Section 194T TDS on Payments to Partners: 10% Withholding on Salary & Interest Guide

Executive Overview & Quick Highlights

The taxation of partnership firms, limited liability partnerships (LLPs), and their partners underwent a structural overhaul with the enactment of the Finance (No. 2) Act, 2024. For decades, payments made by a partnership firm to its partners—including salary, remuneration, bonus, commission, and interest on capital—were completely outside the purview of the statutory Tax Deducted at Source (TDS) provisions under Chapter XVII-B of the Income-tax Act, 1961. Historically, Section 192 excluded partner remuneration, treating it under Section 28(v) as business profits rather than employment salary. However, to track high-value income distributions, eliminate non-reporting in individual tax returns, and establish an unbroken digital trail, Parliament enacted Section 194T, effective from April 1, 2025.

Under Section 194T, every partnership firm and LLP responsible for paying any sum in the nature of salary, remuneration, commission, bonus, or interest to a partner must deduct income-tax at a flat rate of 10%. The statutory deduction is triggered at the earliest point of credit (to the partner's account, capital account, current account, or by whatever name called) or payment (by cash, cheque, draft, or electronic transfer). The mandate incorporates an annual aggregate threshold of ₹20,000 per partner, ensuring that nominal interest or expense reimbursements do not attract unnecessary withholding compliance.

For managing partners, chartered accountants, CFOs, and tax practitioners, Section 194T introduces complex operational and computational friction. Firms must align partner remuneration clauses with Section 40(b) statutory book profit ceilings, manage quarterly TAN compliance in Form 26Q, compute interest on capital capped at 12% per annum, and synchronize year-end balance sheet finalization with TDS deposit deadlines under Section 200. Deploying automated direct tax computational engines like assureTax and integrated financial ledger generators like assureFinancials enables firms to model partner tax liabilities, automate TDS challans, and maintain error-free partnership compliance.

Statutory Architecture & Legislative Logic

To comprehend the legislative architecture of Section 194T, one must examine its interplay with Section 28(v), Section 40(b), Section 192, and Section 194A of the Income-tax Act, 1961.

1. Statutory Interplay: Section 194T vs Prior Legal Regimes

Statutory Component	Prior Legal Framework (Up to March 31, 2025)	New Section 194T Framework (Effective April 1, 2025)
Partner Salary & Remuneration	No TDS applicable. Section 192 explicitly excluded partner remuneration because the relationship between a partner and firm is not master-servant (employer-employee). Taxed as PGBP u/s 28(v).	Mandatory 10% TDS under Section 194T upon credit or payment, where aggregate payments exceed ₹20,000 in the financial year. Taxed as PGBP u/s 28(v) with full TDS credit.
Interest on Partner Capital	Section 194A(3)(iv) explicitly exempted interest paid by a firm to a partner from TDS.	Section 194T overrides the historical exemption. Interest credited or paid to a partner is subject to 10% TDS, subject to the ₹20,000 aggregate limit.
Partner Share of Profit	Exempt under Section 10(2A). No TDS.	Remains completely exempt under Section 10(2A). Section 194T does not apply to share of profit distributions or capital drawings.
Non-Deduction Consequences	No withholding default could be alleged against the firm for partner payments.	Non-deduction triggers 30% disallowance of partner remuneration and interest under Section 40(a)(ia), plus 18% interest under Section 201(1A).
Reporting Mechanism	Disclosed only in Tax Audit Form 3CD Clause 21 and ITR-5 Schedule BP.	Quarterly reporting in Form 26Q, Form 16A TDS certificate issuance, Form 3CD Clause 34 verification, and AIS / Form 26AS matching.

Deep-Dive Technical Mechanics: Timing, Valuation & Section 40(b) Interplay

The mechanical execution of Section 194T involves three critical statutory checkpoints that every practicing accountant must master:

1. Timing of Deduction: The Credit vs. Payment Principle

Section 194T mandates deduction at the time of credit of such sum to the account of the partner (including a capital account, current account, or any other reserve ledger) or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

In standard partnership accounting practice, monthly drawings are drawn by working partners, while formal remuneration and interest are credited only at the year-end (March 31) upon finalizing the annual financial statements and determining "book profit" under Section 40(b). If a firm makes ad-hoc advances or salary disbursements during the year, Section 194T is triggered on each payment date once cumulative payments exceed ₹20,000. Conversely, if no interim payments are made and the entire remuneration is credited on March 31, 10% TDS must be deducted on March 31 and deposited by April 30.

2. Harmonization with Section 40(b) Book Profit Ceilings

Section 40(b) limits the maximum deductible remuneration paid to working partners based on book profits:

• On the first ₹3,00,000 of book profit or in case of loss: ₹1,50,000 or 90% of book profit, whichever is more.
• On the balance of book profit: 60% of book profit.
• Interest on capital is allowable up to a maximum rate of 12% simple interest per annum, provided it is authorized by the partnership deed.

If a firm credits ₹10,00,000 as remuneration to a partner in its books, but under Section 40(b) only ₹6,00,000 is allowable as a tax deduction (with ₹4,00,000 disallowed), Section 194T still applies to the entire credited amount of ₹10,00,000! Section 194T does not restrict withholding to the Section 40(b) allowable limit. The partner receives tax credit for the entire TDS in their ITR-3, while adjusting the taxable business income under Section 28(v) to the allowable ₹6,00,000. Finance teams use assureTax to model these dual calculations seamlessly.

8 Real-World Practical Case Studies & Numerical Illustrations

Case Study 1: Complete Section 194T Computation for Multi-Partner Firm

Fact Pattern: M/s Apex Legal Consultants (a partnership firm with 3 partners: A, B, and C) finalized its accounts for FY 2025-26. The partnership deed authorizes 12% interest on capital and monthly working partner remuneration. Partner details are as follows:

• Partner A (Working Partner): Capital ₹50,00,000. Interest @ 12% = ₹6,00,000. Remuneration credited on March 31, 2026 = ₹12,00,000. Total credited = ₹18,00,000.
• Partner B (Working Partner): Capital ₹20,00,000. Interest @ 12% = ₹2,40,000. Remuneration credited on March 31, 2026 = ₹6,00,000. Total credited = ₹8,40,000.
• Partner C (Sleeping Partner): Capital ₹1,50,000. Interest @ 12% = ₹18,000. No remuneration. Total credited = ₹18,000.

Section 194T Withholding Analysis:

Partner A: Total = ₹18,00,000 (> ₹20,000 threshold). TDS @ 10% = ₹1,80,000. Net credit = ₹16,20,000. Partner B: Total = ₹8,40,000 (> ₹20,000 threshold). TDS @ 10% = ₹84,000. Net credit = ₹7,56,000. Partner C: Total = ₹18,000 (< ₹20,000 threshold). TDS = NIL (Fully exempt under de minimis threshold). Total TDS to be deposited by Firm = ₹1,80,000 + ₹84,000 = ₹2,64,000.

The firm deposits ₹2,64,000 via Form PMT-06/DRC-03 on or before April 30, 2026 and reports it in Q4 Form 26Q. Partner A and B claim ₹1,80,000 and ₹84,000 in their personal ITR-3 returns. Automated generation via assureTax ensures flawless quarterly TDS allocation.

Case Study 2: Monthly Partner Drawings vs Year-End Remuneration Credit

Fact Pattern: Shanti Pharma Distributors, a partnership firm, allows its working partner Mr. Vijay to draw ₹50,000 per month as advances against profits. On March 31, 2026, the firm credits ₹6,00,000 as annual partner salary to Vijay's current account, adjusting the ₹6,00,000 drawings taken during the year.

Timing Determination: If the monthly drawings of ₹50,000 were disbursed as formal salary payments, the firm was legally obligated to deduct 10% TDS (₹5,000) every month starting from the month when cumulative payments crossed ₹20,000. However, if the partnership deed structures drawings as general drawings against the partner's capital/profit share, no TDS applies during the year. Upon credit of the ₹6,00,000 salary on March 31, 2026, the entire 10% TDS (₹60,000) must be deducted simultaneously with the adjusting journal entry and deposited by April 30, 2026.

Case Study 3: Disallowance under Section 40(a)(ia) for Failure to Deduct u/s 194T

Fact Pattern: Modern Architects LLP credited partner remuneration of ₹25,00,000 and interest of ₹5,00,000 (total ₹30,00,000) to its partners on March 31, 2026. The accountant was unaware of newly enacted Section 194T and did not deduct 10% TDS. The total net profit of the LLP before partner remuneration was ₹40,00,000.

Tax Consequences on the Firm: Under Section 40(a)(ia), any payment subject to TDS where tax has not been deducted or paid attracts a 30% disallowance of the expenditure! Therefore, 30% of ₹30,00,000 = ₹9,00,000 is disallowed and added back to the firm's taxable income. At the partnership corporate tax rate of 30% plus 4% cess (31.2%), the firm suffers an additional tax liability of ₹2,80,800, plus mandatory interest at 1% per month under Section 201(1A). Utilizing assureFinancials prevents un-flagged TDS omissions during closing.

Case Study 4: Partner Share of Profit Distributions vs Section 194T Exemption

Fact Pattern: GreenTech Agro LLP earned a total net income of ₹80,00,000 for FY 2025-26 after paying all expenses. On April 15, 2026, the LLP distributed ₹40,00,000 each to its two equal partners as their 50% share of net profit.

Section 10(2A) Exemption Analysis: Section 194T applies exclusively to salary, remuneration, commission, bonus, and interest. A partner's share in the profits of the firm is exempt from income tax in the partner's hands under Section 10(2A). Because profit distribution is neither remuneration nor interest, Section 194T is completely inapplicable. The LLP disburses the full ₹80,00,000 without deducting any withholding tax.

Case Study 5: Interest on Partner's Loan Account vs Capital Account

Fact Pattern: Partner Rajesh advanced an unsecured commercial loan of ₹30,00,000 to his firm to fund warehouse expansion, over and above his equity capital of ₹10,00,000. The firm pays 12% interest on the capital (₹1,20,000) and 12% interest on the unsecured loan (₹3,60,000). Total interest = ₹4,80,000.

Statutory Treatment: Historically, some tax practitioners debated whether loan interest fell under Section 194A or Section 40(b). Under Section 194T, the wording encompasses "any sum by way of interest... to a partner". Both interest on capital and interest on a partner's loan account fall squarely under Section 194T. The firm must deduct 10% TDS on the entire ₹4,80,000 (total TDS: ₹48,000).

Case Study 6: Section 40(b) Partial Disallowance and Full TDS Withholding

Fact Pattern: Dynamic Logistics Firm had book profits of ₹5,00,000. Under Section 40(b), the maximum allowable partner remuneration is: (₹3,00,000 @ 90% = ₹2,70,000) + (₹2,00,000 @ 60% = ₹1,20,000) = ₹3,90,000. However, the firm credited ₹6,00,000 as salary to its working partner pursuant to the partnership deed, resulting in ₹2,10,000 being disallowed under Section 40(b).

Withholding Base: Section 194T mandates deduction on the "amount credited or paid". The firm must deduct 10% TDS on the full ₹6,00,000 credited (TDS ₹60,000), not on the allowable ₹3,90,000. In the partner's personal ITR-3, only ₹3,90,000 is taxable as PGBP under Section 28(v), but the partner receives credit for the full ₹60,000 TDS, generating a tax refund or reducing other tax liabilities.

Case Study 7: TAN Application Mandate for Non-Audit Small Partnership Firms

Fact Pattern: Royal Trading Co., a small proprietary firm converted into a partnership with turnover of ₹60,00,000, never held a Tax Deduction Account Number (TAN) because it was eligible for Section 44AD presumptive taxation and was exempt from commercial audit. In FY 2025-26, it credits ₹1,20,000 remuneration to its partner.

Statutory Obligation: Under Section 203A, every person responsible for deducting tax under Chapter XVII-B must obtain a TAN. Unlike Section 194-IB or 194M where individuals can deduct TDS using PAN, Section 194T does not contain any PAN-based deduction provision. Therefore, all partnership firms and LLPs—regardless of turnover or audit status—must apply for and obtain a TAN in Form 49B before deducting and depositing Section 194T tax.

Case Study 8: Remuneration Paid to Non-Resident Partner (Section 195 vs 194T)

Fact Pattern: Nexus Global LLP has an NRI partner residing in Dubai, UAE. The LLP credits ₹15,00,000 as interest and technical remuneration to the NRI partner for overseas consulting.

Priority of Withholding Section: Section 194T applies to payments to a partner generally. However, under the specific non-resident withholding regime of Section 195, payments of any sum chargeable to tax made to a non-resident must be withheld under Section 195 at the rates in force (or beneficial DTAA rates), accompanied by Form 15CA/15CB (or Form 145/146 under the 2025 regime). Specific non-resident provisions override general domestic withholding. Tax teams use assureNotice and assureTax to verify residency certificates before applying Section 194T versus Section 195.

Step-by-Step Audit & Compliance Verification Checklist

Step	Compliance Action	Verification & Execution Procedures	Documentation Required	Risk Level
1	Partnership Deed Scrutiny	Review partnership deed clauses; verify explicit authorization for salary, remuneration, bonus, and interest on capital up to 12%.	Certified Partnership Deed / LLP Agreement.	High
2	TAN Registration Verification	Confirm firm holds an active Tax Deduction Account Number (TAN); obtain TAN in Form 49B if not already held.	TAN Allotment Letter.	High
3	De Minimis Threshold Monitoring	Track cumulative payments and credits per partner; trigger 10% withholding immediately once aggregate exceeds ₹20,000.	Partner ledger extracts in assureFinancials.	High
4	Section 40(b) Ceiling Computation	Calculate book profit ceilings on working partner remuneration and verify interest on capital is capped at 12% per annum.	Section 40(b) calculation schedule.	High
5	Drawing vs Salary Classification	Segregate monthly drawings against capital from formal remuneration disbursements; document intent via board/partner minutes.	Partner meeting resolutions, withdrawal slips.	Medium
6	Year-End Accrual Withholding	On March 31, deduct 10% TDS simultaneously on all year-end salary and interest credits; prepare PMT-06 challans.	Year-end journal vouchers in assureFinancials.	High
7	Statutory TDS Challan Deposit	Deposit monthly TDS by the 7th of the following month (and April 30 for March credits) using Challan ITNS 281.	CIN stamped challan receipts.	High
8	Quarterly Form 26Q Filing	Report partner PAN, gross remuneration/interest, and TDS deducted in Form 26Q on or before quarterly due dates.	Form 26Q provisional receipt, FVU validation.	High
9	Form 16A Certificate Issuance	Download digitally signed Form 16A TDS certificates from TRACES portal and furnish to partners within 15 days of 26Q deadline.	TRACES Form 16A PDF files.	Medium
10	Tax Audit Form 3CD Clause 34 Reconcile	Tax auditor must cross-reconcile partner payments in Clause 21(d) and Clause 34 with Form 26Q and books using assureTax.	Clause 34 audit workpapers.	High

Ecosystem Automation: Partnership Tax Management with assureOffice

Seamlessly executing Section 194T compliance across multiple partners and diverse payment channels demands unified accounting and tax software:

• assureTax: Automates Section 194T 10% withholding computations, monitors the ₹20,000 threshold across partner accounts, prepares Form 26Q returns, and performs automated Form 3CD Clause 34 reconciliations.
• assureFinancials: Embeds automated Section 40(b) allowable remuneration limits, computes 12% interest on capital ceilings, and generates year-end partner current account journal entries with integrated TDS deductions.
• assureITR: Seamlessly populates firm Form ITR-5 and partner individual Form ITR-3, cross-matching Section 28(v) business income with TRACES Form 26AS/AIS credits.
• assurePractice: Centralizes partnership firm compliance calendars, manages quarterly TDS filing due dates, and archives client Form 16A acknowledgments.
• assureNotice: Tracks TRACES default notices, manages Section 201(1) demand rectifications, and handles faceless TDS inquiries.

16 Detailed Practitioner FAQs on Section 194T TDS on Partners

1. What is the effective date of Section 194T?

Section 194T was enacted by the Finance (No. 2) Act, 2024 and comes into statutory effect on April 1, 2025 (applicable for Assessment Year 2026-27 onwards).

2. What is the rate of tax deduction under Section 194T?

The rate of TDS under Section 194T is a flat 10% of the amount paid or credited to the partner.

3. What is the monetary threshold below which Section 194T does not apply?

Under the proviso to Section 194T(1), no tax shall be deducted if the aggregate amount of salary, remuneration, commission, bonus, or interest paid or credited to a partner does not exceed ₹20,000 during the financial year.

4. Does Section 194T apply to the partner's share of net profit from the firm?

No. A partner's share of profit in the total income of the firm is exempt from tax under Section 10(2A). Section 194T applies strictly to salary, remuneration, commission, bonus, and interest, and does not apply to share of profit distributions.

5. Is Section 194T applicable to Limited Liability Partnerships (LLPs)?

Yes. Under Section 2(23) of the Income-tax Act, the definition of a "firm" includes a Limited Liability Partnership as defined in the LLP Act, 2008, and "partner" includes a partner of an LLP. Section 194T applies equally to LLPs.

6. What happens if a firm fails to deduct TDS under Section 194T?

Failure to deduct TDS attracts a 30% disallowance of the partner remuneration or interest expense under Section 40(a)(ia) in the hands of the firm, interest at 1% per month under Section 201(1A), and potential penalties under Section 271C.

7. Does Section 194T apply to interest paid on a partner's loan account?

Yes. Section 194T applies to any sum credited or paid to a partner by way of interest, which encompasses both interest on equity capital and interest on partner loan advances.

8. Does a firm require a TAN to deduct tax under Section 194T?

Yes. Under Section 203A, every person deducting tax under Chapter XVII-B must hold a Tax Deduction Account Number (TAN). Section 194T does not provide for PAN-based deduction.

9. Can a partner apply for a lower or nil TDS certificate under Section 197 for Section 194T?

Yes. Section 197 has been amended to include Section 194T, enabling partners whose estimated total income is below the taxable threshold to apply for a lower withholding certificate in Form 13.

10. If partner remuneration is disallowed under Section 40(b), does Section 194T still apply to the disallowed portion?

Yes. Section 194T applies to the entire amount credited or paid as remuneration in the books of the firm, irrespective of whether a portion is subsequently disallowed in the firm's tax computation under Section 40(b).

11. When is the tax deducted under Section 194T required to be deposited with the government?

Tax deducted during April to February must be deposited by the 7th of the following month. Tax deducted on year-end credits on March 31 must be deposited on or before April 30.

12. Which return form is used to report Section 194T deductions?

Section 194T deductions are reported quarterly in Form 26Q, and the firm must issue quarterly TDS certificates in Form 16A to the partners.

13. Does Section 194T apply to non-working or sleeping partners who receive interest?

Yes. While sleeping partners cannot receive remuneration under Section 40(b), any interest on capital credited or paid to them exceeding ₹20,000 is subject to 10% TDS under Section 194T.

14. What if a firm pays remuneration to an NRI partner?

Payments to non-resident partners are governed by the specific non-resident withholding provisions of Section 195, which take precedence over domestic Section 194T.

15. Are reimbursement of actual official expenses incurred by a partner subject to Section 194T?

No. Reimbursement of verified, actual commercial expenses incurred by a partner on behalf of the firm (supported by third-party bills) does not constitute remuneration, bonus, or interest, and is not subject to Section 194T.

16. Can a partner claim credit for Section 194T TDS in their personal tax return?

Yes. Under Section 199 read with Rule 37BA, the partner is entitled to full credit for the TDS reflected in their Form 26AS/AIS in their personal income tax return (ITR-3) for the relevant assessment year.