Introduction
The Finance (No. 2) Act, 2024 has introduced a significant new withholding tax provision in the form of Section 194T, which mandates tax deduction at source (TDS) on certain payments made by partnership firms and LLPs to their partners. This provision marks a shift from the earlier regime where most partner-related payments were outside the scope of TDS.
It is important to clearly note that Section 194T is applicable only from Financial Year 2025-26 (Assessment Year 2026-27 onwards).
Legislative Background
Section 194T was inserted by the Finance (No. 2) Act, 2024 with the objective of improving reporting and tax compliance in respect of partner-related income, which traditionally remained subject only to self-assessment by partners.
Persons Covered
1.Partnership Firms
2.Limited Liability Partnerships (LLPs)
There is no exemption based on turnover, profit, or tax audit applicability.
Nature of Payments Covered
TDS under Section 194T is required on any payment or credit by a firm to its partner in the nature of:
- Remuneration / Salary
- Bonus
- Commission
- Interest on capital or loans
- Any other payment made to a partner (excluding capital repayment)
Both working partners and non-working partners are covered.
Threshold Limit
- ₹20,000 per partner per financial year
Once the threshold is exceeded, TDS is applicable on the entire amount, not merely the excess.
Rate of TDS
- 10% where PAN is furnished
- 20% where PAN is not furnished (as per Section 206AA)
Timing of Deduction
TDS is to be deducted at the earlier of:
- Credit of the amount to the partner’s account (including capital or current account), or
- Actual payment, whether in cash, cheque, or bank transfer
Even book entries crediting partner accounts will trigger TDS.
Conclusion
Section 194T is a forward-looking compliance measure applicable strictly from Financial Year 2025-26. Partnership firms and LLPs must proactively realign their accounting systems, partner payment structures, and TDS compliance processes well before the start of FY 2025-26 to avoid interest, penalties, and disallowances.
Early planning will be critical, especially for firms making regular monthly partner remuneration entries.
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