194T TDS – Partner Payments, Rate & Deduction Rules

Key Takeaways

1. Section 194T requires partnership firms to deduct 10% TDS on partner income once total payments cross ₹20,000 in a financial year.
    
2. TDS must be deducted at the earlier of credit or payment, even if the amount is only credited to the capital account.
    
3. Capital withdrawals, genuine expense reimbursements, and profit sharing are excluded, but clear records are essential to avoid compliance issues.

Bonus point: Before Section 194T, partner salary, bonus, commission, and interest were taxable but escaped TDS. From April 1, 2025, firms must deduct TDS, improving reporting, compliance, and preventing revenue leakage.

 From April 1, 2025, Section 194T reshapes how partnership firms deal with tax on partner payments. Even if income is only recorded in the books and not yet paid, this new TDS rule steps in and requires action.

Section 194T works like a checkpoint for partner income. Whenever a firm pays or records income for a partner, tax must be deducted immediately. Even a simple entry in the books is treated the same as an actual payment.

Let’s say a firm credits ₹50,000 as partner remuneration to the capital account in June 2025 but pays it in August. Under Section 194T, TDS must be deducted in June itself, because the credit happened first.

What Is Section 194T under the Income Tax Act?

The Finance Bill, 2024, proposes a new TDS provision, Section 194T, for partnership firms. Under this section, firms must deduct TDS at 10% on payments made to partners such as salary, remuneration, commission, bonus, or interest, if the total exceeds ₹20,000 in a financial year. TDS applies even if amounts are credited to the partner’s capital account. This rule will apply from 1 April 2025 (AY 2025–26).

194T TDS Applicability

Section 194T will take effect from April 1, 2025. From this date, partnership firms must deduct TDS on payments made to partners. The most important part to understand is when the TDS has to be deducted.

TDS under Section 194T must be deducted at the earlier of these two events:

1. At the time of credit
When the firm records the amount in its books as partner salary, interest, commission, bonus, or remuneration.
This also includes credit to the partner’s capital account. Even if no money is paid, TDS still applies.

2. At the time of actual payment
When the amount is actually paid to the partner by bank transfer, cheque, or any other mode.

Let’s understand it with the help of an example

A firm credits ₹50,000 as partner remuneration to the partner’s capital account in June 2025. The payment is made in August 2025.
 

TDS must be deducted in June itself, when the amount is credited.

Under Section 194T, book entries matter. If the amount is credited or paid, whichever happens first, TDS must be deducted at that time.

Exclusions from TDS under Section 194T

Section 194T may sound strict, but here’s the good news: not every payment to a partner attracts TDS. The law clearly keeps some genuine and routine transactions outside its scope. Knowing these exclusions can save your firm from unnecessary deductions and confusion.

Here’s what does NOT attract TDS under Section 194T:

1. Repayment of capital balance: A partner’s pure capital withdrawal is not income and attracts no TDS. However, if remuneration or interest is routed through the capital account and withdrawn, it remains taxable, and TDS still applies despite the label.
    
2. Reimbursement of business expenses: If a partner pays business expenses on behalf of the firm and later gets reimbursed, this is not treated as income.
   Just make sure proper bills, invoices, and records are maintained to prove it is a genuine reimbursement.
    
3. Distribution of profits: When the firm distributes its actual profits among partners, it is a share of business income, not salary or bonus. Hence, Section 194T does not apply here.

Section 194T targets partner earnings, not capital returns, genuine expense refunds, or profit sharing. Clear records and clean accounting keep you safely compliant.

194T TDS Rate And Threshold Limit

Section 194T brings partner payments under the TDS spotlight, but once you break it down, the rule is quite easy to follow. If you run a partnership firm or LLP, this section tells you how much tax to deduct, when to deduct it, and on which payments, all in one place.
 

Section 194T ensures that partner income is tracked at the time it is earned or recorded. Keep PAN details updated, monitor yearly totals, and deduct TDS on time to stay fully compliant and stress-free.

Conclusion

Section 194T introduces a clear TDS framework for partner payments from April 1, 2025. Firms must deduct 10% TDS once payments exceed ₹20,000, even on book credits to capital accounts. While capital withdrawals, profit sharing, and genuine reimbursements remain excluded, accurate records, timely deductions, and valid PAN details are essential to stay compliant and avoid penalties.

FAQs

Q: Why is dividend income shown under different information codes like TDS 194 and SFT 015 in the Annual Information Statement (AIS)?

Dividend appears under TDS 194 when tax is deducted by the company, and under SFT 015 when the company reports the dividend paid without TDS for information purposes.

Q: What is TDS, and how does it work in India?

TDS is tax deducted at source by the payer while making certain payments, which is deposited with the government and adjusted against the recipient’s final tax liability.

Q: Why is Section 194T being criticised as unfair to small partnership firms?

Because it imposes 10% TDS and adds compliance even on very small partnership firms with low turnover, despite partners enjoying a higher basic tax exemption and corporate tax rates being reduced earlier.

Q: Do I need to deduct TDS on ₹95,000 rent plus security deposit, and how often should it be paid?

Yes, under Section 194IB, deduct 2% TDS only on rent (not security deposit) once a year (usually in March or on tenancy end) using Form 26QC, then issue Form 16C to the landlord; HRA can still be claimed using the landlord’s PAN.

Q: Does Section 194T require TDS even if partner payments are only credited in the books and not actually paid?

Yes, under Section 194T, TDS must be deducted at the time of credit (including capital account) or payment, whichever happens earlier.