10% TDS on Every Rupee a Partnership Firm Pays Its Partners — Salary, Interest, Bonus, Commission. No Exceptions Above Rs 20,000.
From April 1, 2025, every partnership firm in India must deduct 10% TDS when paying salary, remuneration, interest, bonus, or commission to partners if the amount exceeds Rs 20,000. This is Section 194T — the newest TDS section introduced by the Finance Act 2025. Most partnership firms are not yet compliant.
Before this section, partner payments were a blind spot in the TDS framework. Employees had TDS under Section 192. Contractors had 194C. Professionals had 194J. But partners — receiving lakhs in salary, interest, and commission — had zero TDS deduction at source. That gap is now closed.
Here is exactly what Section 194T covers, what it costs, and what your firm needs to do by the next TDS deposit date.
What Section 194T Covers
| Parameter | Detail |
|---|---|
| Payments covered | Salary, remuneration, interest on capital, bonus, commission |
| Payer | Partnership firms and LLPs |
| Payee | Partners (including designated partners of LLPs) |
| TDS rate | 10% (flat) |
| Rate without PAN | 20% (Section 206AA) |
| Threshold | Rs 20,000 per financial year (aggregate per partner) |
| Trigger point | At the time of credit to partner’s account or payment — whichever is earlier |
| Effective from | April 1, 2025 (FY 2025-26 onward) |
| Applicable return form | Form 26Q (quarterly) |
| TDS certificate | Form 16A |
The threshold of Rs 20,000 is an aggregate limit. If a partner receives Rs 15,000 as interest in April and Rs 10,000 as salary in May, the aggregate crosses Rs 20,000 in May — TDS applies from that point on the full amount exceeding the threshold.
Why This Section Was Introduced
Partnership firms were the last major TDS gap in the Indian tax system. Consider the asymmetry that existed before April 2025:
| Payment type | TDS section | Rate | Existed before 194T? |
|---|---|---|---|
| Salary to employee | 192 | Slab-based | Yes |
| Payment to contractor | 194C | 1-2% | Yes |
| Professional fees | 194J | 10% | Yes |
| Rent to landlord | 194I | 10% | Yes |
| Salary to partner | None | Nil | No |
| Interest to partner | None | Nil | No |
| Commission to partner | None | Nil | No |
Partners in firms — especially those in high-income professional LLPs (CA firms, law firms, consulting firms) — received substantial income with no TDS trail. The government had limited visibility into these payments. A senior partner in a large CA firm earning Rs 1.5 crore annually had zero TDS deducted at source, while an employee earning Rs 15 lakh had monthly TDS cuts.
Section 194T closes this gap. It is part of Budget 2025’s broader TDS rationalization, which also merged and simplified several existing TDS sections.
Practical Impact — Real Numbers
Here is what Section 194T means in actual rupee terms for different partner scenarios:
| Scenario | Payment Type | Annual Amount | TDS at 10% | Net Payment to Partner | Partner Claims in ITR |
|---|---|---|---|---|---|
| Senior partner salary | Remuneration | Rs 5,00,000 | Rs 50,000 | Rs 4,50,000 | Rs 50,000 credit |
| Interest on capital (Rs 25L at 12%) | Interest | Rs 3,00,000 | Rs 30,000 | Rs 2,70,000 | Rs 30,000 credit |
| Combined salary + interest | Both | Rs 8,00,000 | Rs 80,000 | Rs 7,20,000 | Rs 80,000 credit |
| Small firm partner — below threshold | Salary | Rs 18,000 | Rs 0 | Rs 18,000 | No TDS |
| Partner without PAN | Remuneration | Rs 5,00,000 | Rs 1,00,000 (20%) | Rs 4,00,000 | Rs 1,00,000 credit |
Key takeaway: A partner earning Rs 8 lakh combined (salary + interest) now has Rs 80,000 locked as TDS. That money is recovered only after filing ITR and processing — typically 3-9 months later.
Cash Flow Impact on Partners
This is where Section 194T bites hardest. Partners are not employees — they do not have the employer handling their entire tax compliance. And unlike employees (where Section 192 TDS roughly matches final tax liability), the flat 10% rate under 194T may be significantly more or less than the partner’s actual tax rate.
Scenario 1 — Overpayment trap: A partner in a small firm earns Rs 4,00,000 salary. Under the new tax regime, income up to Rs 12,00,000 is effectively tax-free (after rebate under Section 87A). If partnership income is this partner’s only income, the actual tax is Rs 0 — but Rs 40,000 is deducted as TDS and locked until ITR processing.
Scenario 2 — Underpayment gap: A senior partner earns Rs 25,00,000 in remuneration. TDS at 10% = Rs 2,50,000. But actual tax liability at the 30% slab (plus surcharge and cess) could be Rs 6,50,000+. The partner still needs to pay advance tax on the shortfall.
Scenario 3 — Interest on capital cash crunch: Partner has Rs 25 lakh capital earning 12% = Rs 3,00,000 annual interest. Previously received in full. Now Rs 30,000 is withheld. For partners in small firms with tight working capital, this Rs 30,000 retained by the firm (for government deposit) creates genuine monthly cash flow pressure — especially if interest is credited quarterly.
Partners must now plan for reduced take-home amounts and factor TDS recovery timelines into their personal cash flow projections.
Compliance Steps for Partnership Firms
Every partnership firm and LLP must complete these steps. Non-compliance is expensive — see penalties section below.
Step 1: Obtain TAN
If your firm does not already have a Tax Deduction and Collection Account Number (TAN), apply immediately using Form 49B on the NSDL/UTIITSL portal. Processing takes 7-15 days. Without TAN, you cannot deduct or deposit TDS.
Step 2: Deduct TDS at the Right Time
Deduct 10% TDS when crediting the amount to the partner’s account in the firm’s books, or at the time of actual payment — whichever is earlier. This “credit or payment” rule is critical. Even if you have not paid cash but have credited the partner’s capital account with salary or interest, TDS is triggered.
Step 3: Deposit TDS with the Government
| Month of deduction | Due date for deposit |
|---|---|
| April to February (any month) | 7th of the following month |
| March | April 30 |
Deposit using Challan No. 281 via the e-Pay Tax portal on the income tax website. Quote the correct section code (194T), assessment year, and firm’s TAN.
Step 4: File Quarterly TDS Return (Form 26Q)
| Quarter | Period | Due date |
|---|---|---|
| Q1 | April - June | July 31 |
| Q2 | July - September | October 31 |
| Q3 | October - December | January 31 |
| Q4 | January - March | May 31 |
File Form 26Q using any TDS return preparation utility (the free RPU software from NSDL, or any authorized vendor). Include each partner’s PAN, payment details, and TDS amount.
Step 5: Issue TDS Certificate (Form 16A)
Generate Form 16A from the TRACES portal within 15 days from the due date of filing the quarterly return. Provide it to each partner — they need it for ITR filing and TDS credit claims.
Penalties for Non-Compliance
| Default | Consequence |
|---|---|
| Failure to deduct TDS | Firm liable to pay TDS amount + interest at 1% per month (Section 201) |
| Deducted but not deposited | Interest at 1.5% per month from deduction date to deposit date |
| Late filing of TDS return | Rs 200 per day under Section 234E (capped at TDS amount) |
| Non-deduction of TDS | Payment disallowed as business expense under Section 40(a)(ia) |
| Deliberate failure to deduct/deposit | Prosecution under Section 276B — imprisonment up to 7 years |
The Section 40(a)(ia) disallowance is the hidden killer. If your firm pays Rs 10,00,000 partner salary without deducting TDS, that entire Rs 10,00,000 is disallowed as a deduction. At a 30% tax rate for the firm, this costs Rs 3,00,000 in additional tax — on top of the TDS amount, interest, and penalties.
Section 194T vs Section 192: Partner TDS vs Employee TDS
Many firms have both employees and partners. Here is how the two TDS sections compare:
| Aspect | Section 194T (Partners) | Section 192 (Employees) |
|---|---|---|
| Rate | Flat 10% | Based on income tax slabs |
| Threshold | Rs 20,000 per year (aggregate) | Basic exemption limit (Rs 3,00,000 new regime) |
| Applies to | Partners of firms and LLPs | All salaried employees |
| TDS return form | Form 26Q | Form 24Q |
| TDS certificate | Form 16A | Form 16 |
| Deductions considered | None — flat 10% on gross | 80C, 80D, HRA, standard deduction, etc. |
| Advance tax gap | Often significant (10% vs actual slab) | Minimal (TDS matches slab liability) |
| Filing frequency | Quarterly (26Q) | Quarterly (24Q) |
The key difference: Section 192 calibrates TDS to the employee’s actual tax liability (considering deductions and slabs). Section 194T applies a blunt 10% regardless. A partner in the 30% bracket will have substantial advance tax obligations beyond TDS. A partner below the taxable limit will overpay and must wait for a refund.
Edge Cases and Traps
Partner’s income below taxable limit
TDS still applies at 10%. The partner must file ITR and claim a refund. There is no mechanism for the partner to submit a declaration (like Form 15G/15H for interest income) to avoid TDS under 194T.
Drawings and capital withdrawals
Not covered under Section 194T. Drawings are a withdrawal of the partner’s own capital or accumulated profit — not an income payment. However, if the firm disguises salary as drawings to avoid TDS, this is a clear evasion that will attract penalties upon assessment.
Interest exceeding Section 40(b) limits
Section 40(b) allows firms to deduct interest paid to partners only up to 12% simple interest. But a partnership deed may authorize 15% interest. TDS under 194T applies on the full interest paid — not just the amount deductible under 40(b). If the firm pays 15% interest on Rs 20 lakh capital = Rs 3,00,000, TDS is Rs 30,000 — even though only Rs 2,40,000 (at 12%) is deductible for the firm.
LLPs and designated partners
Section 194T applies equally to LLPs. Both designated partners and non-designated partners receiving covered payments are subject to TDS. This is particularly impactful for large professional LLPs — CA firms, law firms, consulting firms — where partner remuneration runs into crores.
Multi-partner firms — threshold calculation
The Rs 20,000 threshold is per partner, not aggregate across all partners. A firm with 5 partners, each receiving Rs 15,000, has no TDS obligation. But a firm paying one partner Rs 25,000 and another Rs 15,000 must deduct TDS only on the first partner’s payment.
Profit share vs salary
A partner’s share of profit is NOT covered under Section 194T. Section 194T covers only salary, remuneration, interest, bonus, and commission — not the partner’s distributive share of profit. Profit share is exempt under Section 10(2A) in the partner’s hands and has no TDS implications.
Income Tax Act 2025 Mapping
The government passed the new Income Tax Act 2025 (effective from April 1, 2026) to replace the Income Tax Act, 1961. The section references are changing:
| Old Act (1961) | New Act (2025) | Description |
|---|---|---|
| Section 194T | Section 393, Table 3 | TDS on partnership firm payments to partners |
| Section 40(b) | Section 29(1)(b) | Limits on partner remuneration/interest deduction |
| Section 10(2A) | Section 11(2) | Exemption for partner’s share of firm profit |
Firms should start referencing new Act section numbers in internal documentation and partnership deeds to avoid confusion during the transition year. For a complete section-by-section mapping, see our Income Tax Act 2025 vs 1961 guide.
What Partnership Firms Should Do Right Now
- Get TAN — if your firm does not have one, apply today. You cannot deposit TDS without TAN.
- Update your accounting software — ensure it calculates 10% TDS on partner payments and generates the correct challans.
- Revise partnership deed cash flows — partners will receive 90% of entitled amounts. Adjust monthly drawings and cash flow projections accordingly.
- Track the Rs 20,000 threshold — maintain a running aggregate of all 194T-covered payments per partner per year.
- Calendar the deadlines — TDS deposit by 7th of next month, quarterly returns, Form 16A issuance.
- Inform all partners — partners need to know their take-home reduces by 10% and they must claim TDS credit in their ITR.
Related Guides
Understanding Section 194T is part of a broader tax compliance picture. These guides cover adjacent topics:
- TDS rate chart FY 2026-27 — complete TDS rates for all sections including 194T
- Income Tax Act 2025 vs 1961 — section mapping — how every section number changes under the new Act
- Freelancer tax guide — 44ADA — relevant for partners who are also independent professionals
- Income tax slabs FY 2026-27 — determines actual tax liability vs flat 10% TDS
- ITR filing guide — how to claim TDS credit when filing returns
Section 194T is a straightforward provision with a straightforward impact: 10% of every partner payment above Rs 20,000 goes to the government upfront. The compliance burden falls entirely on the firm. The cash flow impact falls entirely on the partner. Neither can afford to ignore it.