Income-tax Act, 1961 (The Act) - New and Existing Provisions

• The recently enacted Section 194T (added by the Finance (No. 2) Act, 2024) - becomes effective from 1 April 2025.
• Earlier, payments like interest on capital or remuneration to partners were not subjected to TDS because they were not regarded as salary (as per Explanation 2 to Section 15 of the Act) - and thus existing TDS provisions (e.g. under Section 192 for salary or Section 194A for interest) did not apply.
• The new Section 194T changes this - now “any sum in the nature of salary, remuneration, commission, bonus or interest” paid/credited by a firm to a partner (including LLP) will attract TDS, if certain conditions are met.
• The limits for deduction of remuneration/interest for computing firm’s taxable income (i.e. as business expense) are governed by Section 40(b) of the Income-tax Act. This affects how much remuneration / interest on capital is allowable as expense for the firm - but separate from TDS applicability.

Key Provisions under Section 194T (Applicable from 1-4-2025)

Interaction with Section 40(b) - Deductibility of Remuneration / Interest for Firm

• The firm’s claim for deduction of remuneration/interest paid to partners for computing taxable income is regulated by Section 40(b). 
• As per revised limits (post-Finance Bill 2024), allowed remuneration / interest deduction depends on book profit and whether the firm is “professional” (as defined under Section 44AA) or not.
• Payments to partners exceeding the allowed limit under Section 40(b) may be disallowed as expense - this remains separate and independent from TDS liability under Section 194T.

Important: Even if the firm claims deduction under Section 40(b), it still must deduct TDS under Section 194T (if the threshold and other conditions are met) - these are two distinct compliance aspects: one for the firm’s deduction, one for withholding and deposit obligations.

What Changed in FY 2024-25 / Effectively from AY 2025-26

• Before 2025: Remuneration, interest or other payments to partners were not subject to TDS - partners had to self-assess and pay tax.
• From 1 April 2025: New mandatory TDS deduction under Section 194T - makes firms responsible for withholding.
• This increases compliance burden on firms - maintenance of partner-wise records, timely TDS deduction, deposit, return filing, issuing certificate.
• Firms may need to revise partnership deeds / payment mechanisms to accommodate TDS deduction and compliance.

Practical Implications & What Partners / Firms Should Do

1. Monitor aggregate payments to each partner - TDS triggered only if total exceeds ₹20,000 in a year (remuneration + interest + bonus etc.).
2. Deduct TDS at earliest - on credit to partner’s account (including capital) or at payment, whichever is earlier.
3. Deposit TDS & file return - comply with quarterly TDS return filing, deposit challan, issue TDS certificate (Form 16A).
4. Maintain clear records - partner-wise ledger of payments, credits, deductions; bank/payment vouchers; capital account entries.
5. Review partnership deed - ensure it authorizes remuneration/interest payments, and has clarity on withdrawal, credit, and profit-sharing to avoid disputes and ensure deductibility under Section 40(b).
6. Advance tax planning for partners - partners should consider TDS when estimating taxable income and advance tax liability.
7. Update accounting & payroll software - include functionality for 194T deduction, scheduling, certificates.

Frequently Asked Questions (FAQ)

Q1: Does this TDS apply if the firm pays to partners their share of profit?
A: No. Share of profit is exempt in the hands of the partner under Section 10(2A) - and not covered under Section 194T.

Q2: Are capital withdrawals liable for TDS under 194T?
A: No. Withdrawals / return of capital are not considered “income” under Section 194T - TDS does not apply.

Q3: Is TDS applicable if aggregate partner payments are below ₹20,000 in a year?
A: No. Section 194T provides threshold - if total payments (remuneration, interest, etc.) to a partner do not exceed ₹20,000 in a financial year, TDS is not required.

Q4: Can partner claim lower or nil TDS with Form 15G / 15H or certificate under Section 197?
A: No. For deduction under Section 194T, certificate under Section 197 or Form 15G / 15H facility is not allowed.

Q5: What if firm fails to deduct TDS, or deducts but does not deposit?
A: Consequences include interest and penalty under general TDS default provisions; plus, under Section 40(a)(ia) the firm may lose deduction for such payments.

Q6: Does this apply to both partnership firms and LLPs?
A: Yes. The definition of “firm” in Section 194T includes LLPs as well.

Conclusion: What This Means for FY 2024-25 (01-04-2024 to 31-03-2025) and Ahead

What this means for FY 2024-25 For the financial year 2024-25, payments made to partners by a firm/LLP before 1 April 2025 (or credited before that date) are not subject to TDS under Section 194T. 

• Hence, even if you pay/remunerate partners, or credit interest on capital etc. during FY 2024-25, no deduction under Section 194T is required for that FY - the liability arises only from FY 2025-26 onwards.
• The first “affected year” will be FY 2025-26 (Assessment Year 2026-27), for payments made or credited from 01-04-2025 onward.

Important Considerations / Caveats

• Although Section 194T is part of the law effective 1 April 2025.
• Payments credited before 1-4-2025 or payments for FY 2024-25 credited after 1-4-2025 may create ambiguity - typically, the “credit or payment date” rule under 194T will apply.
• For accounting/tax-deductibility under Section 40(b), firms should still ensure that remuneration/interest are within the allowable limits - 194T does not change 40(b)’s limits, but adds TDS compliance. 
• No - The TDS deduction under Section 194T is not applicable for payments made during FY 2024-25 (i.e. before 1 April 2025).
• Should plan to apply it from FY 2025-26 onward, i.e. for any remuneration, interest on capital, etc., credited/payed on or after 01-04-2025.

With the introduction of Section 194T effective 1 April 2025, partnership firms and LLPs must now treat remuneration, interest on capital, commission, bonus paid/credited to partners with the same seriousness as salary payments - i.e. deduct TDS, deposit it, issue certificates, file returns.

This is a major compliance shift. Firms must update internal accounting, revise or review partnership deeds, streamline partner payment processes, and maintain detailed records. Partners should anticipate advance tax impacts and plan accordingly.

While this adds compliance workload, it promotes transparency, reduces tax evasion risk, and aligns partnership-based businesses with the broader TDS framework under Indian law.

Author:

Dr. Muhammed Mustafa C T
Senior Tax Consultant, BRQ Associates
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