I. Executive Summary
Section 194T of the Income Tax Act, 1961, effective from April 1, 2025, introduces a mandate
for Tax Deducted at Source (TDS) on specific payments made by partnership firms and
Limited Liability Partnerships (LLPs) to their partners. This new provision requires firms to
deduct TDS at a rate of 10% on the aggregate amount of salary, remuneration, commission,
bonus, or interest paid or credited to a partner within a financial year, if such aggregate amount
exceeds ₹20,000. The implementation of Section 194T will place an increased compliance
burden on firms, requiring them to adhere to new procedures for tax deduction, deposit, and
reporting, and may also have an impact on the liquidity of partners. This shift in tax
responsibility necessitates firms to diligently manage their financial processes to ensure
compliance with the updated regulations.

II. Introduction to Section 194T
Section 194T of the Income Tax Act, 1961, is a newly introduced provision through the Finance
Bill 2024. Its primary objective is to bring payments made by partnership firms and LLPs to
their partners, specifically in the nature of salary, remuneration, commission, bonus, and
interest, under the ambit of Tax Deducted at Source (TDS). Previously, there was no specific
provision mandating TDS on such payments. The introduction of this section is aimed at
enhancing tax compliance within the partnership sector and broadening the overall tax base.
This new regulation will come into effect from April 1, 2025, and will be applicable to
Assessment Year (AY) 2026-27 and subsequent years, corresponding to Financial Year (FY)
2025-26. The implementation of Section 194T represents a significant shift in the tax treatment
of payments made by firms to their partners, necessitating a thorough understanding of its
provisions and implications.
The introduction of Section 194T addresses a gap in the existing TDS framework. While
salaries paid to employees were already subject to TDS under Section 192, similar payments
to partners were not explicitly covered. This distinction might have led to inconsistencies in tax
compliance and potential underreporting of income by partners. By bringing partner payments
within the TDS net, the government intends to ensure a more uniform and timely collection of
tax revenue from this income stream. This proactive measure reflects the tax authorities’ aim
to enhance transparency and accountability in financial transactions between firms and their
partners.

III. Scope and Applicability
Section 194T is applicable to any “firm” responsible for making payments to its partners. The
term “firm” under this section encompasses both traditional partnership firms registered under
the Indian Partnership Act, 1932, and Limited Liability Partnerships (LLPs) as defined in the
LLP Act, 2008. However, it is specified that Section 194T will apply to Indian LLPs. This broad
definition ensures that a wide range of business entities operating as partnerships or LLPs
within India fall under the purview of this TDS provision.
The types of payments made by a firm to its partners that are subject to TDS under Section
194T include: salary, remuneration, commission, bonus, and interest on any account. This list
is comprehensive and indicates that Section 194T is designed to cover all forms of
compensation and financial benefits that a partner might receive from the firm, including
interest on their capital contributions or loans to the firm. This aligns with the intention to treat
various forms of partner income similarly to employee income for TDS purposes.

IV. TDS Rate and Threshold
The applicable rate for deducting TDS under Section 194T is 10%. This rate is generally
applicable to resident partners. While the snippets primarily focus on this 10% rate, it is
important to note that a higher TDS rate of 20% will be applicable if the partner fails to provide
their Permanent Account Number (PAN) or Aadhaar. This provision serves as an incentive for
partners to disclose their PAN, ensuring proper tax credit and tracking of deductions.
TDS under Section 194T is required to be deducted only when the aggregate amount of the
specified payments made or credited to a partner during a financial year exceeds ₹20,000.
This threshold applies to the cumulative total of all payments made to a partner within the
financial year, including salary, remuneration, commission, bonus, and interest. Once the
aggregate payments to a partner in a financial year exceed ₹20,000, TDS at 10% is required
to be deducted on the entire amount of such payments, not just on the amount exceeding the
threshold.
The calculation of the ₹20,000 threshold is based on the total of all specified payments made
or credited to a partner from April 1st to March 31st of a financial year. Consider a scenario
where a partner, Rajesh, receives ₹12,000 in June and ₹15,000 in December as remuneration.
The aggregate payment of ₹27,000 exceeds the threshold of ₹20,000. Therefore, TDS at 10%
will be applicable on the entire ₹27,000, amounting to ₹2,700. Another example involves
Seema, who receives ₹18,000 in July as salary and ₹5,000 as interest in February. The total
payment is ₹23,000, which is above the threshold. Consequently, TDS of ₹2,300 (10% of
₹23,000) must be deducted. These examples illustrate that firms must track all payments to a
partner throughout the financial year to accurately determine the applicability of TDS under
Section 194T.

V. Timing of TDS Deduction
Under Section 194T, the obligation to deduct TDS arises at the earlier of two events: when
the sum is credited to the partner’s account in the books of the firm (including the capital
account) or when the payment is made to the partner in cash, by cheque, draft, or any other
mode. This rule ensures that TDS is deducted promptly, either when the firm recognizes the
liability to pay the partner or when the actual transfer of funds occurs, whichever happens first.
The fact that credit to the partner’s capital account is also considered a trigger for TDS
deduction is significant. For instance, if a firm decides to credit a bonus of ₹25,000 to a
partner’s capital account on March 31st, 2026, even if the actual payment is made later in the
next financial year, the TDS obligation arises on March 31st, 2026. This prevents firms from
delaying TDS deduction by merely crediting the amount and postponing the actual payment.

VI. Compliance Requirements for Firms
Partnership firms and LLPs are obligated to fulfill several compliance requirements under
Section 194T. Firstly, any firm responsible for deducting TDS must obtain a Tax Deduction
and Collection Account Number (TAN) if it does not already possess one. This is a
fundamental requirement for reporting and remitting TDS. Secondly, firms must diligently
assess all payments made to their partners to determine if they fall under the ambit of Section
194T and if the aggregate amount for the financial year exceeds the ₹20,000 threshold.
Once the threshold is crossed, firms are required to deduct TDS at the rate of 10% on the
entire amount of the specified payments made to the partner. The deducted TDS must then
be deposited with the government within the prescribed time limits, which are typically on a
monthly or quarterly basis. Maintaining accurate records of all payments made to partners and
the TDS deducted is another crucial compliance obligation. These records will be essential for
filing quarterly TDS returns (e.g., Form 26Q) that provide detailed information about the TDS
deducted and deposited. Furthermore, firms are required to issue TDS certificates in Form
16A to their partners, serving as proof of the tax deducted from their payments, which partners
can use to claim credit while filing their individual income tax returns. Finally, it is advisable for
firms to proactively educate their partners about these new TDS provisions to ensure a smooth
transition and address any potential queries or concerns.

Compliance Requirement Status
Obtain TAN (if applicable) ☐
Assess payments to partners ☐
Deduct TDS at 10% (if threshold exceeded) ☐
Deposit TDS within stipulated time ☐
Maintain detailed payment and TDS records ☐
File quarterly TDS returns (Form 26Q) ☐
Issue TDS certificates (Form 16A) to partners ☐
Educate partners about Section 194T ☐
Table 3: Compliance Checklist for Firms under Section 194T

VII. Exemptions and Non-Applicability
While Section 194T mandates TDS on several types of payments to partners, certain
payments are specifically excluded. TDS under this section is not applicable to the repayment
of capital account balances to partners. Similarly, withdrawals of capital by a partner and the
distribution of profits among the partners are also not subject to TDS under Section 194T.
Additionally, reimbursements made to partners for business expenses incurred on behalf of
the firm are exempt from TDS. These exemptions clarify that the provision primarily targets
payments that represent a form of income or financial benefit to the partner, rather than a
return of their capital or share in the firm’s earnings.

VIII. Practical Implications and Challenges
The introduction of Section 194T is likely to result in an increased administrative burden for
partnership firms and LLPs, particularly for smaller entities. Firms will need to establish new
processes for tracking partner payments, ensuring timely TDS deductions, depositing the
deducted tax with the government, and filing the necessary returns. For firms that do not
already have a TAN, obtaining one will be an additional step in the compliance process.
Updating accounting systems to accommodate these new TDS requirements will also be
necessary.
The deduction of TDS will also have an impact on the liquidity of partners, as they will receive
their payments after the 10% deduction. While partners can claim credit for this TDS against
their final tax liability when filing their individual income tax returns, and may even receive a
refund if the TDS amount exceeds their total tax obligation, there can be a time lag between
the deduction and the receipt of any refund. This could potentially affect the immediate cash
flow planning of the partners.
Another practical challenge might arise concerning the timing of determining partner
remuneration, especially in cases where it is linked to the firm’s profitability, which is often
finalized after the end of the financial year. Despite this, firms will be required to deduct and
deposit TDS on the remuneration pertaining to the financial year ending March 31st by April
30th of the following year. This might necessitate firms to expedite the finalization of their
books of accounts to ensure timely compliance with the TDS obligations.
On a positive note, the implementation of Section 194T is expected to foster greater financial
discipline among firms, encouraging them to maintain more accurate and transparent financial
records related to partner payments. This increased accountability can contribute to better
overall financial management within these entities.

IX. Illustrative Examples
To further clarify the application of Section 194T, consider the following examples:

1. Single Payment Exceeding Threshold: ABC Partnership Firm pays a remuneration of
   ₹30,000 to partner Mr. X in July 2025. Since this single payment exceeds ₹20,000, ABC
   Firm is required to deduct TDS at 10% on the entire amount, i.e., ₹3,000 (10% of ₹30,000)
2. Aggregate Payments Exceeding Threshold: XYZ LLP pays a monthly salary of ₹2,500
   to partner Ms. Y. By the end of the financial year 2025-26, the total salary paid amounts
   to ₹30,000 (₹2,500 x 12 months). As the aggregate payment exceeds ₹20,000, XYZ LLP
   must deduct TDS at 10% on the total amount of ₹30,000, which is ₹3,000.
3. Timing of Deduction: PQR & Associates, a partnership firm, credits a bonus of ₹40,000
   to partner Mr. Z’s capital account on March 31, 2026. The actual payment of this bonus
   is made on May 10, 2026. In this case, TDS at 10% (₹4,000) must be deducted on March
   31, 2026, as the credit to the partner’s account occurred earlier than the actual payment.
4. Payments Below Threshold: If a partnership firm makes aggregate payments of
   ₹18,000 as interest to a partner during the financial year 2025-26, no TDS is required to
   be deducted under Section 194T as the total amount does not exceed the threshold of
   ₹20,000

X. Conclusion and Recommendations
Section 194T of the Income Tax Act, 1961, represents a significant development in the
taxation of partnership firms and LLPs by mandating TDS on payments made to their partners,
effective from April 1, 2025. This provision, with its 10% TDS rate on aggregate payments
exceeding ₹20,000 annually for salary, remuneration, commission, bonus, and interest, aims
to enhance tax compliance and broaden the tax base. While this new regulation introduces an
increased compliance burden for firms and may impact the liquidity of partners, it also
promotes financial accountability and transparency.
To ensure a smooth transition and compliance with Section 194T, partnership firms and LLPs
should consider the following recommendations:

• Obtain TAN: If the firm does not have a Tax Deduction and Collection Account Number,
  it should apply for one well in advance of the effective date.
• Update Accounting Systems: Firms should review and update their accounting
  software and processes to accurately track all payments made to partners and facilitate
  TDS deductions.
• Establish TDS Policies: Implement clear policies and procedures for determining when
  TDS is applicable, calculating the amount, and ensuring timely deduction and deposit.
• Ensure Timely Deduction and Deposit: Firms must adhere to the “earlier of” rule for
  TDS deduction and ensure that the deducted tax is deposited with the government within
  the stipulated deadlines to avoid penalties and interest.
• Maintain Comprehensive Records: Accurate and detailed records of all partner
  payments and TDS-related activities should be maintained for compliance and audit
  purposes.
• File TDS Returns Regularly: Quarterly TDS returns (Form 26Q) must be filed accurately
  and within the due dates.
• Issue TDS Certificates: Form 16A certificates should be issued to partners in a timely
  manner to enable them to claim the TDS credit in their individual tax returns.
• Communicate with Partners: Firms should proactively inform their partners about the
  implications of Section 194T and the TDS process to ensure transparency and address
  any concerns.
• Seek Professional Advice: It is advisable for firms to consult with tax professionals to
  gain specific guidance based on their unique circumstances and ensure full compliance
  with the new regulations.

By taking these steps, partnership firms and LLPs can effectively navigate the requirements
of Section 194T and contribute to a more transparent and compliant tax environment.