- 01 Apr, 2026
- Direct Taxation
- By Kinsmen Direct Tax Practice Group
Statutory Quick Takeaway (Executive Summary)
What is Section 194T? Introduced under the Finance Act into the Income Tax Act, 1961, Section 194T mandates that all Partnership Firms and Limited Liability Partnerships (LLPs) must deduct Tax Deducted at Source (TDS) at the rate of 10% on any salary, remuneration, bonus, commission, or interest credited or paid to a partner if the aggregate amount exceeds ₹20,000 in a financial year. Concurrently, Section 40(b) raises allowable partner remuneration limits up to ₹3,00,000 or 90% of book profits, requiring immediate amendments to existing partnership deeds.
1. Overview of Section 194T: Statutory Provisions & Legislative Intent
Partnership firms registered under the Indian Partnership Act, 1932, and Limited Liability Partnerships (LLPs) incorporated under the Limited Liability Partnership Act, 2008, historically operated without statutory TDS obligations on internal partner disbursements. While payments to external vendors and contractors triggered TDS under Sections 194C, 194J, or 194H, partner compensations were outside the withholding net.
The enactment of Section 194T closes this reporting gap, bringing payments made by a firm to its partners under the formal TDS framework. The legislative intent is to establish real-time reporting via Form 26Q, minimize tax evasion, and ensure seamless reconciliation with the individual Annual Information Statement (AIS) and Form 26AS of each partner.
2. Core Mechanics of Section 194T: Rates, Thresholds & Timing
To ensure complete statutory compliance, firms and tax managers must understand the specific legal triggers governing Section 194T:
| Parameter | Statutory Specification u/s 194T |
|---|---|
| Applicable Entities | All Partnership Firms (registered & unregistered) and LLPs |
| Covered Payments | Partner Salary, Remuneration, Commission, Bonus, and Interest on Capital |
| Exempt Payments | Share of Profit (exempt under Section 10(2A)), Capital repayments, Loan refunds |
| Applicable TDS Rate | 10% (if Partner PAN is furnished) / 20% under Section 206AA (if PAN missing) |
| De-Minimis Threshold | ₹20,000 aggregate per partner during the Financial Year |
| Threshold Application | Once ₹20,000 is crossed, TDS applies to the entire cumulative amount, not just the excess |
| Point of Deduction | At the time of credit to the partner’s account (including capital or current account) or actual payment, whichever is earlier |
| Statutory TDS Form | Form 26Q filed quarterly under Section 200(3) |
3. Revised Partner Remuneration Limits Under Section 40(b)
Alongside Section 194T, the government rationalized the allowable limits of deductible remuneration payable to working partners under Section 40(b)(v) of the Income Tax Act. These enhanced limits grant relief to expanding MSMEs and professional services firms:
Comparative Analysis: Old vs. Revised Section 40(b) Slabs
| Book Profit Bracket | Old Section 40(b) Deduction Limit | Revised Section 40(b) Deduction Limit |
|---|---|---|
| On the first ₹3,00,000 of book profit (or in case of loss) | ₹1,50,000 or 90% of book profit (whichever is greater) | ₹3,00,000 or 90% of book profit (whichever is greater) |
| On the balance book profit exceeding ₹3,00,000 | 60% of the remaining book profit | 60% of the remaining book profit |
Critical Conditions for Section 40(b) Claim:
- Working Partner Mandate: Remuneration is tax-deductible only if paid to an individual partner actively engaged in conducting the firm’s day-to-day business affairs.
- Deed Authorization: The remuneration terms, formula, or specific monthly allowances must be explicitly documented in the registered Partnership Deed or LLP Agreement.
- No Retrospective Clauses: Remuneration cannot be claimed for any period prior to the date of deed execution.
4. Operational Challenges & Compliance Matrix
Implementing Section 194T introduces critical accounting workflows that firms must institutionalize:
A. Cash Flow and Working Capital Management
Prior to Section 194T, partners routinely drew advances throughout the year, with formal remuneration credited only during March year-end finalization. Under Section 194T:
- If advances or monthly drawings are booked as remuneration, TDS must be deducted and deposited by the 7th of the following month.
- Delayed book finalization until ITR filing deadlines (October 31 for audit cases) will cause retrospective interest penalties under Section 201(1A) at 1.5% per month.
B. Mandatory Partnership Deed Restructuring
Firms with older deed templates lacking explicit remuneration clauses or mentioning outdated Section 40(b) limits must draft and register a Supplementary Partnership Deed or LLP Agreement Amendment (Form 3) to legally claim the higher ₹3,00,000 threshold and authorize TDS deductions.
C. Quarterly Compliance & Challan Timelines
| Event / Obligation | Statutory Due Date | Governing Provision |
|---|---|---|
| Monthly TDS Deposit | 7th of subsequent month (April 30 for March) | Rule 30 of IT Rules |
| Form 26Q Q1 Filing (April–June) | July 31 | Section 200(3) |
| Form 26Q Q2 Filing (July–Sept) | October 31 | Section 200(3) |
| Form 26Q Q3 Filing (Oct–Dec) | January 31 | Section 200(3) |
| Form 26Q Q4 Filing (Jan–March) | May 31 | Section 200(3) |
| Form 16A Issuance to Partners | Within 15 days of Form 26Q deadline | Section 203 |
5. Strategic Step-by-Step Action Plan for Firms & LLPs
To prevent disallowance under Section 40(a)(ia) and avoid late-filing fees under Section 234E (₹200/day):
- Conduct Partner Ledger Audit: Review all current and capital accounts across working and non-working partners. Identify distinct ledgers for capital interest, monthly remuneration, performance bonus, and profit share.
- Segregate Exempt Share of Profit: Ensure that profit shares exempt under Section 10(2A) are distinctly routed and not commingled with interest or salary credits.
- Formalize Deed Amendments: Execute supplementary deeds validating the enhanced Section 40(b) limits and detailing the exact remuneration methodology.
- Update ERP and Accounting Systems: Configure Tally Prime, Zoho Books, or enterprise software to automatically compute 10% withholding upon booking partner credits exceeding ₹20,000.
- Collect PAN and Aadhaar Linkage Proof: Verify that all partners have operational PANs linked with Aadhaar to avoid the penal 20% withholding rate under Section 206AA / 206AB.
6. Frequently Asked Questions (Statutory Compliance FAQ)
Q1: Does Section 194T apply to the share of profit distributed to partners?
No. Share of profit distributed to partners is explicitly exempt from income tax in the hands of the partner under Section 10(2A) of the Income Tax Act, 1961. Section 194T applies exclusively to remuneration, salary, bonus, commission, or interest on capital.
Q2: What happens if partner remuneration is ₹18,000 in a financial year?
If the total aggregate of remuneration, salary, interest, and bonus paid or credited to a partner remains below or equal to ₹20,000 during the financial year, no TDS is required to be deducted under Section 194T.
Q3: If a partner receives ₹25,000, is TDS deducted on ₹5,000 or the full ₹25,000?
TDS is deducted on the entire ₹25,000 (amounting to ₹2,500 at 10%). The ₹20,000 figure is a threshold limit, not an exemption limit. Once crossed, the full amount is subject to withholding.
Q4: Can a partner claim credit for TDS deducted under Section 194T?
Yes. The partner can claim full credit for the TDS deducted by the firm when filing their individual Income Tax Return (ITR-3), as the deduction reflects in their Form 26AS and AIS under the respective TAN of the partnership firm.
Q5: What is the penalty for failure to deduct TDS under Section 194T?
Failure to deduct or deposit TDS triggers a disallowance of 30% of the expenditure under Section 40(a)(ia) when computing the firm’s taxable profits, alongside mandatory interest at 1% to 1.5% per month under Section 201(1A) and late filing fees under Section 234E.
Professional Statutory Consultation
Navigating partnership taxation requires meticulous documentation, ledger scrutiny, and deed realignment. Contact Kinsmen Corporate Services to review your firm’s partner agreements, automate Form 26Q workflows, and certify compliance with direct tax statutes.