Section 194T Explained: What Partnership Firms and LLPs Must Know
From April 1, 2025, a new rule called Section 194T has been added to India’s Income Tax Act.
Under this rule, partnership firms and LLPs must deduct TDS when they make certain payments to their partners. Every firm must know about this section in detail to stay compliant:
What is Section 194T?
Section 194T is a provision of the Income-tax Act, 1961, that deals with Tax Deducted at Source (TDS) on payments made by a firm to its partners.
Earlier, partners received full payment without any TDS deduction. However, now, tax will be deducted first and then paid to the partner.
What is the TDS rate, and when is it required?
The TDS Rate is 10%. TDS is required only if total payments to a partner exceed Rs 20,000 in a financial year. If the total payment is Rs 20,000 or less, no TDS is needed.
If the payment crosses Rs 20,000, then the following applies:
- TDS applies to the entire amount, not just the excess.
- Payments on Which TDS Must Be Deducted
TDS will apply to these types of payments made to partners:
- Salary
- Remuneration
- Commission
- Bonus
- Interest on capital
- Interest on the loan given by the partner
These amounts are treated as business income for the partner.
Payments on Which TDS is Not Required
The following payments are excluded:
- Share of profit (this is tax-free for partners)
- Capital withdrawal (drawings)
- Repayment of capital invested.
When Should TDS Be Deducted?
TDS must be deducted at whichever happens first:
When the amount is credited to the partner’s account (even if credited to the capital account), OR
When the payment is actually made.
Who Does This Apply To?
This applies to:
- All partnership firms
- All LLPs
- No minimum turnover limit
- Applies to both resident partners and non-resident partners.
What Firms Must Do
Firms now have additional responsibilities:
- Deduct TDS at 10%
- Deposit TDS with the government on time (monthly)
- File quarterly TDS returns:
- Form 26Q for resident partners
- Form 27Q for non-resident partners
- Issue TDS certificate to partners
If the firm fails to comply:
- Interest will be charged
- Penalty may be imposed
- Expenses may be disallowed in tax computation
What Has Changed Compared to Earlier?
| Before 2025 | After 2026 |
| No TDS on partner payments | TDS is compulsory |
| Less compliance | More compliance work |
| Less tracking of partner income | Better tax reporting |
Impact on Partnership Firms
It has increased compliance work. Firms need:
- Better accounting systems
- Proper tracking of partner payments
- Timely TDS deduction and filing
- Cash Flow Impact
- The partner will receive the amount after TDS deduction.
- The partner must claim TDS credit while filing the Income Tax Return.
- TDS will appear in Form 26AS.
- Better Transparency
- The government can track partner income easily.
- Reduces the chances of under-reporting income.
