TDS on Partners' Remuneration and Interest under Section 194T for FY 2025-26: The New 10% Deduction Every Firm and LLP Must Make

Partners’ remuneration was, for as long as the Income-tax Act has existed, paid gross. A firm computed its book profit, allowed remuneration within the Section 40(b) limits, credited it to the partners’ capital accounts, and the partners paid tax on it in their own returns under Section 28(v). No deduction at source, because no section required one.

Section 194T, inserted by the Finance (No. 2) Act 2024 and effective from 1 April 2025, closes that gap. FY 2025-26 is the first year it applies, and the first year in which most firms will discover that their year-end remuneration entries have a TDS consequence they were not budgeting for.

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What the section requires

	Rule
Who deducts	Any firm — a partnership firm or an LLP
On what	Salary, remuneration, commission, bonus, or interest paid or credited to a partner
Threshold	Aggregate of such payments to a partner exceeding ₹20,000 in the financial year
Rate	10%
No PAN	20% under Section 206AA
When	At credit to the partner’s account — including the capital account — or at payment, whichever is earlier

Once the ₹20,000 threshold is crossed for a partner, TDS applies to the entire amount for the year, including the payments that took it to the threshold. In practice every working partner drawing any meaningful remuneration is above it from the first month.

“Interest” covers both interest on the partner’s capital and interest on any loan from the partner to the firm. It does not matter whether the firm’s deed calls the payment salary, remuneration, or commission — all are within the section.

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What is not covered

• Share of profit. A partner’s share in the firm’s profits is exempt in the partner’s hands under Section 10(2A) and is not a payment “of” the kinds listed. No TDS.
• Drawings against profit. Withdrawals that are a distribution of the partner’s profit share, not remuneration, are outside the section — provided the firm’s accounts actually treat them that way.
• Repayment of capital or loan principal. Only the interest component is covered.
• Reimbursement of expenses incurred by the partner for the firm, on actuals.

The line between drawings and remuneration is where firms will be audited. A partner who withdraws ₹1 lakh a month, which the firm books as remuneration at year-end, has received remuneration monthly for 194T purposes, and TDS was due monthly.

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The year-end credit problem

Most firms fix partners’ remuneration only after the year closes, when book profit is known and the Section 40(b) ceiling can be computed. The remuneration is then credited to the partners’ capital accounts as at 31 March. Under 194T, that credit is the point of deduction — so TDS on the whole year’s remuneration falls due on 31 March and must be deposited by 30 April, in one lump.

Two consequences. First, the firm needs the cash to deposit 10% of the year’s partner remuneration within a month of year-end, at the same time as its own advance-tax and audit obligations. Second, if the partners have been drawing monthly against that remuneration, the firm has arguably been paying remuneration all year, and the deduction was due monthly, not at 31 March — with interest at 1% a month on each late deduction if the department takes that view.

The clean approach, which we recommend to every firm we advise: decide the remuneration policy in the deed, deduct 10% on each month’s drawing that is remuneration in character, deposit by the 7th, and true up at year-end against the 40(b)-computed figure. The alternative — nothing until March, then one large deduction — is defensible only where partners genuinely draw nothing during the year.

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Interplay with Section 40(b)

Section 40(b) limits the remuneration a firm can deduct in computing its own income: it must be authorised by the deed, paid to working partners, and within a ceiling of ₹3 lakh or 90% of the first ₹6 lakh of book profit, and 60% of the balance. Section 194T is indifferent to that ceiling — it applies to remuneration paid or credited, whether or not the firm can deduct it. A firm paying a partner ₹10 lakh of which only ₹7 lakh is allowable under 40(b) deducts TDS on ₹10 lakh.

Failure to deduct adds a second layer: 30% of the remuneration is disallowed under Section 40(a)(ia) in the firm’s hands, on top of whatever 40(b) already disallows. For a firm whose partners’ remuneration is its largest expense, that is the difference between a modest tax bill and a large one.

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When to deposit and what to file

Step	Timing
Deduct	At credit — to the partner’s current or capital account — or at payment, whichever is earlier
Deposit	By the 7th of the following month; March credits by 30 April
Return	Form 26Q quarterly — 31 July, 31 October, 31 January, 31 May
Certificate	Form 16A to each partner within 15 days of the return due date
TAN	Required. Most firms already hold one for salary or contractor TDS; a firm that has never deducted anything must apply before April’s deduction

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Two worked examples

Example 1 — Monthly drawings. A three-partner CA firm pays each working partner ₹1,50,000 a month as remuneration under the deed. Each month: TDS at 10% — ₹15,000 per partner — deposited by the 7th. Interest on capital at 12% on ₹25 lakh each, credited in March: ₹3 lakh per partner, TDS ₹30,000 each, deposited by 30 April. Each partner’s Form 26AS shows ₹2,10,000 of TDS for the year, claimed against tax on their remuneration and interest income.

Example 2 — Year-end remuneration. A trading partnership pays no monthly remuneration; the partners draw against profit and the deed provides for remuneration to be determined at year-end. Book profit for FY 2025-26 comes to ₹40 lakh; remuneration of ₹12 lakh each to two partners is credited on 31 March 2026. TDS at 10% — ₹1,20,000 per partner — is deducted on 31 March and deposited by 30 April 2026. The firm needs ₹2,40,000 available in April for the deposit. If the partners’ drawings during the year exceeded their profit share, the excess is remuneration paid in advance and the deduction on it was due earlier.

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What a miss costs

Default	Consequence
Failure to deduct	Interest at 1% per month from the date deductible
Deducted but not deposited	Interest at 1.5% per month to the date of deposit
Late Form 26Q	₹200 per day under Section 234E, capped at the TDS
Expense disallowance	30% of the remuneration or interest disallowed under Section 40(a)(ia) in the firm’s return — in addition to any 40(b) disallowance

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What firms should do now

• Amend the deed, if needed, to state the remuneration and interest policy clearly enough that the monthly character of payments is unambiguous.
• Obtain a TAN if the firm has never deducted tax.
• Deduct monthly on drawings that are remuneration in character; true up at year-end.
• Budget the April deposit for interest on capital and any year-end remuneration credit.
• Tell the partners. Their advance-tax instalments should fall, since 10% now reaches the department through the firm, and their returns must claim the credit shown in Form 26AS.
• Presumptive firms are not exempt. A partnership firm under Section 44AD deducts under 194T like any other; our guide to 44AD and 44ADA notes the point. LLPs, which cannot use presumptive taxation at all, are squarely covered.

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Frequently asked questions

Does Section 194T apply to LLPs?

Yes. An LLP is a firm for income-tax purposes. Remuneration, commission, bonus, and interest paid or credited to LLP partners are within 194T.

Is TDS under 194T deducted on a partner’s share of profit?

No. The share of profit is exempt in the partner’s hands under Section 10(2A) and is not one of the payments the section lists. Only salary, remuneration, commission, bonus, and interest are covered.

When is TDS due on remuneration credited at year-end?

At the credit — a 31 March credit to the capital account means deduction on 31 March and deposit by 30 April. If the partner drew against that remuneration during the year, the deduction on those drawings was due when they were made.

Does the ₹20,000 threshold apply per payment or per year?

Per year, in aggregate, per partner. Once total remuneration and interest to a partner exceed ₹20,000 in the financial year, TDS applies to the whole amount.

Is TDS under 194T linked to the Section 40(b) limit?

No. Section 40(b) limits what the firm can deduct; 194T applies to what is paid or credited, whether or not deductible. A firm paying remuneration above the 40(b) ceiling deducts TDS on the full amount paid.

Does a partnership firm under Section 44AD have to deduct under 194T?

Yes. Presumptive taxation affects how the firm’s income is computed, not its obligation to deduct tax at source on payments to partners.

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Related reading

• TDS Rate Chart FY 2025-26 (AY 2026-27)
• LLP vs Private Limited Company for a Startup in India
• Presumptive Taxation 44AD & 44ADA FY 2025-26
• Outsourced Accounting & Bookkeeping — TDS deposited before the 7th, every month
• Compliance Calendar FY 2025-26