TDS on Partner Payments: What Section 194T Means for You

The Basics: What’s Staying the Same

Starting April 1, 2025, a flat 10% TDS applies to payments exceeding ₹20,000 annually to partners. This covers salaries, bonuses, commissions, and even interest paid to partners. The rule is straightforward: deduct tax when you credit the amount to their account (like their capital account) or when you physically pay them—whichever happens first.

But here’s where things get sticky…

What Most Articles Miss: Key Exceptions

Profit Shares Aren’t Taxed

Unlike salaries or interest, profit distributions to partners aren’t covered under Section 194T. If your firm’s partnership deed clearly separates profit shares from fixed payments, you’re off the hook for TDS here.

LLPs Aren’t Exempt

Many assume this only applies to traditional partnerships. Wrong. The law explicitly includes Limited Liability Partnerships (LLPs) under the same rules.

Threshold Tricks

The ₹20,000 limit isn’t a “tax the excess” rule. Once total payments cross ₹20,000 in a year, TDS applies to the entire amount, not just the portion above the limit.

Updates You Might Have Missed

Refund Numbers Are Higher Than You Think

Old articles cite ₹2 lakh crore in refunds, but recent data shows ₹4.76 lakh crore issued in FY 2024-25—a 26% jump from last year. Delays here could squeeze your cash flow.

Forms and Codes Have Changed

The CBDT updated Forms 26Q and 27Q in March 2025 to include Section 194T. When filing, use challan code 94T for these deductions.

Other TDS Thresholds Got a Boost

While Section 194T tightens rules, other areas relaxed:

Senior citizens now get a ₹1 lakh exemption on interest income (up from ₹50k).
General interest TDS thresholds rose to ₹50k (from ₹40k).

The Cost of Getting It Wrong

Think penalties are the only risk? Think again.

Monthly Interest: 1% for not deducting TDS, 1.5% for not depositing it.
Late Filing: ₹200/day fines, capped at the TDS amount.
Bigger Pain: 30% of expenses could be disallowed if TDS isn’t handled properly.

Practical Challenges No One Talks About

Timing Is Everything

Monthly salaries? Deduct TDS each month. Annual interest on capital? Wait until March. Mix this up, and you’ll face headaches during audits.

Update Your Partnership Deed

Clear terms on salaries, interest, and profit splits are now non-negotiable. Ambiguity could lead to accidental TDS on exempt amounts.

Cash Flow Crunch

Partners might grumble about 10% deductions temporarily locking up their funds—especially if refunds take months.

The Bigger Picture: Why This Matters

The government’s pushing hard to simplify TDS. Finance Minister Nirmala Sitharaman hinted in Budget 2025-26 about slashing the 71 existing TDS provisions into a simpler slab system. Section 194T is just the start.

Your Action Plan

Review Payments: Separate profit shares from salaries/interest.
Amend Partnership Deeds: Clarify payment structures.
Track Thresholds: Use accounting software to flag the ₹20k limit.
File Early: Avoid last-minute rushes with updated Forms 26Q/27Q.