Section 194T: Tax Burden on Partnership Firms/LLP – Definition, Limit, and Compliance Guide

 

Introduction

So, you’ve got a partnership firm and you’re thinking, “It’s just my partner and me splitting the money-what’s the big deal?” Well, the tax department doesn’t quite share your enthusiasm. Enter Section 194T, the rule that says, “Hey firms, before you pay your partners, don’t forget the taxman’s cut.”

And here’s the twist: if you pay your partners more than ₹20,000 in a year, you’ve got to deduct TDS @ 10%-on the entire amount.

Sounds brutal? Yeah, it is. But don’t worry-I’ll break it all down so you know exactly what this section means, why it exists, and how to stay compliant without pulling your hair out.

 

What is Section 194T?

At its core, Section 194T is a provision of the Income Tax Act (effective from FY 2025–26) that deals with TDS (Tax Deducted at Source) on payments made by a partnership firm/limited liability partnership(LLP) to its partners.

In simple English: whenever your partnership firm/LLP pays you (a partner) things like salary, bonus, commission, or interest, the firm must deduct 10% TDS if the payments cross ₹20,000 in a year.

So nope—you can’t just withdraw all the money and hope the taxman looks the other way.

 

Applicability of Section 194T

Here’s the checklist to know if Section 194T applies to you:

• Who deducts TDS?
  The partnership firm / limited liability partnership
•  receives it?
  The partners-on their salary, bonus, commission, remuneration, or interest.
• Threshold?
  If total payments per partner in a financial year exceed ₹20,000, TDS applies.
• TDS rate?
  A flat 10% on the entire amount.
• When to deduct?
  At the earlier of:

1. Payment date, or
2. Credit date (when the firm records it in the books).

Payments Covered Under Section 194T

This section is pretty wide in scope. Here’s what counts towards the limit:

• Salary paid to partners
• Remuneration
• Commission
• Bonus
• Interest on capital/loans (if mentioned in the partnership deed)

🚫 Not covered: Profit share. That part is exempt under Section 10(2A), so no TDS on that.

 

The ₹20,000 Limit Explained

Here’s the part everyone asks about: “What’s this ₹20,000 thing?”

• If total payments to a partner in a year do not exceed ₹20,000, no TDS is needed.
• Once payments cross ₹20,000, TDS @ 10% applies on the entire amount, not just the excess.

So it’s not like income tax slabs where only the extra bit is taxed. Nope. Cross ₹20,000 even by ₹1, and TDS applies on everything.

 

Example Time (Because Numbers Make It Clear)

Let’s say a firm pays its partner, Ramesh:

• April: ₹12,000 (commission)
• June: ₹8,500 (interest)

Total = ₹20,500.

👉 Since the threshold of ₹20,000 is crossed, the firm must deduct TDS @ 10% on ₹20,500 = ₹2,050.

Yep, even that extra ₹500 drags the whole amount into TDS land.

 

Why Was Section 194T Introduced?

Short answer: to stop tax evasion.

Longer answer: The government noticed that many firms paid partners fat cheques as “remuneration” or “commission,” but partners didn’t always report them correctly.

So instead of chasing partners individually, the IT Department said: “Fine, let’s make the firm deduct tax at source. That way, we get our cut upfront.”

It’s like the taxman setting up automatic debit instructions on your firm’s bank account.

 

Compliance Requirements Under Section 194T

Okay, so what exactly must a firm do if Section 194T applies?

1. Deduct TDS at the time of payment/credit.
2. Deposit TDS to the government within the due date (usually the 7th of the following month).
3. File TDS returns quarterly in Form 26Q.
4. Issue TDS certificates (Form 16A) to partners so they can claim credit.

 

Non-Compliance = Penalties

What if you “forget” to deduct or deposit TDS? Brace yourself:

• Interest @ 1% or 1.5% per month, depending on the lapse.
• Penalty equal to the TDS amount not deducted/deposited.
• Expense disallowance under Section 40(a)(ia), meaning you can’t even claim those payments as deductions in your firm’s P&L.

So yeah-non-compliance costs way more than just doing it right.

 

Section 194T vs Section 40(b)

People often mix up these two sections. Here’s the difference:

• Section 40(b): Sets the limit of how much salary/interest/remuneration you can pay partners (for deduction purposes).
• Section 194T: Ensures you deduct TDS on whatever you pay (within 40(b)’s limits).

So 40(b) says “don’t overpay,” while 194T says “don’t forget my 10%.”

 

Common Mistakes Firms Make

Let’s list a few “oops” moments that often happen:

• Deducting TDS on profit share (not needed).
• Forgetting to club salary + commission + interest while checking the ₹20,000 limit.
• Thinking the ₹20,000 is per payment (nope—it’s annual total).
• Missing deadlines for TDS deposit and filing returns.

Avoid these, and you’ll sleep better at night.

 

FAQs on Section 194T

Q1. Is share of profit taxable under Section 194T?
No. Share of profit is exempt under Section 10(2A).

Q2. Does Section 194T apply to LLPs?
Section 194T applies to both partnership firms and LLPs incorporated in India, requiring them to deduct 10% TDS on specified payments to partners exceeding ₹20,000 in a financial year.

Q3. What is the TDS rate under Section 194T?
Flat 10%.

Q4. What’s the threshold limit?
₹20,000 per partner in a financial year.

Q5. Can partners claim TDS credit?
Yes, it appears in their Form 26AS and can be claimed while filing ITR.

 

Final Thoughts

Here’s the bottom line: Section 194T makes sure partnership firms/limited liability partnership deduct TDS @ 10% on payments to partners once the ₹20,000 yearly limit is crossed.

It may feel like an extra compliance burden, but honestly, it’s better than getting a dreaded tax notice. Just keep good records, deduct on time, deposit on time, and issue certificates.

And remember: the next time you think of giving your partner a bonus, think twice-because the taxman is sitting right at the table, waiting for his share.