TDS on Partner Remuneration and Interest under Income Tax Act, 2025: Section 393(3) vs Section 194T

Payments made by a partnership firm or LLP to its partners - salary, remuneration, commission, bonus and interest remained outside the TDS net for decades. That position ended on 1 April 2025 with Section 194T of the Income-tax Act, 1961, inserted by the Finance (No. 2) Act, 2024. With the Income-tax Act, 2025 taking effect from 1 April 2026, the same obligation now lives at a new statutory address: Section 393(3), Table for Payments to Any Person, Serial No. 7. The substance of the provision is unchanged, but the manner of compliance, how the provision is cited, which forms carry the deduction, and which Act governs a given payment has changed in ways that firms and their advisers must get right in Tax Year 2026-27.

This article sets out the statutory position under the 2025 Act, compares it clause by clause with Section 194T, and addresses the transition and practical questions that arise in the first year of the new regime.

The Statutory Provision under the Income-tax Act, 2025

Section 393 of the Income-tax Act, 2025 consolidates the entire non-salary TDS framework of the 1961 Act into a single section built around three tables — sub-section (1) for payments to residents, sub-section (2) for payments to non-residents, and sub-section (3) for payments to any person. Partner payments sit in the third table.

The entry, as it appears on the Income Tax Department's official publication of the Act, reads:

Sub-section (3) requires the deductor to deduct tax on the entire amount of the sum where the amount or aggregate of amounts exceeds the threshold limit — meaning that once aggregate partner payments for the tax year cross ₹20,000, tax applies to the whole amount, not merely the excess. This mirrors the position under Section 194T.

Two definitional points carry forward from the old regime. "Firm" for income-tax purposes includes a limited liability partnership, so the obligation binds both traditional partnership firms and LLPs. And the entry captures credit to the partner's account including the capital account, so a year-end book credit of remuneration or interest triggers deduction even where no money moves.

Recap: What Section 194T Required

Section 194T, effective for payments and credits from 1 April 2025 to 31 March 2026, required every firm to deduct tax at 10% on any sum in the nature of salary, remuneration, commission, bonus or interest to a partner, at the earlier of credit to the partner's account (including the capital account) or payment, where the aggregate for the financial year exceeded ₹20,000. There was no turnover-based exemption, no exclusion for firms not liable to tax audit, and no facility for the partner to furnish Form 15G/15H or obtain a lower-deduction certificate under Section 197, since Section 194T was not among the provisions listed in Section 197(1).

Payments outside the TDS net remained outside it: share of profit (exempt in the partner's hands), drawings and withdrawals of capital, and genuine reimbursement of expenses incurred for the firm.

What Has Not Changed

The Income-tax Act, 2025 is, in the CBDT's own framing, a structural recodification of the TDS chapter rather than a policy change. For partner payments specifically, the following remain identical:

The rate stays at 10% and the threshold stays at ₹20,000, computed partner-wise on the aggregate of all five categories of payment for the year. Deduction on crossing the threshold applies to the entire amount. Credit to any account of the partner — capital account included — remains a trigger, and Section 393(11) reinforces this by deeming a credit to any suspense account or account by any other name in the deductor's books as credit to the payee. Share of profit, capital withdrawals and expense reimbursements continue to fall outside the entry, since the entry covers only sums in the nature of salary, remuneration, commission, bonus or interest.

The exclusion of partner interest from the general interest-TDS provisions also survives intact. Under the 1961 Act, Section 194A(3)(iv) kept interest paid by a firm to its partner out of Section 194A. Under the 2025 Act, the Table for No Deduction at Source in Section 393(4) [Sl. No. 7] contains the same carve-out for interest credited or paid by a firm to a partner of the firm. The result: interest to a partner is dealt with exclusively under Section 393(3) Sl. No. 7, with its own ₹20,000 aggregate threshold, and never under the interest entries of Section 393(1).

Equally, the unavailability of the nil-deduction declaration continues. The declaration route under Section 393(6) — the successor to Forms 15G/15H, now furnished in the prescribed form under the new Rules — is confined to the provisions listed in the table to that sub-section: accumulated PF balance, insurance commission, rent, units, interest, life insurance payments and dividend. Partner payments under sub-section (3) are not in that list. A partner whose total income is below the taxable limit cannot therefore file a declaration to stop the deduction; the remedy remains a refund claim through the return of income.

What Has Changed: Section 194T vs Section 393(3) Sl. No. 7

A word of caution on the timing point, since the drafting has changed even though the outcome has not. Under Section 194T, the "credit or payment, whichever is earlier" rule sat in the operative text of the section itself. Under the 2025 Act, the only express "whichever is earlier" note in the Section 393(3) table is Note 3, and that note applies to Sl. No. 4 (commission, remuneration or prize to lottery-ticket agents) — not to partner payments. For partners, the same result flows from the structure of Sl. No. 7 itself: the entry captures the sum whether it is paid to the partner or merely credited to his account, including the capital account, so the deduction obligation arises on whichever of the two events happens first. A year-end credit of remuneration or interest to a partner's capital account therefore triggers deduction on the date of credit, exactly as it did under Section 194T; no firm should read the words "at the time of payment" in Section 393(3)(c) as deferring the obligation until cash actually moves.

On reporting, resident-deductee TDS statements move from Form 26Q to Form 140 under the Income-tax Rules, 2026, and the certificate issued to the partner moves from Form 16A to Form 131 (salary statements correspondingly move from Form 24Q to Form 138). The quarterly due dates are unchanged. One transition trap deserves emphasis: the statement for Q4 of FY 2025-26 (January–March 2026) must still be filed in the old Form 26Q quoting Section 194T, even though it is physically filed in May 2026, because the governing law follows the date of the transaction, not the date of filing. The first partner-payment deductions reported in Form 140 with the Section 393(3) table reference will be those of the quarter April–June 2026.

The practical takeaway is that nothing about the computation changes on 1 April 2026 — but everything about the citation does. Accounting software, TDS return utilities, standard operating procedures and even partnership deed clauses that reference "Section 194T" need to be updated to the new table reference for transactions of Tax Year 2026-27 onwards.

The Transition Rule: Which Act Governs a Given Payment

The CBDT has clarified the transition principle: the applicable Act is determined by the earlier of the date of credit or the date of payment.

• Where the earlier event falls on or before 31 March 2026, the Income-tax Act, 1961 applies and the deduction is made and reported under Section 194T, even if the tax is deposited after 1 April 2026.
• Where the earlier event falls on or after 1 April 2026, Section 393(3) of the 2025 Act applies.
• Where tax was already deducted under the 1961 Act on the date of credit, no second deduction arises on subsequent payment of the same sum under the 2025 Act.

A common fact pattern illustrates the point. A firm closing its books for FY 2025-26 credits partner remuneration to the partners' capital accounts on 31 March 2026 and pays the amounts in May 2026. The credit is the earlier event; Section 194T governs, the deduction is reported in Form 26Q for Q4 of FY 2025-26, and nothing further is deductible on the May payment. Conversely, remuneration for April 2026 credited on 30 April 2026 falls squarely under Section 393(3) Sl. No. 7 and is reported in Form 140 for the quarter ending June 2026, with the certificate issued to the partner in Form 131.

Interaction with the Deductibility Limits for Partner Remuneration

The TDS obligation and the deductibility ceiling operate independently, and the mismatch that first surfaced under Section 194T carries into the new Act. Tax is deducted at 10% on the sum credited or paid, but the amount allowable as a deduction to the firm is capped — under the 1961 Act by Section 40(b)(v), whose limits were enhanced by the Finance (No. 2) Act, 2024 to the higher of ₹3,00,000 or 90% of book profit on the first ₹6,00,000 of book profit, and 60% of the balance, with corresponding limits carried into the 2025 Act.

Where remuneration is credited at a figure that later proves to exceed the allowable ceiling once book profit is finalised, tax stands deducted on an amount larger than what is taxable in the partner's hands (the disallowed portion being exempt for the partner). The partner's Form 26AS/AIS then shows TDS against income the partner will not offer. The practical responses remain what they were under Section 194T: computing remuneration provisionally with reference to estimated book profit before the year-end credit, or revising the fourth-quarter TDS statement where the excess deduction is identified before filing. Firms whose deeds peg remuneration to "the maximum permissible under the Act" should compute the ceiling before passing the year-end credit entry rather than after.

Consequences of Non-Deduction: Disallowance of the Expense and Its Subsequent Reversal

Failure to deduct tax on partner payments hits the firm on two fronts — the computation of its own income, and its liability as a deductor.

Disallowance in the firm's computation

Where a sum payable to a resident on which tax was deductible is paid without deduction, or tax is deducted but not deposited by the due date for filing the return of income, 30% of that sum is disallowed while computing business income. For defaults relating to FY 2025-26, this operates through Section 40(a)(ia) of the Income-tax Act, 1961; for Tax Year 2026-27 onwards, the identical rule is housed in Section 35(b) of the Income-tax Act, 2025, with the deposit deadline pegged to the return due date under Section 263(1).

The arithmetic is straightforward but painful. A firm credits ₹5,00,000 as remuneration to a working partner, fully allowable within the deductibility ceiling, but fails to deduct the ₹50,000 TDS. In the firm's computation, ₹1,50,000 (30% of ₹5,00,000) is added back and taxed at the firm's rate of 30% plus surcharge and cess — a tax cost of roughly ₹47,000 flowing purely from a compliance lapse, over and above the interest and fee exposure discussed below. The partner, meanwhile, still offers the full allowable remuneration to tax in his own hands, so the disallowance produces genuine double taxation of the same 30% slice for the year of default.

One interplay point specific to partner payments deserves care. The 30% disallowance operates only on the amount otherwise claimed as a deduction. Remuneration exceeding the ceiling for working partners is already disallowed in full under the deductibility limits (Section 40(b) of the 1961 Act and its successor provision), and that excess cannot be disallowed a second time. The TDS-linked add-back therefore applies to the allowable component which is precisely the component the firm most needs to protect.

Reversal: Re-allowance in the year of deduction and deposit

The disallowance is a deferral, not a permanent loss. Where the tax is deducted in a subsequent year, or was deducted in the year but deposited after the return due date, the disallowed 30% is allowed as a deduction in the tax year in which the tax is actually paid to the Government. Section 35 of the 2025 Act carries this reversal mechanism forward in the same terms as the first proviso to Section 40(a)(ia). Practically, the firm reverses the add-back in the later year's computation, supported by the challan and the corrected TDS statement — but it has meanwhile suffered the cash-flow cost of tax on the disallowed amount, and the reversal lands in a year whose book profit (and hence remuneration ceiling) it may distort.

Assessee-in-default, interest and the escape route

Independently of the disallowance, the firm is treated as an assessee-in-default — under Section 201(1) of the 1961 Act for old-regime defaults and Section 398 of the 2025 Act thereafter — and is liable to interest at 1% per month or part thereof from the date the tax was deductible to the date of deduction, and 1.5% per month from deduction to deposit. Late filing of the quarterly statement attracts the fee of ₹200 per day, and penalty and prosecution provisions for non-deduction and non-deposit remain available to the Department under the respective Acts. Under Section 398(5) of the 2025 Act, an order deeming the firm in default can be passed up to six years from the end of the tax year in which tax was deductible, or two years from the end of the tax year in which a correction statement is delivered, whichever is later — so the exposure does not fade quickly.

The escape route is particularly workable in the partner context. Under Section 398(2) of the 2025 Act — corresponding to the first proviso to Section 201(1) of the old Act — the firm is not deemed in default if the partner has furnished his return of income, included the remuneration or interest in computing his income, and paid the tax due, supported by an accountant's certificate in the prescribed form (Form 26A under the old regime). Where this condition is met, the firm is also deemed under Section 35 to have deducted and paid the tax on the date the partner filed his return, which switches off the 30% disallowance itself. Since a partner will almost invariably offer the allowable remuneration and interest to tax in his own return, this route can neutralise both the default and the disallowance - though interest for the period up to the partner's return-filing date remains payable, and the certificate-based relief is a cure, not a substitute for deduction.

1. Confirm the firm holds a TAN; the obligation applies irrespective of turnover or tax audit status.
2. Track the ₹20,000 threshold partner-wise and on an aggregate basis across all five payment categories — a monthly remuneration of even ₹2,000 will cross the threshold during the year.
3. Deduct on the full amount once the threshold is crossed, including on amounts credited earlier in the year without deduction.
4. Treat every credit — capital account, current account, suspense account — as a trigger event, not just cash payment.
5. Update TDS software, challan mapping and return utilities to the Section 393(3) table reference and Form 140 before the first quarterly statement of the tax year; verify the applicable payment code against the current return preparation utility rather than relying on secondary charts.
6. Issue TDS certificates in Form 131 within the prescribed timelines and reconcile partner-wise credits with the deduction register before each quarterly Form 140 filing.
7. For March 2026 year-end credits, apply the 1961 Act and Section 194T, and report them in old Form 26Q for Q4 of FY 2025-26; do not carry those entries into Form 140.
8. Where a deduction has been missed, quantify the 30% disallowance exposure immediately, deposit the tax with interest at the earliest to fix the year of reversal, and evaluate the accountant's-certificate route under Section 398(2) with the partner's return-filing status before the assessment picks it up.

Conclusion

Section 393(3) Table Sl. No. 7 is Section 194T carried forward without dilution — same rate, same threshold, same triggers, same exclusions. What the Income-tax Act, 2025 changes is the compliance vocabulary: a table reference in place of a section number, the tax year in place of the financial year, renumbered forms in place of the familiar 26Q and 16A, and a transition rule that turns on the earlier of credit or payment. Firms that treated Section 194T seriously in FY 2025-26 need only re-point their systems; firms that did not have a second chance to build the discipline before the first quarterly statement of Tax Year 2026-27 falls due.

Disclaimer: This article is for general informational and educational purposes only and does not constitute professional advice. The statutory position stated herein is based on the Income-tax Act, 2025 and CBDT guidance available as on the date of writing and may undergo change. Readers are advised to refer to the relevant provisions of the Income-tax Act, 2025, the Income-tax Rules, 2026 and applicable CBDT circulars/notifications, and to consult a qualified professional before acting on any matter discussed herein. The author accepts no liability for any loss arising from reliance on this article.