Section 194T: TDS on partner payments

Section 194T requires a partnership firm — and this includes an LLP — to deduct tax at source on certain payments it makes to a partner. The covered payments are things like salary, remuneration, commission, bonus and interest paid to a partner in their capacity as a partner. The idea is to bring these partner payments, which were previously outside TDS, into the same deduct-and-report framework that already applies to many other payments a business makes. So the obligation sits on the firm, in respect of what it pays its own partners.

A key distinction is between payments to a partner and a partner's share of the firm's profit. A partner's share of profit is taxed in the firm's hands and is generally exempt in the partner's hands, and it sits on a different footing from remuneration or interest. Section 194T is aimed at the payment streams — remuneration, salary, commission, bonus and interest — rather than at the profit share itself. Getting this distinction right matters, because applying TDS to the wrong stream, or missing it on a covered one, both create problems.

Like other TDS provisions, Section 194T operates with a threshold and a rate, and tax is generally deducted at the point the amount is credited to the partner or paid, whichever is earlier. Because the exact threshold and rate are statutory figures, confirm the current numbers before you set up your deduction rather than assuming them. The practical takeaway is that the firm needs a system: identify which partner payments are covered, watch the threshold across the year, and deduct at the right trigger point so you are neither deducting too early nor missing the cut-off.

Once deducted, the tax has to be deposited with the government using the correct TDS challan and reported in the firm's TDS statement, with each partner's PAN, so the partner gets credit. This is the same machinery used for other TDS — challan, statement, certificate — applied now to partner payments. The partner then claims the deducted tax against their own liability. Firms that have never deducted on partner payments before will need to fold this into their existing TDS process, including obtaining a deduction account number if they do not already have one.

The main risk is simply being caught unaware that partner payments now attract TDS. Review your partnership deed and how the firm pays its partners, separate the covered payment streams from the profit share, and build the deduction, deposit and reporting steps into your monthly routine. Keep the partners informed so the deduction is not a surprise on their side and so it reconciles cleanly when they file. As with all TDS, timely deduction and deposit avoid interest and fees, so the cost of getting organised early is low compared with the cost of defaults.