Section 194T of the Income-tax Act – TDS on Payments to Partners
Section 194T is a newly introduced provision under the Income-tax Act, 1961, which requires partnership firms and Limited Liability Partnerships (LLPs) to deduct Tax Deducted at Source (TDS) on certain payments made to their partners. This section is applicable from 1 April 2025 and will apply from Financial Year 2025-26 onwards. The objective of introducing this provision is to improve tax compliance and ensure proper reporting of income earned by partners from firms.
Under Section 194T, TDS is required to be deducted on payments made to partners in the nature of salary, remuneration, bonus, commission, or interest, including interest on capital or loans provided by partners. However, the share of profit distributed to partners, which is exempt under Section 10(2A), along with capital contributions, drawings, and repayment of capital, are not covered under this section.
TDS is required only when the aggregate amount paid or credited to a partner during a financial year exceeds ₹20,000. Once this threshold is crossed, tax is deductible on the entire amount at the rate of 10 percent. In cases where the partner does not furnish a valid PAN, TDS will be deducted at a higher rate as prescribed under the Income-tax Act.
The tax must be deducted at the earlier of the date of credit of the amount to the partner’s account, including the capital account, or the date of actual payment. Even book entries can therefore trigger TDS liability. The firm or LLP must obtain a TAN, deposit the deducted tax by the 7th of the following month, file quarterly TDS returns in Form 26Q (for resident partners) or Form 27Q (for non-resident partners), and issue Form 16A to the partner.
It is important to note that Form 15G or 15H cannot be submitted for non-deduction of tax under this section, and lower or nil deduction certificates under Section 197 are also not available. Section 194T applies to both resident and non-resident partners and marks an important change in the taxation of partnership firms by bringing partner payments under the TDS mechanism.
