Starting 1 April 2025, a brand-new provision under the Income Tax Act—Section 194T—will come into play. For the first time, partnership firms and LLPs must deduct TDS on certain payments to their own partners.
This is a fundamental shift. Till FY 2024-25, firms could pay remuneration, commission, or interest to partners without TDS. The income was taxable in the hands of partners, but there was no withholding obligation on the firm.
The Finance Act, 2024 has closed this gap. From FY 2025-26, firms become the withholding agents for payments to partners, ensuring higher transparency and traceability.
What Exactly Falls Under Section 194T?
TDS will apply when a firm pays its partners any amount classified as:
- Remuneration or salary-type payments
- Bonus or commission
- Interest on capital contribution or on loans given by partners
The law uses the phrase “in the nature of”, which is critical. Even if a payment is dressed up under another heading, if it is essentially compensation or interest, it will still be liable for TDS.
What Does Not Attract TDS?
Certain transactions are outside Section 194T’s net:
- Distribution of share of profit (already exempt for partners u/s 10(2A))
- Capital withdrawals/drawings
- Return of reserves or revaluation gains, unless they effectively represent remuneration/interest
The Numbers You Should Know
- Threshold: No TDS if total payments to a partner are ₹25,000 or less in a financial year.
- TDS Rate: Flat 10%
- When Deducted: Whichever is earlier—when the firm credits the amount (even to the capital account) or actually pays it
📌 Example:
Suppose Partner A receives ₹30,000 as monthly remuneration and ₹15,000 as annual interest on capital = ₹3,75,000 total.
- TDS at 10% = ₹37,500 to be deducted by the firm across the year.
Special Case: Non-Resident Partners
If the partner is a non-resident, things get trickier. Section 195 may apply instead of Section 194T, depending on:
- Double Taxation Avoidance Agreement (DTAA) terms
- Applicable withholding rates under treaties
👉 Firms with overseas partners must carefully evaluate which section governs the deduction.
Practical Implications for Firms
- Mismatch with Section 40(b):
The firm may deduct TDS on the entire credited amount, but only a part of it may be allowable as a deduction in its books. This creates reconciliation challenges for both firm and partner. - Capital Account Entries Trigger TDS:
Even if partners don’t withdraw money and it’s simply credited to their account, TDS still applies. - Partnership Deed Drafting:
Ambiguity in clauses around remuneration/interest can lead to disputes. Firms must revisit deeds before 1 April 2025.
Compliance Checklist
- Deposit TDS by the 7th of the following month (for March, by 30 April).
- Quarterly filing in Form 26Q within due dates.
- Issue Form 16A within 15 days of filing quarterly return.
- Correction window: Maximum 6 years from FY 2025-26 onwards.
Risks of Non-Compliance
Failure to comply with Section 194T could mean:
- Interest on delayed deduction/deposit
- Late fees for delayed returns
- Penalties under Section 271H
- Disallowance of 30% of the expense under Section 40(a)(ia)
Preparing Ahead
Section 194T is not just another compliance checkbox—it fundamentally changes how firms account for payouts to partners.
To prepare:
✅ Update partnership deeds for clarity on payouts
✅ Set up systems to track credits vs. withdrawals
✅ Inform partners about how TDS will affect their cashflows
✅ Train accounting teams to avoid mismatches with 40(b) deductions
Section 194T – Final Word
The introduction of Section 194T marks a shift towards greater transparency and stricter compliance for partnerships and LLPs.
While the provision tightens reporting, it also creates new challenges around classification, reconciliation, and non-resident partners.
At Pitchers Global, we work with firms to anticipate such changes, restructure agreements, and put compliance systems in place—so partners don’t get caught off guard.
👉 Preparing for FY 2025-26? Let’s ensure your firm is Section 194T-ready. Get in touch with Pitchers Global today!