Section 194T (w.e.f. 1 April 2025): TDS on Payments to Partners of Firms and LLPs —Complete Guide
- Sep 16, 2025
- 7 min read
By. Nikhil Jain - TaxPath Founder
From 1 April 2025, Section 194T mandates TDS on specified payments by firms/LLPs to partners. Deduct 10% on remuneration/salary, commission, bonus, and interest once a partner's yearly total crosses ₹20,000, at the earlier of credit (including capital/current account) or payment. Share of profit and genuine capital transactions are excluded. This guide explains scope, rates, timing, compliance steps, worked examples, and key pitfalls.
Index
Overview and policy intent of TDS on Payments to Partners
Section 194T brings partner payouts by firms and LLPs into the TDS framework to improve traceability, credit flow in 26AS, and timely tax collection at source. It aligns firm-to-partner cashflows with standard withholding principles and reduces mismatches at partner return filing.
Applicability and scope
The deductor is any "firm" as per the Income-tax Act, which includes LLPs incorporated in India. The deductee is a partner of the firm/LLP as per the deed (including working or non-working partners and minors admitted to benefits). The provision applies regardless of whether the payout is recorded via expense ledgers or directly in partner capital/current accounts.
Covered vs excluded payments
Covered: remuneration/salary to partners, commission, bonus, and interest (on capital, loans, or any account).
Excluded: share of profit under Section 10 2A) and genuine capital transactions such as capital contribution or withdrawals/drawings. Clear documentation and ledger narratives are essential to prevent misclassification.
Threshold and rate
Once covered payments to an individual partner exceed ₹20,000 in a financial year, TDS applies at 10%. Many practitioners apply 10% on the entire covered aggregate in the year once the threshold is breached, not only on the excess; implement a policy and remain consistent.
Time of deduction
Withholding is required at the earlier of: (a) credit to the partner's account (including credit to capital/current account), or (b) actual payment by any mode. Year-end provisioning or capital/current account credits for remuneration/interest trigger TDS even if cash is paid later.
Resident vs non-resident reporting
Report TDS on payments to resident partners in Form 26Q and to non-resident partners in Form 27Q. Ensure correct section tagging 194T) so credits reflect accurately in Form 26AS/AIS for partners.
PAN, 206AA, and relaxation limits
If PAN/Aadhaar is not furnished, Section 206AA requires deduction at 20%. Current practitioner guidance indicates that lower/nil TDS certificates under Section 197 and self-declarations via Forms 15G/15H are not available for Section 194T; adopt mandatory withholding once conditions are met.
Effective date and transition
Applies to amounts paid or credited on or after 1 April 2025. Credits or payments before this date are outside Section 194T and should not be counted toward the FY 2025 26 threshold computation.
Compliance workflow
TAN ready; classify covered vs excluded payouts in ledgers.
Track per-partner aggregates to monitor the ₹20,000 trigger.
Deduct at 10% at credit/payment; deposit within due dates.
File quarterly TDS returns using updated 26Q/27Q rows for 194T and issue Form 16A.
Reconcile partner ledgers with TDS statements; verify credit flow in 26AS/AIS.
Practical examples
Threshold not crossed: Partner's covered payouts = ₹18,000 in FY 2025 26 → no TDS.
Threshold crossed: Covered payouts = ₹3,00,000 → TDS at 10% = ₹30,000, deducted at first credit/payment after threshold monitoring indicates breach.
Capital account credit: Interest of ₹1,20,000 credited on 31 Mar 2026 to capital account →TDS at 10% on credit date.
Edge cases and pitfalls
Misclassification risks: Ensure profit distributions and capital movements are not booked as remuneration/interest.
Consolidated entities/branches: When remuneration is computed post-period (e.g., by September), TDS still follows "earlier of credit/payment"; plan accruals and cashflows accordingly.
Non-resident partners: Map residency correctly and use 27Q to avoid credit mismatches.
Action checklist
Update partnership/LLP deeds to clearly define remuneration, interest, and profit-share.
Enforce KYC: capture PAN/Aadhaar to avoid 20% under 206AA.
Configure ERP/TDS software for Section 194T in 26Q/27Q and Form 16A.
Train finance on timing rules for capital/current account credits and year-end provisions.
Reconcile quarterly; validate 26AS/AIS credits with partner confirmations.
Key takeaways
Deduct 10% under Section 194T on covered partner payouts once the annual ₹20,000 threshold per partner is crossed.
Apply the "earlier of credit/payment" rule, including credits to capital/current accounts; exclude share of profit and genuine capital transactions.
Maintain robust documentation, accurate ledger classification, and timely TDS compliance to ensure smooth credit flow and minimize disputes.
Frequently Asked Questions (FAQs)
Q1. Does Section 194T apply to all types of partnerships?
Answer: Yes, Section 194T applies to all "firms" as defined under Section 2(23) of the Income-tax Act, which includes traditional partnership firms registered under the Indian Partnership Act and LLPs incorporated under the LLP Act, 2008.
Q2. What happens if partner remuneration is decided and paid in the next financial year?
Answer: TDS applies based on the "earlier of credit or payment" rule. If remuneration for FY 2025-26 is credited to partner's account in March 2026 but paid in cash in April 2026, TDS is deducted at the time of credit (March 2026) for FY 2025-26 threshold calculation.
Q3. Is TDS applicable on profit-sharing ratio distributed to partners?
Answer: No, profit-sharing under Section 10(2A) is exempt and not covered under Section 194T. Only remuneration, salary, commission, bonus, and interest are subject to TDS.
Q4. Can a partnership firm claim expenses if TDS is not deducted under Section 194T?
Answer: While Section 194T doesn't explicitly disallow expenses, Section 40(a)(ia) principles may apply for TDS defaults. It's advisable to deduct TDS to avoid potential disallowance risks.
Q5. What if the ₹20,000 threshold is crossed in the middle of the year?
Answer: Once the cumulative payments to a partner exceed ₹20,000 in a financial year, TDS at 10% applies to the entire aggregate amount for that year, not just the excess. Some firms may choose to deduct on the excess only - maintain consistency in policy.
Q6. Are sleeping partners or non-working partners covered under Section 194T?
Answer: Yes, Section 194T applies to all partners as per the partnership deed, regardless of whether they are working, non-working, or sleeping partners. The nature of payment matters, not the partner's involvement level.
Q7. Can partners furnish Form 15G/15H to avoid TDS under Section 194T?
Answer: No, Forms 15G/15H are not applicable for Section 194T. Similarly, no certificate for lower deduction under Section 197 is available for payments covered under this section.
Q8. How to treat advance payments made to partners?
Answer: Advance payments to partners for future remuneration/interest are covered under Section 194T if they exceed the ₹20,000 threshold. TDS should be deducted at the time of advance payment.
Q9. What if a partner doesn't have PAN or Aadhaar?
Answer: If PAN/Aadhaar is not provided, TDS must be deducted at 20% under Section 206AA instead of the normal 10% rate under Section 194T.
Q10. Does Section 194T apply to foreign LLPs or partnerships?
Answer: Section 194T applies to firms as defined under Indian law. Foreign partnerships/LLPs are generally not covered unless they fall within the definition of "firm" under Indian Income-tax Act.
Q11. Can TDS deducted under Section 194T be claimed as tax credit?
Answer: Yes, TDS deducted under Section 194T will reflect in Form 26AS/AIS and can be claimed as tax credit while filing ITR by the partner.
Q12. What is the due date for depositing TDS under Section 194T?
Answer: TDS must be deposited by the 7th of the following month (or next working day if 7th is a holiday). For March deductions, the due date is 30th April.
Q13. Is there any minimum amount below which Section 194T doesn't apply?
Answer: The threshold is ₹20,000 per partner per financial year. If total covered payments to a partner are below ₹20,000 in a financial year, no TDS is required.
Q14. How to handle part-year partners who join or leave during the year?
Answer: The ₹20,000 threshold applies per partner per financial year. For part-year partners, calculate the threshold based on their actual period of partnership and payments received.
Q15. Can automated/ECS payments to partners trigger Section 194T?
Answer: Yes, the mode of payment doesn't matter. Whether paid by cash, cheque, NEFT, RTGS, or any other mode, if covered payments exceed ₹20,000, TDS under Section 194T applies.
Q16. What records should be maintained for Section 194T compliance?
Answer: Maintain partner-wise payment registers, TDS calculation sheets, challan details, quarterly TDS returns (26Q/27Q), Form 16A certificates, and clear documentation distinguishing covered payments from profit-share and capital transactions.
Q17. How does Section 194T interact with presumptive taxation schemes?
Answer: Section 194T is independent of presumptive taxation schemes. Even if a firm opts for presumptive taxation under Section 44AD/44ADA, TDS obligations under Section 194T remain applicable on partner payments.
Q18. What if partners are also employees of the firm?
Answer: If partners receive salary as employees, regular payroll TDS under Section 192 applies. Section 194T applies separately to payments received in capacity as partners (remuneration, commission, bonus, interest).
Q19. Can Section 194T TDS be adjusted against advance tax?
Answer: Partners can consider TDS deducted under Section 194T while calculating advance tax liability, as it will be available as tax credit when filing returns.
Q20. What are the penalty implications for non-compliance with Section 194T?
Answer: Non-compliance may attract interest at 1% per month for non-deduction, 1.5% per month for non-deposit after deduction, and late filing fees of ₹200 per day for TDS returns, along with potential scrutiny and penalty proceedings.
About the Author
Nikhil Jain is a Founder and CEO of TAXPATH INDIA with over 7 years of experience in taxation and compliance. He specializes in GST implementation and has helped numerous businesses navigate the complexities of indirect tax compliance
Contact Information:
Email: contact@taxpathindia.com
Phone: +91-9042364130
Website: www.taxpathindia.com
Disclaimer:
This article is for informational purposes only and should not be considered as professional tax advice. Readers are advised to consult qualified tax professionals for specific compliance requirements and business decisions.
