TDS on Partner Payments: Section 194T, Now Section 393(3)
Firms and LLPs must deduct 10 per cent TDS on partner salary, remuneration, commission, bonus and interest above ₹20,000 a year. The rule, the traps, and the new section number.
Quick answers. Firms and LLPs must deduct TDS on payments to their own partners, at 10 per cent, once the aggregate for a partner crosses ₹20,000 in the year — and then on the whole amount, not the excess. Salary, remuneration, commission, bonus and interest are covered. Profit share, drawings and repayment of capital are not. It applied from 1 April 2025 under Section 194T, and from 1 April 2026 under Section 393(3).
The first TDS provision that reaches inside a firm
For decades, payments by a firm to its own partners sat outside the TDS net. Section 192 did not apply because a partner is not an employee. Section 194A(3)(iv) expressly excluded interest paid by a firm to a partner. Profit share was exempt in the partner’s hands under Section 10(2A).
That ended on 1 April 2025. Section 194T, inserted by the Finance (No. 2) Act 2024, requires a firm to deduct 10 per cent on partner salary, remuneration, commission, bonus and interest once the aggregate for the year crosses ₹20,000.
There is no turnover threshold, no tax audit condition, and no exemption for small firms. A two-partner firm running ₹30 lakh of turnover is squarely inside it, and a great many such firms have never held a TAN.
What is Section 194T?
Section 194T of the Income-tax Act 1961 required every firm, including a limited liability partnership, to deduct income tax at 10 per cent on any sum in the nature of salary, remuneration, commission, bonus or interest paid or credited to a partner, at the earlier of credit or payment, where the aggregate for the financial year exceeded ₹20,000.
With the Income-tax Act 2025 taking effect from 1 April 2026, the same obligation now sits at Section 393(3), Table for Payments to Any Person, Serial No. 7. The substance is unchanged. What has changed is how the provision is cited, which payment code is used, and which Act governs a given payment.
For payments in FY 2025-26 the governing provision is Section 194T of the 1961 Act. For payments from 1 April 2026 it is Section 393(3) of the 2025 Act. Both are commonly still called “194T” in practice, and returns validation is where the difference bites.
Key terms explained
- Firm: includes both a traditional partnership under the Indian Partnership Act 1932 and a limited liability partnership under the LLP Act 2008. The provision is identity-neutral.
- Credit: an entry crediting the partner’s account in the firm’s books, including the capital account or current account. Credit alone triggers deduction even if no money moves.
- Aggregate: the total of all covered payments to a single partner across the financial year, not each payment separately.
- Profit share: the partner’s share of the firm’s profit, exempt in the partner’s hands under Section 10(2A). Not covered by this provision.
- Drawings: withdrawal of capital or of amounts already credited. Not a covered payment.
What is covered and what is not
| Payment to a partner | Covered? |
|---|---|
| Salary | Yes |
| Remuneration under the partnership deed | Yes |
| Commission | Yes |
| Bonus | Yes |
| Interest on capital account | Yes |
| Interest on a partner’s loan account | Yes |
| Share of profit | No, exempt under Section 10(2A) |
| Drawings | No |
| Repayment of capital | No |
| Genuine reimbursement of expenses | No |
The threshold works differently from how it reads
The ₹20,000 limit applies to the aggregate of covered payments to a partner across the year, and once the aggregate crosses it, TDS applies to the entire amount, not merely the excess.
A firm credits Partner A ₹10,000 of remuneration in April and ₹12,000 of interest in May. Nothing is deducted in April, because the aggregate is ₹10,000. In May the aggregate reaches ₹22,000, so the firm deducts ₹2,200, being 10 per cent of the full ₹22,000, and catches up on the April amount in the May deduction.
Partner B is credited ₹18,000 of interest for the whole year and nothing else. No deduction is required at all.
The year-end credit entry that catches firms out
This is where most defaults arise, and it is worth stating plainly.
Deduction is triggered at the earlier of credit or payment, and credit includes a credit to the partner’s capital account. A firm that computes partner remuneration on 31 March and posts the credit entry that day has triggered TDS on 31 March, even if the money is paid in June.
Two consequences follow. First, year-end journal entries to partner accounts cannot be posted casually, because each one is a deduction event. Second, there is a genuine timing mismatch: remuneration allowable under Section 40(b), now Section 35(e) of the Income-tax Act 2025, is finally known only when book profit is computed, which is often after the year has closed, while the deduction obligation attaches to the credit entry itself.
Where TDS has been deducted on remuneration that is later disallowed, the practical route is to revise the fourth quarter TDS return so the partner is not left claiming credit for tax on income they never offered. Our partner remuneration calculator works out the ceiling and the TDS side by side.
The mechanics, step by step
Step 1: Obtain a TAN if the firm does not have one. Apply in Form 49B. Most small firms have never needed a TAN and this is the first blocking step.
Step 2: Maintain partner-wise ledgers for covered and non-covered payments. Keep remuneration, commission and interest in ledgers separate from drawings and profit share. Misclassification is the second most common failure after non-deduction.
Step 3: Track the running aggregate per partner. Deduct from the first payment or credit that takes the aggregate past ₹20,000, on the whole amount.
Step 4: Deduct at 10 per cent. Where the partner has not furnished a PAN, deduct at 20 per cent under the Section 206AA equivalent.
Step 5: Deposit by the 7th of the following month. For a March credit the deposit date is 30 April.
Step 6: File the quarterly TDS return. For FY 2025-26 this is Form 26Q under the 1961 Act framework. From FY 2026-27 the return moves to the new form set under the Income-tax Act 2025, and the correct payment code must be used or the return will fail validation. How TDS returns are filed covers the mechanics.
Step 7: Issue the certificate to each partner. The partner claims the credit in their own return.
Step 8: Reconcile against the partner’s Form 26AS or AIS. Do this quarterly, not at the end of the year.
The numbers
| Item | Position |
|---|---|
| Rate | 10 per cent |
| Rate where PAN not furnished | 20 per cent |
| Threshold | ₹20,000 aggregate per partner per financial year |
| Trigger | Earlier of credit to partner account or payment |
| First applicable year | FY 2025-26, from 1 April 2025 |
| Provision, FY 2025-26 | Section 194T, Income-tax Act 1961 |
| Provision, FY 2026-27 onward | Section 393(3), Table Serial No. 7, Income-tax Act 2025 |
| Form 15G or 15H available? | No |
| Lower deduction certificate available? | No |
| Turnover or audit exemption | None |
| Deposit due date | 7th of the following month |
Common mistakes
- Assuming small firms are exempt. A firm with ₹25 lakh turnover discovers in its first assessment that it has been in default for two years. There is no size exemption. Turnover is irrelevant.
- Posting the 31 March credit entry without checking TDS. The deduction date has passed by the time anyone looks, and interest runs from that date. Treat every partner-account credit as a deduction event.
- Deducting on profit share. Tax is deducted on an exempt receipt and the partner has to claim it back. Keep profit share in its own ledger.
- Applying the threshold per payment. Three payments of ₹15,000 each are treated as below the limit when the aggregate is ₹45,000. Track the running annual aggregate per partner.
- Accepting Form 15G from a partner. No deduction is made and the firm is in default, because the provision does not permit 15G or 15H. Deduct regardless, and let the partner claim a refund.
Penalties and consequences
A firm that fails to deduct becomes an assessee-in-default under Section 201(1), and interest runs at 1 per cent per month from the date the tax was deductible to the date it is deducted.
Where tax is deducted but deposited late, interest runs at 1.5 per cent per month from the date of deduction to the date of payment under Section 201(1A).
Failure to deduct attracts disallowance of 30 per cent of the corresponding expenditure under Section 40(a)(ia), which increases the firm’s own taxable income in that year.
A penalty equal to the amount of tax not deducted may be levied under Section 271C. Late filing of the quarterly TDS return attracts a fee of ₹200 per day under Section 234E until the return is filed, subject to the amount of tax deductible, and a further penalty between ₹10,000 and ₹1,00,000 may be levied under Section 271H.
The equivalent provisions under the Income-tax Act 2025 apply to payments from 1 April 2026 onward.
How these provisions interact
Section 194T of the 1961 Act governs partner payments made up to 31 March 2026 while Section 393(3) of the Income-tax Act 2025 governs payments from 1 April 2026, and a firm filing returns for both periods must cite the correct provision and payment code for each.
The deduction obligation attaches to the credit entry while the deductibility limit is fixed on book profit computed after year end, so the two provisions operate on different dates and a mismatch between deducted and allowable remuneration is a structural feature rather than an error.
Section 10(2A) exempts a partner’s share of profit in their own hands, which is why profit share sits outside the covered payments even though it is credited to the same partner account as remuneration and interest.
Firms against companies
| Partnership firm or LLP | Private limited company | |
|---|---|---|
| Payment to owner-manager | Remuneration and interest to a partner | Salary to a director |
| TDS provision | Section 194T, now Section 393(3) | Section 192, now Section 392 |
| Rate | Flat 10 per cent | Average rate on estimated salary |
| Threshold | ₹20,000 aggregate per year | Basic exemption limit |
| Form 15G or 15H | Not available | Not applicable |
| Deductibility ceiling on the payment | Book profit ceiling under Section 35(e) | No statutory ceiling, subject to Section 197 for public companies |
If you are weighing the two structures, comparing an LLP with a private limited company sets out the wider trade-off, and registering a partnership firm covers the entry point. For an LLP already running, the LLP annual compliance calendar now has a TDS line in it that was not there before 2025. The GST side is separate again — see the GST registration position for firms.
Key takeaways
- Every firm and LLP must deduct tax at 10 per cent on salary, remuneration, commission, bonus and interest paid or credited to a partner, once the aggregate for that partner crosses ₹20,000 in the financial year, and then on the whole amount rather than the excess.
- The obligation sat at Section 194T of the Income-tax Act 1961 from 1 April 2025 and moved to Section 393(3), Table Serial No. 7 of the Income-tax Act 2025 from 1 April 2026, with the substance unchanged and only the citation and payment code differing.
- Deduction is triggered at the earlier of credit or payment, so a year-end credit to a partner’s capital account on 31 March is a deduction event even though no cash has moved.
- There is no turnover threshold, no tax audit condition, no small firm exemption, and no Form 15G, 15H or lower deduction certificate route, so a firm without a TAN must obtain one before it can comply at all.
Frequently asked questions
Q: What is Section 194T?
A: A provision requiring every firm and LLP to deduct 10 per cent tax on salary, remuneration, commission, bonus and interest paid or credited to a partner, where the aggregate for the year exceeds ₹20,000. It applied from 1 April 2025.
Q: What is the TDS rate on partner remuneration?
A: 10 per cent, or 20 per cent where the partner has not furnished a PAN.
Q: What is the ₹20,000 threshold for partner TDS?
A: It is the aggregate of all covered payments to a single partner across the financial year. Once the aggregate crosses ₹20,000, tax is deducted on the entire amount, not on the excess.
Q: Is TDS deducted on a partner’s share of profit?
A: No. Share of profit is exempt in the partner’s hands under Section 10(2A) and sits outside the covered payments, along with drawings and repayment of capital.
Q: Does a credit to the capital account trigger TDS?
A: Yes. Deduction is triggered at the earlier of credit or payment, and a credit to the partner’s capital or current account counts even though no cash has moved.
Q: Does this apply to small partnership firms?
A: Yes. There is no turnover threshold and no tax audit condition. A two-partner firm with modest turnover is covered in exactly the same way as a large one.
Q: Can a partner file Form 15G to avoid this deduction?
A: No. The provision does not permit Form 15G or 15H, and no lower deduction certificate is available. The firm deducts and the partner claims any refund in their own return.
Q: What is Section 393(3) of the Income-tax Act 2025?
A: It is where the same obligation now sits, at Table for Payments to Any Person, Serial No. 7, for payments made from 1 April 2026 onward. The rate, threshold and coverage are unchanged.
Q: What happens if the firm does not deduct?
A: The firm becomes an assessee-in-default under Section 201(1) with 1 per cent monthly interest, 30 per cent of the expenditure is disallowed under Section 40(a)(ia), and a penalty equal to the tax not deducted may be levied under Section 271C.
Q: Does the firm need a TAN?
A: Yes. A firm making covered payments to partners must hold a TAN, applied for in Form 49B. Most small firms have never needed one, and this is usually the first blocking step.
If the firm has never held a TAN
The pattern we see most often is a firm that has been crediting partner remuneration for years, has no TAN, and has just been told by its bank or its new accountant that it should have been deducting since April 2025. The exposure compounds monthly, so the sequence matters: TAN first, then the catch-up deduction and deposit, then the returns.