Partnership firms and LLPs must now deduct 10% TDS on partner payments exceeding ₹20,000. Complete compliance guide with examples.
From April 1, 2025, every partnership firm and LLP must deduct 10% TDS on partner remuneration exceeding ₹20,000 annually. This includes salary, bonus, commission, and interest on capital. Non-compliance attracts 30% expense disallowance + penalties!
Section 393(3) (Section 194T) is a NEW provision introduced in Budget 2024, effective from April 1, 2025. It mandates Tax Deducted at Source (TDS) on payments made by partnership firms and LLPs to their partners.
For decades, partner remuneration was completely outside the TDS framework. Only employee salaries attracted TDS under Section 392 (Section 192 of income tax act 1961). But this created a gap in tax compliance — partners could receive lakhs in remuneration without any upfront tax deduction.
Section 393(3) closes this gap by bringing partner payments under TDS, similar to how employee salaries are taxed.
Before April 1, 2025: No TDS on partner remuneration. Partners paid tax only at year-end when filing ITR.
After April 1, 2025: Firms must deduct 10% TDS on partner payments >₹20,000. Creates advance tax collection for the government.
Under the Income Tax Act 2025 (effective April 1, 2026), Section 194T is renumbered as Section 393(3). The provisions, rates, and thresholds remain identical.
TDS must be deducted on the following payments to partners:
| Payment Type | Description | TDS Applicable? |
|---|---|---|
| Salary | Fixed monthly/annual salary to working partners | ✓ YES (10%) |
| Remuneration | Profit-based compensation under Section 40(b) | ✓ YES (10%) |
| Commission | Performance-based commission to partners | ✓ YES (10%) |
| Bonus | Annual or quarterly bonus payments | ✓ YES (10%) |
| Interest on Capital | Interest paid on partner's capital contribution | ✓ YES (10%) |
| Share in Profit | Partner's share of divisible profits | ✗ NO |
| Capital Withdrawal | Return of partner's own capital | ✗ NO |
| Loan Repayment | Repayment of loan given by partner to firm | ✗ NO |
Important: TDS applies only on payments that are expenses for the firm (deductible under Section 40(b)). Share of profit is NOT an expense, so NO TDS.
| TDS Rate: | 10% |
| Threshold Limit: | ₹20,000 |
| Period: | Per Financial Year |
How the threshold works:
Critical Point: Once the threshold is crossed, TDS applies to the entire amount, not just the excess over ₹20,000!
TDS must be deducted at the earlier of:
This is CRITICAL! Even if you haven't paid cash to the partner, if you've credited their capital account, TDS is due.
Scenario 1: Credit First
Scenario 2: Payment First
Facts:
Analysis:
Total payment: ₹18,000
Threshold: ₹20,000
Status: Below threshold
✓ NO TDS Required
Facts:
Calculation:
Remuneration: ₹3,00,000
TDS Rate: 10%
TDS Amount: ₹30,000
Payment to Partner: ₹2,70,000 (₹3,00,000 - ₹30,000)
TDS Deposit Deadline: April 30, 2026
Facts:
| Month | Payment Type | Amount | Cumulative | TDS Deductible? |
|---|---|---|---|---|
| June 2025 | Salary | ₹18,000 | ₹18,000 | NO (below ₹20K) |
| October 2025 | Bonus | ₹22,000 | ₹40,000 | YES (crossed ₹20K) |
| March 2026 | Interest on Capital | ₹15,000 | ₹55,000 | YES |
TDS Calculation:
Total Payments: ₹55,000
Threshold: ₹20,000
Status: Exceeded (so TDS on ENTIRE amount)
TDS @ 10% on ₹55,000 = ₹5,500
Important: Since the first payment (₹18,000) was below ₹20,000, no TDS was deducted then. But once October payment took the cumulative above ₹20,000, TDS should have been deducted on ₹40,000. Then TDS again on March payment.
Better Practice: If you anticipate total payments will exceed ₹20,000, start deducting TDS from the first payment itself to avoid lump-sum deduction later.
Facts:
Calculation:
Monthly Salary: ₹25,000 × 12 = ₹3,00,000
Annual Bonus: ₹50,000
Interest on Capital: ₹1,20,000
Total Payments: ₹4,70,000
TDS @ 10% = ₹47,000
TDS Deduction Schedule:
Total TDS: ₹47,000
The following payments to partners are NOT subject to TDS under Section 393(3)(Section 194T):
| Payment Type | Reason for Exemption |
|---|---|
| Share of Profit | Not an expense to the firm; it's distribution of profit after all expenses |
| Return of Capital | Partner's own money being returned; not income |
| Loan Repayment | Repayment of principal amount borrowed from partner; not income |
| Interest on Partner's Loan | May be covered under Section 194A (interest other than securities) if threshold exceeded |
| Reimbursement of Expenses | Actual expenses incurred by partner on behalf of firm; not income |
A common question: Should TDS be deducted monthly or annually?
If partnership deed specifies MONTHLY salary/remuneration:
If remuneration/interest is calculated ANNUALLY:
Practical Tip: Many firms calculate remuneration only at year-end after determining profits. In such cases, credit it to partner's capital account on March 31, deduct TDS, and deposit by April 30.
For Government Deductors
TDS deducted in any month must be deposited by 7th of the following month.
Example: May 2025 TDS → Deposit by June 7, 2025
For Non-Government Deductors (March TDS)
TDS deducted in March can be deposited by April 30.
Example: March 2026 TDS → Deposit by April 30, 2026
TDS Return Filing
Q1 (Apr-Jun): July 31
Q2 (Jul-Sep): October 31
Q3 (Oct-Dec): January 31
Q4 (Jan-Mar): May 31
| Violation | Penalty/Consequence |
|---|---|
| TDS Not Deducted |
• 30% disallowance of expense under Section 40(a)(ia) • Interest @ 1% per month under Section 201(1A) • Minimum penalty: ₹10,000 |
| TDS Deducted But Not Deposited |
• Interest @ 1.5% per month from deduction to deposit • Prosecution under Section 276B (up to 7 years imprisonment) |
| Late Deposit of TDS |
• Interest @ 1.5% per month or part of month • Example: ₹10,000 TDS late by 2 months = ₹300 interest |
| Late Filing of TDS Return |
• ₹200 per day late fee (maximum penalty as per rules) • Example: 30 days late = ₹6,000 penalty |
| Non-Issue of TDS Certificate | • ₹500 per day penalty under Section 272A(2)(g) |
Answer: NO.
Unlike other TDS sections, Section 393(3) of Income tax Act,2025(Section 194T) does not allow partners to submit Form 15G or 15H to avoid TDS deduction. The 10% deduction is mandatory.
Answer: NO.
Section 197 (lower TDS certificate) does NOT apply to Section 393(3)(Section 194T). Firms must deduct full 10% TDS with no option for reduction.
Answer: TDS must still be deducted.
Even if the partner's total income is below ₹3 lakh (basic exemption), the firm must deduct 10% TDS. The partner can claim refund when filing ITR.
Answer: YES.
Unlike some TDS sections, there is NO turnover exemption for Section 393(3)(Section 194T). It applies to ALL partnership firms and LLPs, regardless of size or turnover.
Answer: NO TDS.
If a sleeping partner receives only profit share (not remuneration, salary, bonus, or interest), NO TDS is required. Profit share is not covered under Section 393(3)(Section 194T).
Answer: Two options:
Recommended: Book estimated remuneration on March 31 to stay compliant.
Section 40(b) (Section 35 of Income Tax Act 2025) limits the remuneration deductible for partners. The limits were DOUBLED from FY 2025-26:
| Book Profit | Old Limit (up to FY 2024-25) | New Limit (from FY 2025-26) |
|---|---|---|
| On first ₹3 lakh | ₹1,50,000 or 90% of book profit whichever is higher | ₹3 lakh |
| On first ₹6 lakh | ₹5,40,000 | ₹3,00,000 or 90% of book profit whichever is higher |
| Balance book profit | 60% of book profit | 60% of book profit |
Important: Section 393(3) (Section 194T) TDS applies to remuneration PAID/CREDITED, regardless of whether it's within Section 40(b) limits. Even if excess remuneration is later disallowed, TDS must be deducted on the amount paid.
Payments made on/before March 31, 2025:
Payments made on/after April 1, 2025:
Critical Scenario:
Remuneration for FY 2024-25 paid in April 2025:
Even though the remuneration relates to FY 2024-25, if it's PAID on/after April 1, 2025, Section 393(3) of Income tax Act,2025(Section 194T of income tax act,1961) applies.
Solution: Pay FY 2024-25 remuneration before March 31, 2025 to avoid TDS.
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Section 194T represents a significant shift in how partnership firms and LLPs manage partner compensation. While it adds compliance burden, it also:
Key Takeaways:
Ensure your firm is ready for this change. Update your systems, train your team, and start complying from April 1, 2025!
This article is for educational purposes based on Section 194T of the Income Tax Act, 1961 as amended by Finance Act 2024. Tax laws are subject to amendments and judicial interpretations. Always consult with a qualified Chartered Accountant before making tax-related decisions. E Tax Expert is not responsible for actions taken based solely on this information.
Complete mapping of all TDS sections from 1961 Act to 2025 Act with payment codes.
View Mapping →Calculate maximum allowable partner remuneration under Section 40(b).
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