Section 194T: Complete Guide to TDS on Partner Payments
TL;DR: Section 194T requires partnership firms to deduct 10% TDS on partner payments exceeding ₹20,000 annually. This creates compliance headaches due to timing mismatches between payments and profit determination. Strategic decisions about remuneration depend on partner tax brackets.
As someone who has spent over two decades navigating the ever-evolving landscape of Indian taxation, I thought I had seen it all. From the chaos of GST implementation to the annual ritual of decoding new TDS provisions, accountants like us have developed thick skin when it comes to compliance requirements. But when the Finance (No. 2) Act, 2024 introduced Section 194T through Clause 62 of the Finance Bill, I felt that familiar knot in my stomach—the one that appears when you realize months of extra work are about to land on your desk.
This provision has fundamentally changed how partnership firms operate, and not necessarily for the better. Let me walk you through everything you need to know about Section 194T, why it exists, how it impacts your firm, and most importantly, how to navigate it strategically.
The Purpose Behind Section 194T
Before we dive into the problems, let us understand why the government introduced this provision in the first place. The intent is not arbitrary—there is a clear objective behind bringing partner payments under the TDS net.
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Revenue Tracking and CompliancePartnership firms in India have historically operated with significant autonomy in how they handle partner payments. Remuneration, interest on capital, and commissions were paid without any withholding mechanism.
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Ensuring Advance Tax CollectionPartners often earn substantial income from their firms but may not always pay adequate advance tax. By mandating TDS at source, the government ensures that at least 10% of partner earnings reach the treasury throughout the year.
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Aligning with Broader TDS FrameworkThe Indian tax system has progressively expanded TDS coverage to include more transaction types. Professional fees, rent, contractual payments, and numerous other categories already attract TDS.
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Curbing Tax EvasionWhile most firms operated legitimately, the absence of TDS made it easier for some to under-report. Section 194T closes this potential loophole.
The objective behind Section 194T is understandable from a policy perspective, but the implementation creates significant practical challenges that lawmakers did not fully anticipate.
Section 194T: Applicability, Dates, and Rules
Let me lay out the technical framework clearly so you understand exactly what you are dealing with.
Basic Framework of Section 194T
Table 1| Parameter | Details |
|---|---|
| Introduced By | Finance (No. 2) Act, 2024 (Clause 62) |
| Effective Date | 1st April 2025 |
| Applicable To | Partnership Firms and Limited Liability Partnerships (LLPs) |
| Payments Covered | Salary, Remuneration, Commission, Bonus, Interest on Capital |
| Payments NOT Covered | Share of Profit, Capital Repayment, Drawings against Capital |
| Threshold Limit | ₹20,000 aggregate per financial year per partner |
| TDS Rate | 10% |
| TDS Calculation | On FULL amount once threshold is crossed (not just excess) |
| Time of Deduction | At the time of credit or payment, whichever is earlier |
Critical Point: TDS on Full Amount
This is extremely important and often misunderstood. Once the aggregate payments to a partner exceed ₹20,000 in a financial year, TDS at 10% must be deducted on the entire amount, not just the portion exceeding ₹20,000.
Example: If a firm pays a partner remuneration of ₹3,00,000 in a financial year, the entire ₹3,00,000 is subject to 10% TDS. This means ₹30,000 will be deducted as TDS—not just ₹28,000 (which would be 10% of ₹2,80,000 exceeding the threshold).
Why Section 194T Creates Headaches for Indian Partnership Firms
Now we come to the heart of the matter. While the government's intentions may be sound, the practical implementation of Section 194T clashes fundamentally with how partnership firms in India actually operate. Let me explain the core issues.
Problem 1: The Book Finalization Timing Problem
This is the single biggest issue that makes Section 194T almost impossible to implement correctly.
In India, most partnership firms finalize their book profit only at the time of audit. This typically happens in September, a full six months after the financial year ends. Until the audit is complete and profits are determined, the actual remuneration payable to partners remains unknown.
Estimation vs Actual Impact Analysis
Table 2| Situation | Estimated | Actual | TDS Deducted | TDS Required | Impact |
|---|---|---|---|---|---|
| Over-estimation | ₹1,00,00,000 | ₹70,00,000 | ₹10,00,000 | ₹7,00,000 | Partner waits 8-14 months for ₹3,00,000 refund |
| Under-estimation | ₹1,00,00,000 | ₹1,30,00,000 | ₹10,00,000 | ₹13,00,000 | Firm pays ₹3,00,000 shortfall plus 6 months interest |
| Correct estimation | ₹1,00,00,000 | ₹1,00,00,000 | ₹10,00,000 | ₹10,00,000 | No issue—but this almost never happens |
Problem 2: The Drawing Versus Remuneration Puzzle
Here is the second major issue that is driving accountants to frustration. When a partner withdraws money from the firm, how do you prove what the withdrawal represents?
Treated as Remuneration: ₹10,00,000 withdrawal → ₹1,00,000 TDS → ₹9,00,000 to Partner
Treated as Capital Drawing: ₹10,00,000 withdrawal → ₹0 TDS → ₹10,00,000 to Partner
That ₹1 lakh difference is real money. And without clear documentation at the time of withdrawal, neither the firm nor the partner has a clear basis to determine the correct treatment.
Impact on Working Capital
The working capital implications of Section 194T are severe and deserve detailed analysis. Let me break down exactly how this provision affects firm liquidity.
Monthly Cash Flow Impact for a Typical Firm
Table 3| Partner | Monthly Drawing | TDS Deducted | Net to Partner | Cash for TDS |
|---|---|---|---|---|
| Partner A | ₹2,00,000 | ₹20,000 | ₹1,80,000 | ₹20,000 |
| Partner B | ₹1,50,000 | ₹15,000 | ₹1,35,000 | ₹15,000 |
| Partner C | ₹1,50,000 | ₹15,000 | ₹1,35,000 | ₹15,000 |
| Total | ₹5,00,000 | ₹50,000 | ₹4,50,000 | ₹50,000 |
Strategic Approaches to Minimize Impact
The provision is here to stay, so let us focus on practical strategies to minimize its impact on your firm and partners.
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Restructure Payment PatternsMove away from ad-hoc drawings toward a structured monthly payment system with clear documentation.
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Conservative Estimation with BufferEstimate remuneration conservatively to minimize the risk of under-deduction and associated penalties.
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Segregate Capital and Remuneration AccountsMaintain separate tracking for remuneration entitlement and capital balance.
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Create TDS Contingency ReserveSet aside funds specifically for potential shortfall payments discovered during audit.
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Optimize Payment TimingStrategic timing of payments can reduce the overall TDS blockage period.
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Advance Tax Planning for PartnersPartners should adjust their advance tax calculations to account for TDS credits.
Critical Analysis: Should You Debit Remuneration at All?
This is perhaps the most important strategic question that Section 194T forces us to consider. Given the compliance burden and TDS blockage, should partnership firms continue to debit remuneration and interest to partners, or should they simply distribute profits?
The answer depends entirely on the tax slab of the partners. Let me demonstrate with detailed calculations that will help you make an informed decision.
Base Assumptions for All Scenarios
Table 4| Particulars | Amount |
|---|---|
| Amount available for partners | ₹50,00,000 |
| Number of partners | 2 (equal share) |
| Per partner share | ₹25,00,000 |
Scenario 1: Partners in 30% Tax Bracket
30% Slab: Pay Remuneration vs Don't Pay
Table 5| Particulars | Option A: Pay Remuneration | Option B: Don't Pay ⭐ |
|---|---|---|
| Firm Saves Tax | ₹15,60,000 | ₹0 |
| Partner Pays Tax | ₹15,60,000 | ₹0 (Tax Free u/s 10(2A)) |
| Money Stuck in TDS | ₹5,00,000 | ₹0 |
| Net Tax Benefit | ₹0 (No Benefit) | ₹0 (Same Result) |
| Partners Receive | ₹34,40,000 | ₹34,40,000 |
| Compliance Work | High | Low |
Scenario 2: Partners in 20% Tax Slab
20% Slab Comparison
Table 6| Particulars | Option A: Debit Remuneration ⭐ | Option B: No Remuneration |
|---|---|---|
| Firm's Tax Saving | ₹15,60,000 | ₹0 |
| Partner's Tax | ₹10,40,000 | ₹0 (Exempt u/s 10(2A)) |
| TDS Blocked | ₹5,00,000 | ₹0 |
| Net Tax Saving | ₹5,20,000 | ₹0 |
| Net to Partners | ₹39,60,000 | ₹34,40,000 |
Scenario 3: Partners in 10% Tax Slab
10% Slab Comparison
Table 7| Particulars | Option A: Debit Remuneration ⭐ | Option B: No Remuneration |
|---|---|---|
| Firm's Tax Saving | ₹15,60,000 | ₹0 |
| Partner's Tax | ₹5,20,000 | ₹0 (Exempt u/s 10(2A)) |
| TDS Blocked | ₹5,00,000 | ₹0 |
| Net Tax Saving | ₹10,40,000 | ₹0 |
| Net to Partners | ₹44,80,000 | ₹34,40,000 |
Master Decision Framework
Table 8| Partner Tax Slab | Tax Saved | TDS Blocked | Net Benefit | Recommendation |
|---|---|---|---|---|
| 30% (₹15L+) | Nil | ₹5,00,000 | Negative | ❌ Don't debit |
| 25% (₹12-15L) | ₹2,60,000 | ₹5,00,000 | ~₹2,00,000 | ⚖️ Consider |
| 20% (₹9-12L) | ₹5,20,000 | ₹5,00,000 | ~₹4,60,000 | ✅ Debit |
| 15% (₹6-9L) | ₹7,80,000 | ₹5,00,000 | ~₹7,20,000 | ✅ Debit |
| 10% (₹3-6L) | ₹10,40,000 | ₹5,00,000 | ~₹9,80,000 | ✅✅ Definitely |
| 5% (up to ₹3L) | ₹13,00,000 | ₹5,00,000 | ~₹12,40,000 | ✅✅ Definitely |
For partners in the 30% tax bracket, avoiding remuneration achieves the same tax result with zero TDS blockage and minimal compliance burden. For partners in lower brackets, the tax savings justify the compliance burden.
Frequently Asked Questions
Section 194T FAQs
Q1 Which Act introduced Section 194T and when did it become effective?
Section 194T was introduced by the Finance (No. 2) Act, 2024 through Clause 62 of the Finance Bill. It became effective from 1st April 2025. It applies to payments made on or after this date, regardless of which assessment year the remuneration relates to.
Q2 Does Section 194T apply to all payments made to partners?
No. Section 194T applies only to salary, remuneration, commission, bonus, and interest on capital. It does not apply to profit share distributions (which are exempt under Section 10(2A)), capital repayments, or drawings against capital balance.
Q3 What is the threshold limit for TDS under Section 194T?
The threshold is ₹20,000 aggregate per financial year per partner. If total payments covered under 194T to a partner exceed ₹20,000 in the year, TDS must be deducted on the entire amount, not just the excess over ₹20,000.
Q4 Does Section 194T apply to LLPs also?
Yes. Section 194T applies to both traditional partnership firms and Limited Liability Partnerships. The term "firm" as used in this section includes LLPs as per the definition under Section 2(23) of the Income Tax Act.
Have more questions about Section 194T? Ask in the comments section or consult with a qualified tax professional.
Conclusion: Key Takeaways
Section 194T represents a significant shift in how partnership firms must handle partner payments. While the government's intent to improve compliance and tracking is understandable, the practical implementation creates genuine challenges for firms across India.
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Understand the Legal FrameworkSection 194T was introduced by the Finance (No. 2) Act, 2024 and became effective from 1st April 2025. It mandates 10% TDS on salary, remuneration, commission, bonus, and interest on capital paid to partners.
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Know the RestrictionsUnlike many other TDS sections, partners cannot submit Form 15G/15H to avoid TDS, and cannot obtain lower or nil deduction certificates under Section 197.
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Address the Core Timing IssueThe fundamental problem with Section 194T is the mismatch between when TDS must be deducted and when actual remuneration is determined.
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Make Strategic Decisions Based on Tax SlabsThe decision to debit remuneration should not be automatic. For partners in 30% tax bracket, avoiding remuneration achieves the same tax result with zero TDS blockage.
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Implement Proper Documentation SystemsClear documentation of payment characterization, board resolutions for remuneration estimates, and separate tracking of capital versus remuneration accounts are essential.
Need help navigating Section 194T? Consult with a qualified tax professional to develop a strategy tailored to your firm's specific circumstances and partner tax profiles.