rates or treaty exemptions could result in excess TDS. Conversely, assuming DTAA exemption and deducting nil exposes the firm to Section 201 interest and Section 40(a)(i) disallowance. Obtain a tax opinion and, where necessary, apply under Section 195(2).
Conclusion
Section 194T represents the first TDS framework specifically designed for partner payments — closing a long-standing compliance gap in the taxation of partnership firms and LLPs. Effective 1 April 2025, all firms must deduct 10% TDS on salary, remuneration, commission, bonus, and interest paid or credited to partners once aggregate payments exceed ₹20,000 per partner per year. The absence of relief mechanisms such as Form 15G/15H or Section 197 certificates, combined with the capital-account credit trigger and the Section 40(a)(ia) disallowance risk, makes timely and accurate TDS compliance non-negotiable. Firms should ensure TAN registration, partner-wise payment tracking, quarterly Form 26Q filings, and Form 16A issuance are embedded into their routine accounting and compliance processes.
Key Points
- Section 194T — effective 1 April 2025 | TDS @ 10% | Threshold: ₹20,000 aggregate per partner per FY.
- Trigger: credit to account (including capital account) OR payment — whichever is earlier.
- Covers: salary, remuneration, commission, bonus, interest on capital/current account.
- Excludes: profit share (Section 10(2A)), capital repayment, genuine reimbursements.
- No Form 15G/15H; no Section 197 certificate available.
- CBDT Notification 22/2025 — Forms 26Q / 27Q updated; deduction code '94T'.
- Non-deduction or non-deposit: 30% Section 40(a)(ia) disallowance + interest + penalty.
- Partner to declare remuneration as PGBP income, not salary, in ITR.
Disclaimer
This article is for general informational purposes only and does not constitute professional advice, legal opinion, tax opinion or solicitation of professional work. Readers should consult their professional advisor before taking any action based on the contents of this article.