Last reviewed: 7 August 2026. Until last year, a firm could credit remuneration and interest to its partners without thinking about TDS even once — those payments sat outside the deduction net altogether. Section 194T ended that from 1 April 2025, and the change is now biting in two places at once: FY 2025-26 books (the first full year of deduction) are entering ITR and tax-audit season, while payments made from 1 April 2026 fall under the Income-tax Act, 2025, which carries the same rule into its consolidated TDS table. Here is the full position — rate, the ₹20,000 trap, the Section 40(b) interplay, and exactly what changes for FY 2026-27.
What Section 194T covers — and what stays outside
The section targets the working relationship between a firm and its partners, not the ownership relationship. That one distinction settles most classification doubts:
| Payment to partner | TDS under 194T? | Why |
|---|---|---|
| Salary / remuneration of a working partner | Yes | Named expressly in the section |
| Commission or bonus | Yes | Named expressly in the section |
| Interest on capital | Yes | “Interest” covers capital and loan accounts |
| Interest on a loan given by the partner | Yes | Same — and Section 194A never applied to firm-to-partner interest |
| Share of profit | No | Exempt in the partner’s hands under Section 10(2A) |
| Drawings / return of capital | No | Not income at all |
Two points practitioners keep having to repeat. First, there is no small-firm carve-out: a two-partner firm reporting presumptive income under Section 44AD must deduct just like an audited LLP, and it needs a TAN to do so. Second, interest paid by a firm to its partners was historically kept out of Section 194A by a specific exclusion — many firms read that old position as “no TDS on partner interest, ever”. Since 1 April 2025 that reading is wrong.
The ₹20,000 threshold works differently than people assume
₹20,000 is an all-or-nothing trigger, tested on the aggregate of salary, remuneration, commission, bonus and interest credited or paid to that partner during the year. Once the aggregate crosses the line, tax applies to the entire amount — not the excess.
- Interest of ₹18,000 for the year and nothing else → aggregate ₹18,000 → no TDS.
- Same partner also credited commission of ₹5,000 in March → aggregate ₹23,000 → TDS of ₹2,300 (10% of the full ₹23,000, not of ₹3,000).
Because a single year-end credit can retroactively make the whole year’s payments deductible, the clean discipline is to project each partner’s expected annual total at the start of the year and, where it will clearly exceed ₹20,000, deduct from the first credit onwards.
Rate, timing, deposit and paperwork — both regimes side by side
FY 2025-26 (now being audited and filed) ran under the 1961 Act; FY 2026-27 runs under the Income-tax Act, 2025. The mechanics carried forward almost untouched:
| Item | FY 2025-26 (AY 2026-27) | FY 2026-27 (current year) |
|---|---|---|
| Governing provision | Section 194T, Income-tax Act, 1961 | Sl. No. 7 of the table in Section 393(3), Income-tax Act, 2025 |
| Rate | 10% — 20% where PAN is not furnished | |
| Threshold | ₹20,000 aggregate per partner per year; whole amount taxable once crossed | |
| Point of deduction | Credit to any account (including capital account) or payment, whichever is earlier | |
| Deposit due date | 7th of the following month; 30 April for amounts credited in March | |
| Quarterly statement | Form 26Q | Form 140 (Q2 of FY 2026-27 is due 31 October 2026) |
| TDS certificate to partner | Form 16A | Form 131, within 15 days of the statement due date |
| Lower / nil deduction route | Not available — no Section 197 certificate, no Form 15G/15H | |
The statutory entry under the 2025 Act reads materially the same as Section 194T — same rate, same threshold, same triggers — so no fresh board resolutions or deed changes are needed for the transition. What does change is the paperwork vocabulary: our old-to-new TDS section mapping and the Q1 FY 2026-27 TDS return guide (Forms 138/140) cover the renumbering in detail.
How 194T sits with the Section 40(b) ceilings
TDS and deductibility are separate tests, and conflating them causes most of the year-end confusion. Section 40(b) caps how much remuneration the firm may deduct; Section 194T taxes what the firm actually credits or pays. The ceilings, enhanced from AY 2025-26, are:
| Book profit | Maximum allowable remuneration (all working partners) |
|---|---|
| On the first ₹6,00,000 (or in case of loss) | ₹3,00,000 or 90% of book profit, whichever is higher |
| On the balance book profit | 60% |
Interest to partners is deductible up to 12% simple interest per annum, and both remuneration and interest must be authorised by the partnership deed. The same ceilings continue under the 2025 Act for FY 2026-27. The practical wrinkle: if the firm credits more than the allowable ceiling, TDS still applies to the full credited amount, while the disallowed portion is not taxable in the partner’s hands (proviso to Section 28(v)). The partner’s AIS then shows TDS against income that is partly not theirs to offer — reconcile this before filing, the same way you would match Form 26AS and AIS for any other credit.
Worked example: two-partner LLP in Thane
Meridian Consulting LLP has two equal working partners. Capital: ₹10,00,000 each. The deed authorises 12% interest on capital and salary of ₹30,000 per month per partner. Book profit for FY 2026-27 (after interest, before remuneration) is ₹10,00,000.
| Step | Computation | Amount |
|---|---|---|
| Interest on capital (each) | ₹10,00,000 × 12% | ₹1,20,000 |
| Salary (each) | ₹30,000 × 12 | ₹3,60,000 |
| 40(b) ceiling on remuneration | 90% × ₹6,00,000 + 60% × ₹4,00,000 | ₹7,80,000 |
| Remuneration actually claimed | ₹3,60,000 × 2 — within ceiling | ₹7,20,000 |
| TDS per partner for the year | 10% × (₹3,60,000 + ₹1,20,000) | ₹48,000 |
Cash-flow rhythm: ₹3,000 deducted on each monthly salary credit and deposited by the 7th of the next month; ₹12,000 deducted when interest is credited on 31 March 2027 and deposited by 30 April 2027; all of it reported in the quarterly Form 140 statements. Each partner offers ₹4,80,000 as business income under Section 28(v) in ITR-3 and claims the ₹48,000 credit.
Compliance checklist for firms and LLPs
- TAN first. Apply before the first credit of the year if the firm has never deducted TDS.
- Read the deed. Remuneration and interest must be authorised and quantified — this protects the 40(b) deduction and defines what you are deducting on.
- Project each partner’s annual total against ₹20,000 in April, not in March.
- Deduct on credit, not payment. Ledger credits to the capital account count, even if the partner withdraws nothing.
- Mind the March trap. Year-end interest and remuneration credited on 31 March need deposit by 30 April and reporting in Q4.
- File Form 140 quarterly and issue Form 131 to partners within 15 days of the statement due date.
- Audit cases: deduction details will be reported under clause 34 of Form 3CD — align the TDS ledger with the partners’ accounts before handing over the tax-audit data pack. Non-audit firms and partners face the 31 August 2026 return deadline; audit cases have 31 October 2026.
- Partner side: reconcile AIS/26AS TDS entries with taxable remuneration before filing ITR-3.
Common mistakes we keep seeing
- Deducting only on the excess above ₹20,000 — the threshold is all-or-nothing.
- Netting drawings against remuneration without deed backing, or labelling regular drawings as “salary” — classification follows the deed and the ledger, and TDS follows classification.
- Missing interest on partner loans. The section is not limited to interest on capital.
- Assuming presumptive or small firms are exempt. There is no such carve-out in the section.
- Waiting for actual payment when the credit entry already happened — interest “merely credited” to capital on 31 March is already deductible-event territory.
- Applying for a Section 197 certificate. The route simply does not cover this section; plan partner cash flows for the 10% instead.
Frequently asked questions
Does Section 194T apply to small firms and LLPs not liable to tax audit?
Yes. Section 194T applies to every partnership firm and LLP that pays salary, remuneration, commission, bonus or interest to a partner — there is no turnover or tax-audit threshold, and firms taxed on a presumptive basis under Section 44AD or 44ADA are not exempt. The firm needs a TAN to deduct and deposit the tax.
Is TDS deducted on a partner’s share of profit or on drawings?
No. Share of profit is exempt in the partner’s hands under Section 10(2A) and is outside Section 194T. Drawings and repayment of capital are not income at all, so no tax is deducted on them. TDS applies only to salary, remuneration, commission, bonus and interest.
Is TDS deducted only on the amount above ₹20,000?
No. ₹20,000 is a threshold, not an exemption slab. Once the aggregate of remuneration, interest, commission and bonus credited or paid to a partner crosses ₹20,000 in a year, tax at 10% applies to the entire amount, not merely the excess.
Can a partner obtain a lower or nil TDS certificate against Section 194T?
No. The Section 197 lower/nil-deduction certificate route does not cover Section 194T, and self-declarations in Form 15G or 15H are also not available. If the partner’s final tax liability is lower, the TDS is claimed as credit and any excess is refunded through the partner’s return.
What changes for payments made from 1 April 2026 under the Income-tax Act, 2025?
The substance is unchanged — 10% rate, ₹20,000 aggregate threshold, deduction on credit (including to the capital account) or payment, whichever is earlier. The provision now sits at Sl. No. 7 of the table in Section 393(3) of the Income-tax Act, 2025, the quarterly statement is Form 140 (replacing Form 26Q) and the TDS certificate is Form 131 (replacing Form 16A).
What happens if the firm did not deduct TDS on partner payments in FY 2025-26?
The firm is treated as an assessee-in-default: interest under Section 201(1A) at 1% per month for non-deduction and 1.5% per month for non-deposit, a late-filing fee of ₹200 per day under Section 234E for the statement, possible penalty under Section 271H, and exposure to a 30% disallowance of the expense under Section 40(a)(ia). It is usually cheaper to deduct, deposit with interest and file a correction statement now than to let it surface in processing or audit.
Somesh Chandak & Associates, Thane assists partnership firms and LLPs with TAN setup, monthly deduction workflows, quarterly statements and correction filings, and partner-side return filing. If FY 2025-26 deductions were missed, we help quantify the interest and fee exposure and regularise it before processing or audit picks it up.
TDS Return FilingIncome Tax FilingTalk to usThis article is general information for FY 2025-26 and FY 2026-27 (AY 2026-27), based on the law as on 7 August 2026, including the Income-tax Act, 2025 effective from 1 April 2026. It is not advice on any specific case — transitional positions can evolve with CBDT guidance, so please take professional advice on your facts before acting.