Section 194T TDS on Partner Remuneration and Interest from FY 2025-26

Introduction

A significant change in the tax deduction framework for partnership firms and Limited Liability Partnerships (LLPs) is the introduction of Section 194T, applicable from 1 April 2025.

Under this provision, firms and LLPs are required to deduct Tax Deducted at Source (TDS) on certain payments made or credited to their partners, including salary, remuneration, commission, bonus and interest.

This change is particularly important for partnership firms and LLPs because partner remuneration and interest, which were previously not subject to TDS under a specific provision, now fall within the TDS framework.

This article explains the applicability of Section 194T, threshold limit, TDS rate, timing of deduction, practical examples and compliance requirements.

What is Section 194T?

Section 194T requires a firm to deduct TDS when it pays or credits certain amounts to a partner.

The provision covers the following payments:

Salary to partners

Remuneration to partners

Commission to partners

Bonus to partners

Interest payable to partners

The provision applies where the aggregate amount of such payments or credits to a partner exceeds the prescribed threshold during the financial year.

From When is Section 194T Applicable?

Section 194T is applicable from 1 April 2025.

Therefore, payments or credits covered by the provision arising on or after 1 April 2025 are subject to the new TDS requirement, subject to the applicable threshold and other conditions.

For FY 2025-26, firms and LLPs should therefore review all partner remuneration and interest transactions from 1 April 2025 onwards.

Who is Required to Deduct TDS?

The obligation primarily applies to a firm making covered payments or credits to its partners.

For this purpose, the term firm includes an LLP where applicable under the relevant tax provisions.

The firm should evaluate the aggregate amount credited or paid to each partner during the financial year to determine whether the TDS threshold has been crossed.

What Payments Are Covered?

Section 194T covers amounts credited or paid to a partner in the nature of:

Salary

Salary paid or credited to a partner is covered.

Remuneration

Partner remuneration, including remuneration determined under the partnership deed, is covered.

Commission

Commission paid or credited to a partner is also covered.

Bonus

Any bonus payable to a partner falls within the scope of the provision.

Interest

Interest payable or credited to a partner is also subject to TDS where the prescribed conditions are satisfied.

TDS Rate under Section 194T

The applicable TDS rate under Section 194T is 10%.

The deduction is generally required without considering whether the partner is an individual, company or another type of person, because the provision specifically deals with payments made to partners.

The firm’s accounting and TDS systems should therefore be updated to apply the appropriate rate from the effective date.

Threshold Limit under Section 194T

TDS is required only when the aggregate amount of the covered payments or credits to a partner exceeds ₹20,000 during the financial year.

This threshold applies to the aggregate of the amounts covered under the provision.

For example, if a partner receives:

Interest: ₹15,000

Remuneration: ₹25,000

Total covered amount = ₹40,000

Since the aggregate amount exceeds ₹20,000, the TDS provisions become applicable.

When Should TDS Be Deducted?

TDS under Section 194T is required to be deducted at the earlier of:

The time of credit of the amount to the partner’s account; or

The time of payment.

Importantly, the provision also covers situations where the amount is credited to an account other than the partner’s own account, in accordance with the statutory wording.

Therefore, firms should carefully review their accounting entries and the timing of credits to partner accounts.

Example 1 – Partner Remuneration

A partnership firm credits ₹5,00,000 as remuneration to a partner during FY 2025-26.

Since the amount exceeds the ₹20,000 threshold, TDS under Section 194T will apply.

TDS:

₹5,00,000 × 10% = ₹50,000

The firm would credit/pay the partner after deducting the applicable TDS.

Example 2 – Partner Interest

A firm credits ₹1,50,000 as interest to a partner.

Since the amount exceeds ₹20,000:

TDS = ₹1,50,000 × 10% = ₹15,000

The firm should deduct ₹15,000 as TDS and credit/pay the balance amount to the partner.

Example 3 – Remuneration and Interest Together

Suppose a partner receives:

Particulars	Amount
Partner Remuneration	₹3,00,000
Interest on Capital	₹50,000
Total	₹3,50,000

Since the aggregate covered amount exceeds ₹20,000, TDS is applicable.

TDS = ₹3,50,000 × 10% = ₹35,000

Accounting Treatment

Suppose partner remuneration of ₹3,00,000 is credited and TDS of ₹30,000 is deducted.

The accounting entry may be recorded as:

Partner Remuneration A/c Dr. ₹3,00,000

To Partner’s Capital/Current A/c ₹2,70,000

To TDS Payable A/c ₹30,000

The exact ledger treatment may vary depending on the firm’s accounting structure and whether the amount is credited to the partner’s capital or current account.

Is Section 194T Applicable to LLPs?

Yes. LLPs are treated as firms for income-tax purposes, and the provisions relating to firms need to be considered while determining the applicability of Section 194T.

Accordingly, LLPs should review payments such as partner remuneration and interest and implement appropriate TDS procedures where the statutory conditions are satisfied.

Does TDS Apply to Drawings by Partners?

Partner drawings are generally not the same as remuneration, commission, bonus, salary or interest.

A genuine withdrawal of a partner’s capital/current account balance is therefore distinguishable from a covered payment under Section 194T.

However, the underlying nature of the transaction should be examined carefully. Merely describing a payment as a “drawing” does not change its actual character if it represents remuneration, interest or another covered amount.

What About Partner Capital Introductions?

A genuine capital contribution made by a partner into the firm is generally not a payment covered by Section 194T.

For example, if a partner introduces ₹10,00,000 as capital into the firm, this is a capital contribution and not partner remuneration or interest.

However, interest subsequently credited on that capital can fall within Section 194T.

TDS on Partner Interest

Partner interest is one of the most important areas affected by Section 194T.

For example, if interest on capital is credited monthly:

April: ₹5,000

May: ₹5,000

June: ₹5,000

July: ₹5,000

August: ₹5,000

The firm should monitor the cumulative amount because the threshold is based on the aggregate covered amount during the financial year.

Once the statutory threshold is exceeded, the firm must apply the TDS provisions appropriately.

TDS Compliance Requirements

Firms and LLPs should ensure that they:

Identify all partners receiving covered payments.

Track remuneration, interest, commission and bonus separately.

Monitor the ₹20,000 annual threshold.

Deduct TDS at the applicable rate.

Deposit the TDS within the prescribed due date.

File the applicable TDS return.

Issue the appropriate TDS certificate to the partner.

Reconcile the TDS payable account regularly.

Important Point for Partnership Deeds

The partnership deed should clearly specify provisions relating to:

Partner remuneration

Interest on capital

Commission

Bonus

Other payments to partners

Proper documentation is important not only for TDS compliance but also for determining the deductibility of partner remuneration and interest in the firm’s income-tax computation.

Interaction with Section 40(b)

Section 194T deals with TDS compliance, whereas Section 40(b) deals with the deductibility of certain payments to partners while computing the firm’s taxable income.

These provisions should not be confused.

A payment may be subject to TDS under Section 194T, but its deduction in the firm’s tax computation will still depend upon compliance with the conditions and limits prescribed under Section 40(b) and other applicable provisions.

Therefore, firms should separately evaluate:

TDS compliance under Section 194T + Deductibility under Section 40(b).

Common Mistakes to Avoid

Ignoring the New TDS Requirement

Some firms may continue their old accounting practices without considering the introduction of Section 194T.

Not Monitoring the Threshold

The ₹20,000 threshold should be monitored on an aggregate basis during the financial year.

Missing Interest Payments

Firms should include interest credited to partners while evaluating the applicability of Section 194T.

Confusing Drawings with Remuneration

The actual nature of the transaction should be examined rather than relying solely on the ledger description.

Failing to Reconcile TDS

The TDS payable ledger should be reconciled with the books and TDS returns.

Practical Compliance Checklist for FY 2025-26

Partnership firms and LLPs should review the following:

Partnership/LLP deed

Partner remuneration ledgers

Partner interest ledgers

Partner commission and bonus ledgers

Partner capital/current accounts

Monthly accounting entries

TDS deductions

TDS payment challans

Quarterly TDS returns

TDS certificates

Section 40(b) limits and conditions

Conclusion

Section 194T introduces an important TDS compliance requirement for partnership firms and LLPs by bringing specified payments to partners within the TDS framework from 1 April 2025.

Where the aggregate covered payments to a partner exceed ₹20,000 during the financial year, TDS is generally required at 10%, subject to the applicable provisions.

Firms should therefore review their partner remuneration, interest, commission and bonus arrangements, update their accounting and TDS systems, and ensure timely deduction and reporting.