New Section 194T has been inserted in the Income Tax Act, 1961, which states that certain payments made by a Firm to its partners shall be liable for TDS deduction @ 10% w.e.f 1st April, 2025. Provisions reproduced below:
“Payments to partners of firms. 194T.
(1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees”
Following are the nature of transactions on which TDS will be applicable :
- Salary, Remuneration to partners
- Commission, incentive, Bonus to partners
- Interest on Loans / advances to partners
The TDS needs to be deducted when the aggregate of above transactions exceeds Rs. 20,000/- in a Financial year.
Rate of TDS is 10% and TDS needs to be deducted on payment of such amount or Accounting of above mentioned transactions whichever is earlier.
It is pertinent to note some important points as under :
- A Firm shall include a Partnership Firm formed under Partnership Act, 1932 and Limited Liability Partnership (LLP) defined under LLP Act, 2008.
- TDS u/s 194T is not applicable in the following cases :
- Share of the profit payable/ paid to the partners
- Withdrawl of Capital / Drawings
- Repayment of Loans / Advances
- Reimbursement of Expenses on Actual basis
TDS is not applicable since the above are not treated as Income chargeable to Tax under Income Tax Act.
- The TDS is applicable w.e.f 1st April, 2025 and hence any amount paid to partners which was payable as on 31.3.2025 will not be subjected to TDS.
- TDS on remuneration is to deducted irrespective of whether such remuneration is allowable as deduction under Sec 40b of the Income Tax Act, 1961 while computing the Total Income of the Firm.
- Similar provisions for TDS on payments to partners continue in the New Income Tax Bill, 2025 to be applicable from 1st April 2026.
Further, Sec 40(b) of the Income Tax Act, 1961 provides for allowability of Remuneration to Working Partners while computing Income assessable to Tax of Firm and increase in the said limits as under:
| FY 23-24 (AY 24-25) | FY 23-24 (AY 24-25) | FY 24-25 (AY 25-26) | FY 24-25 (AY 25-26) | |
| Book Profit (as per Income Tax) | Maximum Allowable Remuneration to Working Partners | Book Profit (as per Income Tax) | Maximum Allowable Remuneration to Working Partners | |
| On the first ₹3,00,000 or in case of a loss | Rs. 1,50,000/- or @ 90 % of the book-profit, whichever is more; | On the first ₹6,00,000 or in case of a loss | Rs. 3,00,000/- or @ 90 % of the book-profit, whichever is more; | |
| On the balance of book profit | at the rate of 60 per cent | On the balance of book profit | at the rate of 60 per cent |
The limits till FY 23-24 were put in place on the statute w.e.f AY 2010-11 and hence the limits were enhanced considering the increased levels of business and profits.
In view of above, partnership firms and LLPs need to deduct TDS on certain payments to partners as mentioned above w.e.f 1st April 2025 and consider the increased limits for allowability of partners remuneration in computation of Income for FY 24-25 (AY 25-26).
