Section 194T TDS on Partner Salary and Interest: Rules & Limit

TL;DR

Section 194T of the Income-tax Act requires partnership firms and LLPs to deduct 10% TDS on salary, remuneration, commission, bonus, and interest paid to partners when total payments exceed ₹20,000 in a financial year. Exemptions apply strictly to profit shares and capital withdrawals. Non-deduction triggers 30% expenditure disallowance under Section 40(a)(ia) alongside statutory interest.

Quick Answer

Under Section 194T of the Income-tax Act, 1961 (inserted by the Finance (No. 2) Act, 2024 with effect from 1st April 2025), any partnership firm or Limited Liability Partnership (LLP) making payments in the nature of salary, remuneration, commission, bonus, or interest to a partner must deduct Tax Deducted at Source (TDS) at the rate of 10%. Withholding applies the moment aggregate payments or ledger credits to that partner exceed ₹20,000 in the financial year. Deduction must occur at the time of credit to the partner’s account (including capital or current account) or actual payment, whichever is earlier. If the partner does not furnish a valid PAN, the withholding rate jumps to 20% under Section 206AA.

Statutory Background: Why Section 194T Was Inserted into the Income-tax Act

Historically, payments made by partnership firms to their partners—such as working partner remuneration, executive salary, management commission, and interest on partner capital—were outside the purview of TDS provisions under Chapter XVII-B of the Income-tax Act. While employee salaries faced Section 192 and professional fees faced Section 194J, partner compensation escaped upstream withholding entirely.

The Income Tax Department previously relied on partners declaring these receipts as business income under Section 28(v) in their individual returns (ITR-3) and paying advance tax under Section 208. In practice, tax authorities observed widespread compliance leakages:

• Partners delayed paying advance tax instalments, settling liabilities only at year-end return filing.
• Year-end book entries credited partner accounts without corresponding real-time reporting to the tax department.
• Discrepancies between remuneration claimed as an expense by the firm under Section 40(b) and income declared by the individual partner went unnoticed until manual scrutiny.

To establish early tax collection, enhance digital audit trails, and synchronize firm deductions with individual partner reporting, Parliament enacted Section 194T through the Finance (No. 2) Act, 2024.

The statutory provision reads:

“Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus, by whatever name called, to a partner of the firm, or with respect to interest on capital, or loan, or advance, to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including any capital account or current account) or at the time of payment thereof, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax thereon.”

The proviso specifies:

“Provided that no deduction shall be made under this section where the aggregate of the amounts of such sum credited or paid or likely to be credited or paid during the financial year to the partner does not exceed twenty thousand rupees.”

Payments Subject to TDS vs. Non-Taxable Drawings

A critical challenge for firm accountants and partners is distinguishing between payments that attract Section 194T and transactions that represent non-taxable internal capital movements.

Salary, Remuneration, and Bonus

Any periodic salary, managerial remuneration, performance bonus, or commission authorized by the partnership deed and paid or credited to a partner is subject to 10% TDS once the ₹20,000 aggregate threshold is breached.

Interest on Capital and Current Accounts

Interest credited or paid on capital accounts, current accounts, partners’ personal loans, or cash advances given to the firm attracts 10% TDS under Section 194T. Note that Section 194A (general interest TDS) contains an explicit carve-out for partner interest, meaning Section 194T now exclusively governs partner interest withholding.

Share of Profit (Strictly Exempt)

A partner’s share in the net taxable profits of the firm is exempt from income tax in the partner’s hands under Section 10(2A) of the Income-tax Act. Because it does not constitute taxable income, share of profit is strictly outside the scope of Section 194T and attracts 0% TDS.

Drawings Against Capital

When a partner withdraws accumulated personal capital or previously taxed profits from the firm’s bank account for personal maintenance, no TDS applies. Drawings represent a balance-sheet capital adjustment, not a revenue expense or interest payment.

Why Section 194T Directly Affects Gujarat Partnership Firms and LLPs

Gujarat’s commercial landscape relies heavily on partnership firms and Limited Liability Partnerships. Unlike jurisdictions dominated exclusively by private limited corporate structures, Gujarat’s multi-generational trade networks and manufacturing clusters favor partnerships for operational agility:

• Surat: Thousands of textile weaving units, yarn trading firms, and diamond cutting workshops operate as traditional partnership firms or family LLPs.
• Morbi and Himmatnagar: Ceramic tile factories, glaze pigment suppliers, and sanitaryware packing units structure their operational entities as multi-partner LLPs.
• Rajkot and Jamnagar: Precision engineering casting foundries, diesel engine spare manufacturers, and brass component machining shops run as industrial partnerships.
• Ahmedabad and Sanand: Chemical trading entities, pharmaceutical formulation distributors, and dye manufacturing hubs maintain long-standing partnership structures.
• Bhavnagar and Alang: Ship recycling aggregators, brass scrap traders, and agro-commodity commission agencies operate through registered partnership deeds.

In these trade hubs, partners routinely draw monthly executive stipends of ₹50,000 to ₹3,00,000 alongside quarterly capital interest credits. Historically, these transactions occurred without any TDS bookkeeping. From FY 2025-26 and FY 2026-27 onward, every one of these firms must hold an active TAN, deduct 10% TDS, remit funds to the central government monthly, and submit quarterly Form 26Q filings.

The Statutory Threshold and Tax Deduction Rates

Section 194T applies a uniform framework across all eligible payments. The following matrix outlines the statutory treatment for each payment type:

Nature of Payment	Statutory Benchmark / Basis	Threshold Limit	Normal TDS Rate	Rate Without PAN (Sec 206AA)
Working Partner Remuneration	Permissible under partnership deed	₹20,000 per partner per FY	10%	20%
Partner Monthly Salary	As per partnership deed terms	₹20,000 aggregate per FY	10%	20%
Management Commission / Bonus	Performance or turnover linked	₹20,000 aggregate per FY	10%	20%
Interest on Capital Account	Contractual interest up to deed terms	₹20,000 aggregate per FY	10%	20%
Interest on Partner Loan	Unsecured loan interest	₹20,000 aggregate per FY	10%	20%
Share of Firm Profits	Section 10(2A) statutory exemption	No threshold (Exempt)	Nil (0%)	Nil (0%)
Partner Capital Drawings	Withdrawal of capital balance	No threshold (Exempt)	Nil (0%)	Nil (0%)

Key Observations on the ₹20,000 Threshold

1. Per-Partner Benchmark: The ₹20,000 ceiling applies individually to each partner, not to the firm as a whole. A firm with four partners can pay up to ₹20,000 to each partner (₹80,000 total) without triggering withholding.
2. Aggregate Basis Across Heads: The threshold combines all covered payment types. If Partner Ramesh receives ₹15,000 as salary and ₹10,000 as interest on capital during the year, total payments equal ₹25,000. Because the combined sum exceeds ₹20,000, 10% TDS applies to the entire ₹25,000, not merely the ₹5,000 excess.
3. Credit or Payment Benchmark: TDS triggers when the sum is credited to the partner’s account in the firm’s ledgers or actually paid out in cash or bank transfer, whichever occurs earlier.

Section 194T vs Section 40(b): Two Distinct Statutory Rules

Many firm partners conflate Section 194T with Section 40(b). These two sections operate in separate statutory domains:

Parameter	Section 40(b) of Income-tax Act	Section 194T of Income-tax Act
Core Function	Caps allowable business deductions for the firm	Mandates upstream tax withholding by the firm
Statutory Target	Limits maximum salary and interest firm can deduct	Ensures tax deduction at source on payments
Interest Ceiling	Simple interest capped at maximum 12% per annum	Applies to actual interest credited or paid
Remuneration Limit	Capped based on book profits (slab-wise percentage)	Applies to actual remuneration paid or credited
Timing of Review	Computed during year-end tax computation & audit	Executed real-time during monthly/quarterly entries
Consequence of Breach	Excess over limit is added back to firm’s taxable profit	30% of expenditure disallowed under Sec 40(a)(ia) + interest

Practical Scenario: Excess Interest Paid to Partner

Consider a partnership deed authorizing 14% interest on partner capital. The firm credits ₹1,40,000 to Partner Bhavik:

• Under Section 40(b): The firm can deduct interest only up to 12% per annum (₹1,20,000). The excess 2% (₹20,000) is disallowed under Section 40(b) and taxed in the hands of the firm at the maximum marginal rate (30% plus surcharge and cess).
• Under Section 194T: The firm must deduct 10% TDS on the entire ₹1,40,000 credited (₹14,000 TDS), because Section 194T applies to any sum credited or paid in the nature of interest without restricting itself to Section 40(b) ceilings.

Worked Calculation: TDS on Partner Remuneration and Interest for a Gujarat Firm

To observe how Section 194T functions in practice, review this worked case study for a Morbi-based ceramic tile manufacturing partnership firm, Shree Umiya Ceramic Industries, for Financial Year 2025-26.

Firm Profile & Partnership Deed Terms

• Partner A (Working Partner): Active factory operations director. Entitled to monthly remuneration of ₹60,000. Capital balance: ₹15,00,000 earning 10% simple interest.
• Partner B (Financing Partner): Inactive in daily operations (non-working). Capital balance: ₹40,00,000 earning 10% simple interest. Entitled to no salary.
• Partner C (Junior Working Partner): Joined mid-year. Total remuneration credited: ₹18,000. Capital balance: Nil.

Annual Computation Table

Calculation Component	Partner A (Working)	Partner B (Financing)	Partner C (Junior)
Annual Remuneration / Salary	₹7,20,000	₹0	₹18,000
Annual Capital Interest (10%)	₹1,50,000	₹4,00,000	₹0
Total Aggregate Payments (FY)	₹8,70,000	₹4,00,000	₹18,000
Threshold Exceeded (> ₹20,000)?	Yes	Yes	No (Below ₹20,000)
Applicable TDS Rate	10%	10%	0% (Exempt)
Total TDS Deducted	₹87,000	₹40,000	₹0
Net Credit to Partner Account	₹7,83,000	₹3,60,000	₹18,000
Statutory Deposit Challan	ITNS 281	ITNS 281	N/A
Quarterly Reporting Form	Form 26Q	Form 26Q	Form 26Q

Step-by-Step Breakdown of the Calculation

1. Partner A Analysis:

   • Monthly remuneration = ₹60,000. At month one, the payment crosses the ₹20,000 annual threshold.
   • Monthly TDS = 10% of ₹60,000 = ₹6,000.
   • At year-end, annual interest of ₹1,50,000 is credited. TDS on interest = ₹15,000.
   • Total annual TDS deducted = ₹87,000. The firm deposits ₹6,000 each month and ₹15,000 in the month interest is credited.

2. Partner B Analysis:

   • Partner B is non-working, receiving no salary.
   • Annual capital interest of ₹4,00,000 is credited on 31st March.
   • Because the interest exceeds ₹20,000, 10% TDS (₹40,000) is deducted at the time of credit.
   • The firm deposits ₹40,000 by 7th April (or 30th April for March credits) using Challan ITNS 281.

3. Partner C Analysis:

   • Total annual remuneration is ₹18,000, which is below the statutory ceiling of ₹20,000.
   • Section 194T does not apply. No TDS is deducted, and Partner C receives the full ₹18,000 without tax withholding.

Step-by-Step Compliance Playbook for Firms and LLPs

To establish airtight compliance and avoid scrutiny from the Centralized Processing Cell (TDS), Gujarat firms should implement this 7-step operational workflow:

1. Obtain a Tax Deduction Account Number (TAN)

Under Section 203A of the Income-tax Act, every entity deducting tax at source must possess a valid 10-digit TAN. If your partnership firm or LLP previously operated without a TAN because it had no employees or contracted services, you must apply immediately via Form 49B on the Protean (formerly NSDL) or UTIITSL portal. Quoting a firm’s PAN instead of a TAN on TDS challans results in unmatched payments and Section 272BB penalties.

2. Verify Every Partner’s Permanent Account Number (PAN)

Collect physical or digital copies of each partner’s PAN card. Run PAN validation checks on the Income Tax Department e-filing portal to ensure:

• The partner’s PAN is active and operative.
• The partner’s Aadhaar is linked to their PAN. Under Rule 114AAA, an inoperative PAN due to non-linkage triggers higher TDS deduction at 20% under Section 206AA.

3. Establish Real-Time Ledger Deductions (Credit vs Payment)

Configure accounting software (Tally Prime, Busy, or Zoho Books) to account for TDS at the earliest point of trigger:

• If partners draw regular monthly drawings against salary, book the debit to Partner Remuneration Account and credit to TDS Payable under Section 194T simultaneously with the net bank transfer.
• If partner remuneration or capital interest is credited as an annual adjustment entry on 31st March, record the 10% TDS deduction in the year-end journal voucher itself.

4. Deposit TDS Monthly via Challan ITNS 281

Tax deducted under Section 194T must be remitted to the central government electronically through the e-filing portal using Challan ITNS 281:

• Standard Due Date: By the 7th day of the month following the month of deduction (for example, TDS deducted in August must be deposited by 7th September).
• March Due Date: For tax deducted or credited during the month of March, the statutory deposit deadline is 30th April.
• Select Major Head 0021 (Income Tax other than Companies) and Minor Head 200 (TDS Payable by Taxpayer).

5. File Quarterly Form 26Q Returns

Report all deductions and challan details quarterly in Form 26Q under Section 194T code:

• Quarter 1 (April to June): Due by 31st July.
• Quarter 2 (July to September): Due by 31st October.
• Quarter 3 (October to December): Due by 31st January.
• Quarter 4 (January to March): Due by 31st May.

Failure to submit Form 26Q on or before these dates triggers a mandatory late fee of ₹200 per day under Section 234E until the default continues.

6. Generate and Issue Form 16A TDS Certificates

Within 15 days from the due date of quarterly return filing, download digitally signed Form 16A certificates from TRACES (TDS Reconciliation Analysis and Correction Enabling System). Distribute Form 16A to each partner for their tax records:

• Q1 Certificate: Due by 15th August.
• Q2 Certificate: Due by 15th November.
• Q3 Certificate: Due by 15th February.
• Q4 Certificate: Due by 15th June.

7. Reconcile Annual Partner Returns (ITR-3 / ITR-5)

Ensure each partner’s Form 26AS and Annual Information Statement (AIS) reflect the TDS deducted by the firm:

• In the partner’s individual return (ITR-3), report the gross remuneration and interest under Schedule BP (Profits and Gains from Business or Profession).
• Claim corresponding credit for the TDS reflected under Schedule TDS-2.
• Verify that the gross income reported by the partner matches the expenditure claimed by the firm in Form ITR-5.

Common Mistakes

Non-compliance with Section 194T carries severe financial consequences under the Income-tax Act. Watch out for these 7 frequent compliance errors:

1. Ignoring the 30% Expenditure Disallowance Under Section 40(a)(ia)
   If a firm fails to deduct Section 194T TDS, or deducts tax but fails to deposit it on or before the ITR filing due date under Section 139(1), 30% of the entire partner remuneration and interest expense is disallowed. For a firm paying ₹10,00,000 in partner salary, a ₹3,00,000 disallowance adds approximately ₹93,600 in avoidable direct tax at the 31.2% firm tax rate.

2. Deducting TDS on Exempt Share of Profit
   Applying 10% TDS to a partner’s share in firm profits is legally incorrect. Share of profit is fully exempt under Section 10(2A). Deducting tax on profit distributions locks up partner cash flow and creates unnecessary refund claims.

3. Treating Section 194T as a Year-End Accounting Task
   Firms that disburse monthly salaries throughout the year cannot postpone TDS deduction to 31st March. When payments occur monthly, tax must be deducted and deposited monthly. Delaying deduction triggers penal interest of 1% per month under Section 201(1A), while delaying deposit after deduction incurs 1.5% interest per month.

4. Failing to Apply the 20% Non-PAN Rate Under Section 206AA
   If a partner has not provided their PAN or if their PAN is inoperative due to Aadhaar de-linking, the firm must deduct TDS at 20% instead of 10%. Deducting at 10% in the absence of an operative PAN makes the firm an assessee-in-default for the short-deduction shortfall.

5. Believing Firms Below Tax Audit Thresholds Are Exempt
   Unlike Section 194C, 194H, 194I, or 194J—where individuals and proprietorships are exempt if turnover falls below Section 44AB tax audit limits—Section 194T applies universally to all partnership firms and LLPs regardless of turnover or audit status.

6. Applying Section 194A or Section 192 Instead of Section 194T
   Partners are not employees of the firm, so Section 192 (salary TDS) does not apply. Similarly, Section 194A(3)(iv) explicitly exempts partner interest from Section 194A. Both remuneration and interest must be routed strictly under Section 194T.

7. Forgetting to Deduct TDS on Partner Loan Interest
   Firms often distinguish between capital account interest and interest paid on separate unsecured loans provided by partners. Section 194T explicitly covers interest on capital, loans, or advances. Both categories must be aggregated toward the ₹20,000 threshold.

FAQ

Does Section 194T apply to Limited Liability Partnerships (LLPs)?

Yes. Under Section 2(23) of the Income-tax Act, 1961, the term “firm” includes both traditional partnership firms registered under the Indian Partnership Act, 1932, and Limited Liability Partnerships incorporated under the LLP Act, 2008. Consequently, all designated partners and working partners in an LLP receiving remuneration or interest fall strictly within Section 194T.

What is the maximum threshold under Section 194T before TDS applies?

The statutory threshold under Section 194T is ₹20,000 per partner during the financial year. No tax is deducted if the aggregate sum of salary, remuneration, commission, bonus, and interest credited or paid to an individual partner remains at or below ₹20,000 in that financial year. The moment cumulative credits or disbursements exceed ₹20,000, 10% TDS applies to the entire amount.

Is TDS deductible on the partner’s share of net profit?

No. A partner’s share in the total income of a partnership firm is exempt from tax under Section 10(2A) of the Income-tax Act because the firm pays tax on its net business profits at the entity level. Because profit distribution does not represent taxable income in the hands of the partner, no TDS is deductible under Section 194T.

What happens if a partnership firm fails to deduct TDS under Section 194T?

Failure to deduct TDS under Section 194T results in three statutory penalties. First, 30% of the unpaid or non-deducted expenditure is disallowed as a business expense under Section 40(a)(ia), inflating the firm’s taxable profits. Second, the firm is liable to pay interest under Section 201(1A) at 1% per month for delay in deduction and 1.5% per month for delay in payment. Third, the Assessing Officer may levy a penalty under Section 271C equal to the total tax not deducted.

Can a partner submit Form 15G or Form 15H to avoid TDS under Section 194T?

No. Under Section 197A, declarations in Form 15G and Form 15H are permitted only for specified sections such as Section 192A, 193, 194, 194A, 194D, 194DA, 194-I, and 194K. Section 194T is not included in the eligibility list for Form 15G or 15H. However, a partner whose estimated total taxable income is below the taxable threshold may apply to their jurisdictional Assessing Officer for a lower or nil deduction certificate under Section 197.

What is the due date for depositing Section 194T TDS with the government?

TDS deducted under Section 194T must be deposited by the 7th of the following month for payments made between April and February. For tax deducted or ledger amounts credited in March, the deposit deadline is 30th April. Payments are submitted electronically via Challan ITNS 281 on the official income tax portal.

Does Section 194T apply to sleeping or non-working partners?

Yes. While sleeping or non-working partners typically do not receive management salary or working partner remuneration, they frequently earn interest on their capital investments or loans provided to the firm. Any interest credited or paid to a non-working partner exceeding ₹20,000 in a financial year attracts 10% TDS under Section 194T.

Can partners claim credit for Section 194T TDS in their personal income tax returns?

Yes. Tax deducted by the firm under Section 194T is credited directly to the partner’s PAN and appears in their Form 26AS and Annual Information Statement (AIS). When filing their personal income tax return in Form ITR-3, partners can adjust the TDS against their total tax liability or claim an income tax refund if their net tax liability is lower than the tax deducted.

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Sources & Statutory References

• Income-tax Act, 1961 — Section 194T (Payments to Partners)
• Income-tax Act, 1961 — Section 40(b) (Limits on Partner Remuneration and Interest)
• Income-tax Act, 1961 — Section 40(a)(ia) (Statutory Disallowance for TDS Default)
• Income-tax Act, 1961 — Section 10(2A) (Exemption of Partner Share of Profit)
• Finance (No. 2) Act, 2024 (Enactment of Section 194T Provisions)
• Central Board of Direct Taxes (CBDT) Official Portal

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Professional Support for Gujarat Partnerships and LLPs

Structuring partnership remuneration, managing monthly TDS challans, and reconciling capital accounts against Section 40(b) limits requires structured compliance to protect your firm from 30% expense disallowances. If your partnership firm or LLP needs help setting up TAN registration, configuring partner ledger TDS in your accounting software, or preparing quarterly TDS return filing services, our team at FinTax24 can manage your withholding cycles from start to finish. You can also explore our LLP registration and compliance services, review year-end business tax filing solutions, manage individual partner income tax return filing services, or calculate deductions instantly with our online TDS calculator.

Disclaimer: This article is for general informational purposes and reflects the rules understood at the time of publication. Tax and compliance requirements can vary based on individual circumstances and subsequent government notifications. Consider professional advice before acting on a significant tax or legal matter.