Section 194T TDS Not Deducted? What It Costs and How to Fix It

The year this quietly went wrong

Section 194T came into force on 1 April 2025, introduced by the Finance (No. 2) Act, 2024. FY 2025-26 is therefore the first year it has actually bitten, and the returns for that year are being finalised right now.

Two things made this an unusually easy rule to miss. First, a great many partnership firms have never deducted tax at source on anything and do not hold a TAN. The obligation arrived at a category of business with no infrastructure for it. Second, the trigger is not a payment. It is a credit — including the year-end journal entry that moves remuneration to a partner’s capital account, where no money moves at all and nobody thinks of it as a transaction.

The result is a large number of firms discovering the problem in an audit conversation in August, for a year that closed in March.

This article is for them. If you want the rule itself rather than the remedy, start with TDS on partner payments under Section 194T.

First, confirm you actually have a default

Not every partner payment is inside Section 194T, and a fair number of firms panic unnecessarily.

Three further tests decide whether the threshold was crossed.

• The ₹20,000 limit is per partner, per financial year, and aggregate across all the covered categories. A partner drawing ₹15,000 of remuneration and ₹9,000 of interest has crossed it, even though neither figure alone does.
• The obligation arises on credit or payment, whichever is earlier. A credit to the partner’s current or capital account is a credit. So is a credit to a suspense account.
• Once the aggregate crosses ₹20,000 in the year, tax is deducted on the whole of the covered amount, not just the excess over ₹20,000.

What a default actually costs

Four separate consequences, and they stack. Take them one at a time, because firms tend to fixate on the interest and miss the one that costs more.

1. Interest under Section 201(1A)

Two rates, and which applies depends on where the failure sits.

• 1 per cent per month, or part of a month, from the date the tax was deductible to the date it is actually deducted. This is the rate for a failure to deduct at all.
• 1.5 per cent per month, or part of a month, from the date of deduction to the date the tax is actually paid to the Government. This is the rate for deducting and not depositing.

"Part of a month" is counted as a whole month, so a delay of one day into a new month costs a full month of interest. Interest is not deductible as an expense.

2. Disallowance of 30 per cent under Section 40(a)(ia)

This is the expensive one, and it is the one that gets overlooked.

Where tax was deductible and was not deducted, 30 per cent of the expenditure is disallowed in computing the firm’s business income for that year. Not 30 per cent of the tax — 30 per cent of the payment.

A firm that credited ₹24,00,000 of partner remuneration without deducting has ₹7,20,000 added back to its taxable income. The TDS that should have been deducted was ₹2,40,000. The disallowance costs the firm more than the tax it failed to withhold.

The disallowance is not permanent. It reverses in the year in which the tax is finally deducted and paid — so a firm that fixes this in, say, October 2026 gets the deduction back in the FY 2026-27 computation. But it is a real cash cost in the year of default, and it is the reason to fix this before the return is filed rather than after.

3. Late fee under Section 234E and penalty under Section 271H

Once the quarterly statement in Form 26Q is overdue, a fee of ₹200 per day runs until it is filed, capped at the amount of TDS involved. The fee is mandatory — there is no discretion to waive it, and the statement will not upload until it is paid.

Separately, Section 271H allows a penalty between ₹10,000 and ₹1,00,000 for failing to file the statement or for filing incorrect particulars. It is not automatic, and it is generally not levied where the tax, interest and fee have been paid and the statement filed within a year of the due date.

4. It appears in your tax audit report

The statement of particulars in the tax audit report requires disclosure of amounts on which tax was deductible and was not deducted, and of the resulting disallowance. Your auditor cannot leave it out, and does not have discretion about it.

This is worth knowing before the audit conversation rather than during it. A default that has been identified, quantified, paid and corrected is a paragraph. A default discovered by the auditor a week before the filing deadline is a scramble.

A worked example

A firm with two working partners provided remuneration monthly through FY 2025-26 and credited interest on capital at the year end. No TDS was deducted.

Total TDS not deducted: ₹2,40,000. Total covered expenditure: ₹24,00,000, of which 30 per cent — ₹7,20,000 — is disallowed in the FY 2025-26 computation.

Interest runs on each monthly credit separately, from the date each amount became deductible. It is not one calculation on one date, which is why this is tedious to do by hand and worth handing to someone with the software for it.

How to fix it, in order

The sequence matters. Doing these out of order produces challans that will not match statements.

• Step 1 — get a TAN if you do not have one. Nothing else can happen until this exists. Apply through TAN registration; allow a few working days.
• Step 2 — extract every credit and payment to every partner for the year, by date, split into the five covered categories. Include journal credits, not just bank payments.
• Step 3 — identify each partner who crossed ₹20,000 in aggregate, and compute 10 per cent on the whole covered amount for those partners.
• Step 4 — collect PANs. Without a valid PAN, Section 206AA requires deduction at 20 per cent rather than 10. This is entirely avoidable and entirely your problem if it is not fixed before you deposit.
• Step 5 — compute interest under Section 201(1A) on each amount from its own due date to the intended deposit date.
• Step 6 — deposit the tax and interest by challan, correctly tagged to the relevant assessment year and section.
• Step 7 — file or revise Form 26Q for each affected quarter, paying the Section 234E fee where the statement is late.
• Step 8 — recover the TDS from the partners, or record it as recoverable against their accounts. Deducting from your own funds without adjusting the partner’s account quietly changes the economics between partners.
• Step 9 — reflect the disallowance in the computation, and tell your auditor before they find it.
• Step 10 — put the deduction into the monthly process so this does not recur, and set a control for the year-end credit specifically.

Steps 5 to 7 are where most of the errors happen. If you would rather not, TDS return filing covers the computation, the challans and the correction statements.

The relief most firms do not know about

The first proviso to Section 201(1) says that where the payee — here, the partner — has furnished their return of income, included the amount in it, paid the tax on it, and this is certified by an accountant in the prescribed form, the firm is not treated as an assessee in default.

For partner payments this is a genuinely useful route, because in most firms the partners have in fact declared the remuneration in their own returns. It does not make everything go away — interest under Section 201(1A) still runs from the date the tax was deductible to the date the partner filed their return, and the certificate has to be obtained and filed. But it changes the character of the default.

Preventing the next one

Four controls, none of them elaborate.

• Treat partner remuneration as payroll. It runs monthly, TDS is deducted at the point of credit, and it is deposited by the 7th of the following month like everything else.
• Put a hard control on the year-end journal. Any credit to a partner’s capital or current account for remuneration, bonus, commission or interest passes through a TDS check before it is posted.
• Hold PAN for every partner on file, verified, before the first credit of the year.
• Reconcile Form 26Q against the partners’ ledgers at each quarter end rather than at the year end. A quarter’s error is cheap to fix; a year’s error is not.

For firms and LLPs that would rather this simply happened, monthly bookkeeping and LLP annual compliance both carry the deduction as part of the monthly cycle.

Key takeaways

• 10 per cent, on aggregate covered payments above ₹20,000 per partner per year, on credit or payment whichever is earlier. Profit share is outside it.
• The cost of missing it is interest, plus a 30 per cent disallowance of the expenditure, plus a ₹200-a-day statement fee, plus a disclosure in the audit report.
• The disallowance reverses in the year the tax is eventually deducted and paid.
• Where partners have declared the income and paid tax on it, the firm can avoid assessee-in-default status on an accountant’s certificate — but interest still runs.
• Fix it before the return is filed. The same default is materially cheaper to disclose than to have discovered.

Frequently asked questions