By CA Surekha S Ahuja
The introduction of Section 194T by the Finance (No. 2) Act, 2024, effective 1 April 2025, marks a fundamental shift in the tax compliance framework governing partnership firms and LLPs.
For decades, payments made by firms to partners—whether in the form of interest on capital or remuneration to working partners—were taxable in the hands of partners under Section 28(v) but escaped the TDS regime entirely.
The legislature has now addressed this gap by introducing mandatory tax deduction at source on such payments.
This development has particular significance as the last installment of advance tax approaches, because many firms finalize remuneration and interest adjustments near year-end. Without careful planning, such adjustments may trigger TDS defaults, interest liability, and potential disallowances.
Accordingly, firms must now evaluate partner payments with a structured legal approach that integrates Section 194T with Sections 40(b), 44AD, 28(v), and the broader TDS framework.
This guidance note provides a comprehensive and practical interpretation of the provision, with analytical reasoning, scenario analysis, and compliance insights designed to prevent any default risk.
Statutory Framework of Section 194T
Section 194T requires a partnership firm or LLP to deduct tax at source when making certain payments to its partners.
The payments covered include:
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salary
-
remuneration
-
commission
-
bonus
-
interest on capital or loan
-
any similar payment in consideration of services rendered by a partner.
These categories broadly mirror the terminology used in Section 40(b) which governs deductibility of partner remuneration and interest in computing firm income.
Rate and Threshold
| Particulars | Requirement |
|---|---|
| Specified payments to partners | TDS @ 10% |
| Aggregate payment up to ₹20,000 per partner per financial year | No TDS required |
| No PAN furnished | 20% TDS (Section 206AA) |
Time of Deduction
Tax must be deducted at the earlier of:
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credit of the amount to the partner’s account (including capital account), or
-
actual payment.
Therefore, mere credit entries—even without cash payment—trigger the TDS obligation.
Reasoning Behind the Provision
The legislative objective behind Section 194T is to integrate partner remuneration and interest into the information reporting and tax collection framework.
Historically:
-
firms could credit partner remuneration at year-end
-
the tax department had limited visibility over such payments until returns were filed
-
collection of tax depended entirely on partner compliance.
By introducing TDS, the law now ensures:
| Earlier position | Position after Section 194T |
|---|---|
| No withholding mechanism | Mandatory withholding |
| Limited reporting | Full TDS reporting through Form 26Q |
| Tax collected at return stage | Tax collected during the year |
Thus Section 194T functions primarily as a tax collection and reporting mechanism, not as a new tax levy.
Core Legal Principle — TDS Trigger Is the Payment Itself
The most important interpretational principle of Section 194T is that the obligation to deduct tax depends on the nature of payment, not on the method of income computation of the firm.
Consequently, the section applies irrespective of whether:
| Situation | Applicability |
|---|---|
| The firm opts for presumptive taxation under Section 44AD | Yes |
| The firm maintains full books of account | Irrelevant |
| The payment is allowable under Section 40(b) | Irrelevant |
| The partner claims presumptive taxation | Irrelevant |
The character of payment alone determines applicability.
Interaction with Section 44AD (Presumptive Taxation)
A common misunderstanding arises where firms adopting Section 44AD believe that because profits are computed presumptively and partner remuneration is not separately deducted, TDS should not apply.
Such interpretation is legally incorrect.
Section 44AD merely determines how the firm computes its taxable income. It does not alter the existence or character of payments made to partners.
Even in a presumptive regime:
-
remuneration remains remuneration
-
interest remains interest.
Thus the moment such payment is credited or paid, Section 194T becomes operational.
The absence of books of account or reliance on presumptive computation does not negate the factual existence of the payment.
Relationship with Section 40(b) – Allowability vs TDS
Section 40(b) governs the deductibility of remuneration and interest in the hands of the firm.
However, Section 194T operates independently of deductibility.
Illustration
| Particulars | Amount |
|---|---|
| Interest paid to partner | ₹1,50,000 |
| Maximum allowable under Section 40(b) | ₹1,20,000 |
| Disallowed portion | ₹30,000 |
Even though ₹30,000 is disallowed in the firm’s computation, TDS must still be deducted on the entire ₹1,50,000.
The disallowance affects tax computation, not TDS obligation.
Payments Covered and Not Covered
Understanding the precise scope of Section 194T is essential.
| Nature of Payment | TDS Applicability | Reason |
|---|---|---|
| Salary or remuneration to partner | Yes | Explicitly covered |
| Interest on partner capital | Yes | Explicitly covered |
| Commission to partner | Yes | Explicitly covered |
| Bonus to partner | Yes | Explicitly covered |
| Share of profit | No | Exempt under Section 10(2A) |
| Return of capital | No | Capital transaction |
| Partner drawings | No | Withdrawal of capital/profit |
Thus pure profit share distributions remain outside the TDS regime.
Important Practical Scenarios
Pure Capital Withdrawals
Where partners merely withdraw amounts from their capital accounts without any remuneration or interest credit, such withdrawals represent distribution of profits or capital.
In such cases Section 194T should not apply, provided there is no underlying remuneration or interest entry.
However, substance prevails over form. If remuneration is credited and then withdrawn, it remains remuneration for TDS purposes.
Composite Partner Accounts
Many firms maintain a single partner current account containing:
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profit share
-
remuneration
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interest
-
drawings.
In such cases the firm must segregate each component.
| Component | TDS requirement |
|---|---|
| Profit share | No |
| Interest | Yes |
| Remuneration | Yes |
Failure to maintain such segregation may expose the firm to disputes.
Remuneration Exceeding Partnership Deed Limits
Even if remuneration exceeds limits prescribed in the partnership deed or under Section 40(b), the payment still retains the character of remuneration.
Therefore TDS must be deducted on the full amount actually paid.
Partner Claiming Presumptive Taxation
If the partner opts for Section 44AD or 44ADA in his own return, it does not affect the firm’s TDS obligation.
The partner may claim credit or refund of TDS while filing the return.
Availability of Form 15G / 15H and Form 13
Many taxpayers ask whether TDS under Section 194T can be avoided through declarations or lower deduction certificates.
The position requires careful understanding.
| Provision | Applicability under 194T |
|---|---|
| Form 15G / Form 15H | Not applicable |
| Lower or Nil TDS certificate (Form 13) | Generally not available in practice |
| Reason | Section 197 does not presently list 194T |
Thus once the threshold is crossed, deduction of tax becomes mandatory.
Consequences of Non-Compliance
Failure to deduct or deposit TDS may trigger multiple consequences.
| Section | Consequence |
|---|---|
| Section 201(1) | Assessee deemed in default |
| Section 201(1A) | Interest liability |
| Section 221 | Penalty |
| Section 271C | Penalty equal to TDS |
| Section 234E | Late filing fee for TDS returns |
| Section 40(a)(ia) | Possible disallowance of expenditure |
Thus a single lapse can lead to cascading financial exposure.
Strategic Planning to Reduce TDS Exposure
While Section 194T cannot be ignored, certain legitimate structuring approaches may reduce unnecessary TDS outflow.
Profit Share Model
Since profit share is exempt in the hands of partners, firms may rely more on profit distribution instead of fixed remuneration, particularly in small firms.
Controlled Remuneration
Firms may limit remuneration to remain within the ₹20,000 annual threshold where commercially feasible.
Flexible Deed Provisions
Partnership deeds providing mandatory fixed remuneration may trigger unavoidable TDS obligations. Flexible clauses allow better tax planning.
Treatment in the Hands of the Partner
Although TDS is deducted by the firm, the final tax liability rests with the partner.
| Partner situation | Result |
|---|---|
| Income below basic exemption | Full refund possible |
| Presumptive taxation claimed | TDS adjusted against liability |
| High deductions available | Refund likely |
Therefore, in many cases TDS becomes merely a temporary cash flow adjustment rather than a permanent tax burden.
Advance Tax Planning Implications
With Section 194T in force, firms and partners must re-evaluate advance tax obligations.
Key considerations include:
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monitoring partner payments during the year
-
adjusting advance tax based on TDS deducted
-
avoiding year-end remuneration credits without TDS deduction.
Failure to do so may trigger interest under Sections 234B and 234C.
Compliance Approach for Firms
The safest compliance strategy involves:
| Step | Action |
|---|---|
| Review partnership deed | Identify remuneration clauses |
| Track partner payments | Monitor aggregate amount |
| Deduct TDS when threshold crossed | Apply correct rate |
| Deposit TDS within due date | Avoid interest liability |
| File TDS returns | Ensure Form 26Q reporting |
| Issue Form 16A | Enable partner credit |
Professional Conclusion
Section 194T transforms partner remuneration and interest from internal accounting adjustments into regulated TDS transactions.
From FY 2025-26 onward, partnership firms and LLPs must treat such payments with the same level of compliance discipline applicable to other TDS provisions.
The safest professional approach is:
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clear distinction between profit share and remuneration
-
continuous monitoring of partner accounts
-
early advance tax planning.
In essence, Section 194T does not increase the tax burden, but it significantly increases the compliance responsibility of partnership firms.
When properly understood and planned, the provision can be managed smoothly without creating any default, interest exposure, or litigation risk.
