Introduction<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
This article explains the applicability of Section 194T, threshold limit, TDS rate, timing of deduction, practical examples and compliance requirements.<\/p>\n
What is Section 194T?<\/p>\n
Section 194T requires a firm to deduct TDS when it pays or credits certain amounts to a partner.<\/p>\n
The provision covers the following payments:<\/p>\n
Salary to partners<\/p>\n
Remuneration to partners<\/p>\n
Commission to partners<\/p>\n
Bonus to partners<\/p>\n
Interest payable to partners<\/p>\n
The provision applies where the aggregate amount of such payments or credits to a partner exceeds the prescribed threshold during the financial year.<\/p>\n
From When is Section 194T Applicable?<\/p>\n
Section 194T is applicable from 1 April 2025.<\/p>\n
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.<\/p>\n
For FY 2025-26, firms and LLPs should therefore review all partner remuneration and interest transactions from 1 April 2025 onwards.<\/p>\n
Who is Required to Deduct TDS?<\/p>\n
The obligation primarily applies to a firm making covered payments or credits to its partners.<\/p>\n
For this purpose, the term firm includes an LLP where applicable under the relevant tax provisions.<\/p>\n
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.<\/p>\n
What Payments Are Covered?<\/p>\n
Section 194T covers amounts credited or paid to a partner in the nature of:<\/p>\n
Salary paid or credited to a partner is covered.<\/p>\n
Partner remuneration, including remuneration determined under the partnership deed, is covered.<\/p>\n
Commission paid or credited to a partner is also covered.<\/p>\n
Any bonus payable to a partner falls within the scope of the provision.<\/p>\n
Interest payable or credited to a partner is also subject to TDS where the prescribed conditions are satisfied.<\/p>\n
TDS Rate under Section 194T<\/p>\n
The applicable TDS rate under Section 194T is 10%.<\/p>\n
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.<\/p>\n
The firm’s accounting and TDS systems should therefore be updated to apply the appropriate rate from the effective date.<\/p>\n
Threshold Limit under Section 194T<\/p>\n
TDS is required only when the aggregate amount of the covered payments or credits to a partner exceeds \u20b920,000 during the financial year.<\/p>\n
This threshold applies to the aggregate of the amounts covered under the provision.<\/p>\n
For example, if a partner receives:<\/p>\n
Interest: \u20b915,000<\/p>\n
Remuneration: \u20b925,000<\/p>\n
Total covered amount = \u20b940,000<\/p>\n
Since the aggregate amount exceeds \u20b920,000, the TDS provisions become applicable.<\/p>\n
When Should TDS Be Deducted?<\/p>\n
TDS under Section 194T is required to be deducted at the earlier of:<\/p>\n
The time of credit of the amount to the partner’s account; or<\/p>\n
The time of payment.<\/p>\n
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.<\/p>\n
Therefore, firms should carefully review their accounting entries and the timing of credits to partner accounts.<\/p>\n
Example 1 \u2013 Partner Remuneration<\/p>\n
A partnership firm credits \u20b95,00,000 as remuneration to a partner during FY 2025-26.<\/p>\n
Since the amount exceeds the \u20b920,000 threshold, TDS under Section 194T will apply.<\/p>\n
TDS:<\/p>\n
\u20b95,00,000 \u00d7 10% = \u20b950,000<\/p>\n
The firm would credit\/pay the partner after deducting the applicable TDS.<\/p>\n
Example 2 \u2013 Partner Interest<\/p>\n
A firm credits \u20b91,50,000 as interest to a partner.<\/p>\n
Since the amount exceeds \u20b920,000:<\/p>\n
TDS = \u20b91,50,000 \u00d7 10% = \u20b915,000<\/p>\n
The firm should deduct \u20b915,000 as TDS and credit\/pay the balance amount to the partner.<\/p>\n
Example 3 \u2013 Remuneration and Interest Together<\/p>\n
Suppose a partner receives:<\/p>\n Since the aggregate covered amount exceeds \u20b920,000, TDS is applicable.<\/p>\n TDS = \u20b93,50,000 \u00d7 10% = \u20b935,000<\/p>\n Accounting Treatment<\/p>\n Suppose partner remuneration of \u20b93,00,000 is credited and TDS of \u20b930,000 is deducted.<\/p>\n The accounting entry may be recorded as:<\/p>\n Partner Remuneration A\/c Dr. \u20b93,00,000<\/p>\n To Partner’s Capital\/Current A\/c \u20b92,70,000<\/p>\n To TDS Payable A\/c \u20b930,000<\/p>\n 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.<\/p>\n Is Section 194T Applicable to LLPs?<\/p>\n 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.<\/p>\n Accordingly, LLPs should review payments such as partner remuneration and interest and implement appropriate TDS procedures where the statutory conditions are satisfied.<\/p>\n Does TDS Apply to Drawings by Partners?<\/p>\n Partner drawings are generally not the same as remuneration, commission, bonus, salary or interest.<\/p>\n A genuine withdrawal of a partner’s capital\/current account balance is therefore distinguishable from a covered payment under Section 194T.<\/p>\n 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.<\/p>\n What About Partner Capital Introductions?<\/p>\n A genuine capital contribution made by a partner into the firm is generally not a payment covered by Section 194T.<\/p>\n For example, if a partner introduces \u20b910,00,000 as capital into the firm, this is a capital contribution and not partner remuneration or interest.<\/p>\n However, interest subsequently credited on that capital can fall within Section 194T.<\/p>\n TDS on Partner Interest<\/p>\n Partner interest is one of the most important areas affected by Section 194T.<\/p>\n For example, if interest on capital is credited monthly:<\/p>\n April: \u20b95,000<\/p>\n May: \u20b95,000<\/p>\n June: \u20b95,000<\/p>\n July: \u20b95,000<\/p>\n August: \u20b95,000<\/p>\n The firm should monitor the cumulative amount because the threshold is based on the aggregate covered amount during the financial year.<\/p>\n Once the statutory threshold is exceeded, the firm must apply the TDS provisions appropriately.<\/p>\n TDS Compliance Requirements<\/p>\n Firms and LLPs should ensure that they:<\/p>\n Identify all partners receiving covered payments.<\/p>\n Track remuneration, interest, commission and bonus separately.<\/p>\n Monitor the \u20b920,000 annual threshold.<\/p>\n Deduct TDS at the applicable rate.<\/p>\n Deposit the TDS within the prescribed due date.<\/p>\n File the applicable TDS return.<\/p>\n Issue the appropriate TDS certificate to the partner.<\/p>\n Reconcile the TDS payable account regularly.<\/p>\n Important Point for Partnership Deeds<\/p>\n The partnership deed should clearly specify provisions relating to:<\/p>\n Partner remuneration<\/p>\n Interest on capital<\/p>\n Commission<\/p>\n Bonus<\/p>\n Other payments to partners<\/p>\n 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.<\/p>\n Interaction with Section 40(b)<\/p>\n 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.<\/p>\n These provisions should not be confused.<\/p>\n 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.<\/p>\n Therefore, firms should separately evaluate:<\/p>\n TDS compliance under Section 194T + Deductibility under Section 40(b).<\/p>\n Common Mistakes to Avoid<\/p>\n Some firms may continue their old accounting practices without considering the introduction of Section 194T.<\/p>\n The \u20b920,000 threshold should be monitored on an aggregate basis during the financial year.<\/p>\n Firms should include interest credited to partners while evaluating the applicability of Section 194T.<\/p>\n The actual nature of the transaction should be examined rather than relying solely on the ledger description.<\/p>\n The TDS payable ledger should be reconciled with the books and TDS returns.<\/p>\n Practical Compliance Checklist for FY 2025-26<\/p>\n Partnership firms and LLPs should review the following:<\/p>\n Partnership\/LLP deed<\/p>\n Partner remuneration ledgers<\/p>\n Partner interest ledgers<\/p>\n Partner commission and bonus ledgers<\/p>\n Partner capital\/current accounts<\/p>\n Monthly accounting entries<\/p>\n TDS deductions<\/p>\n TDS payment challans<\/p>\n Quarterly TDS returns<\/p>\n TDS certificates<\/p>\n Section 40(b) limits and conditions<\/p>\n Conclusion<\/p>\n 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.<\/p>\n Where the aggregate covered payments to a partner exceed \u20b920,000 during the financial year, TDS is generally required at 10%, subject to the applicable provisions.<\/p>\n Firms should therefore review their partner remuneration, interest, commission and bonus arrangements, update their accounting and TDS systems, and ensure timely deduction and reporting.<\/p>\n","protected":false},"excerpt":{"rendered":" Learn about Section 194T TDS on partner remuneration, salary, interest, commission and bonus from FY 2025-26. Understand the 10% TDS rate, \u20b920,000 threshold, applicability.<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[5],"tags":[],"class_list":["post-971","post","type-post","status-publish","format-standard","hentry","category-income-tax"],"_links":{"self":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/971","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/comments?post=971"}],"version-history":[{"count":2,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/971\/revisions"}],"predecessor-version":[{"id":1511,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/971\/revisions\/1511"}],"wp:attachment":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/media?parent=971"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/categories?post=971"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/tags?post=971"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n\n
\n \nParticulars<\/th>\n Amount<\/th>\n<\/tr>\n<\/thead>\n \n Partner Remuneration<\/td>\n \u20b93,00,000<\/td>\n<\/tr>\n \n Interest on Capital<\/td>\n \u20b950,000<\/td>\n<\/tr>\n \n Total<\/td>\n \u20b93,50,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n Ignoring the New TDS Requirement<\/h2>\n
Not Monitoring the Threshold<\/h2>\n
Missing Interest Payments<\/h2>\n
Confusing Drawings with Remuneration<\/h2>\n
Failing to Reconcile TDS<\/h2>\n