New TDS Rule for Partnership Firms

Balasahana Suresh
10% Tax on Partner Payments from FY 2025-26

A major change in India’s tax system has been introduced through Section 194T of the Income Tax Act. Effective from April 1, 2025 (FY 2025-26), partnership firms and LLPs are now required to deduct Tax Deducted at Source (TDS) on payments made to partners.

1. What is Section 194T?

Section 194T is a newly introduced provision that mandates:

  • TDS on payments made by firms to partners
  • Applies to partnership firms and LLPs
Earlier, such payments were not subject to TDS, making this a significant compliance change.

2. TDS Rate and Threshold Limit

✔ TDS Rate

  • Fixed at 10%
✔ Threshold Limit

  • TDS applies only if total payment exceeds ₹20,000 per year
  • If payments are below ₹20,000 → No TDS
👉 Important: Once the limit is crossed, TDS applies on the entire amount, not just the excess.

3. Payments Covered Under This Rule

TDS will be deducted on the following payments made to partners:

  • Salary
  • Remuneration
  • Commission
  • Bonus
  • Interest (on capital or loan)
These are treated as business income in the partner’s hands.

4. Payments NOT Covered

The following are excluded from TDS:

  • Share of profit (tax-free for partners)
  • Capital withdrawal/drawings
  • Repayment of capital
So, not every payment to a partner attracts TDS.

5. When Should TDS Be Deducted?

TDS must be deducted at the earlier of:

  • When the amount is credited to the partner’s account (including capital account), OR
  • When the payment is actually made
This ensures tax is captured even before actual payment.

6. Applicability

  • Applies to all partnership firms and LLPs
  • No minimum turnover condition
  • Applicable to both resident and non-resident partners
7. Compliance Requirements

Firms must:

  • Deduct TDS at 10%
  • Deposit TDS with the government (monthly deadlines)
  • File TDS returns (Form 26Q / 27Q)
  • Issue TDS certificates to partners
Failure to comply may lead to:

  • Penalties
  • Interest on delayed payment
  • Disallowance of expenses
8. Key Differences from Earlier Rules

Aspect

Before april 2025

After april 2025

TDS on partner payments

Not applicable

Mandatory

Compliance burden

Low

Increased

Transparency

Limited

High

9. Impact on Partnership Firms

Increased Compliance

Firms now need:

  • Proper accounting systems
  • Timely TDS deductions
Cash Flow Impact

  • Partners receive net amount after TDS
  • Need to claim TDS credit while filing returns
Better Tax Transparency

  • Reduces tax evasion
  • Improves reporting of partner income
10. Example

If a partner receives:

  • ₹1,00,000 as remuneration
Then:

  • TDS @10% = ₹10,000
  • Net payment = ₹90,000
The ₹10,000 can be claimed as tax credit by the partner.

Conclusion

The introduction of 10% TDS on partner payments under Section 194T is a major reform effective from FY 2025-26. It brings partnership firms in line with other entities in terms of tax compliance and transparency.

What You Should Do:

  • Firms: Update accounting and TDS systems
  • Partners: Track TDS credits in Form 26AS
  • Both: Ensure timely compliance to avoid penalties
 

Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.

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