TDS on Partners Remuneration (Section 194T): Limits, Calculation and Rules for 2026
For decades, partnership firms paid salary, bonus, commission and interest to partners without deducting any tax at source. That changed with Section 194T of the Income-tax Act, introduced by the Finance (No. 2) Act, 2024 and effective from 1 April 2025. Firms and LLPs must now deduct 10% TDS on remuneration, interest, commission and bonus paid to partners once payments cross ₹20,000 in a financial year. At the same time, the deductible remuneration limits under Section 40(b) were raised. This guide explains both changes, the partners remuneration calculation, and how to stay compliant.
Key Features
Coverage
Section 194T applies to every payment of salary, remuneration, bonus, commission, and interest (on capital or loan) by a firm or LLP to its partners.
Threshold
No TDS if total such payments to a partner stay within ₹20,000 in the year; once crossed, TDS applies to the entire amount, not just the excess.
Timing
Deduct at credit to the partner’s account (including capital account) or payment, whichever is earlier. Year-end credits trigger TDS too.
Exclusions
Drawings and repayment of capital are not income, so no TDS. Profit share is exempt in the partner’s hands under Section 10(2A), and 194T does not touch it.
No PAN-Aadhaar relief
If the partner has no PAN or it is inoperative, TDS rises to 20% under Section 206AA.
Compliance trail
Firms need a TAN, must deposit TDS by the 7th of the next month, and report it in quarterly Form 26Q.
Section 40(b): how much remuneration is deductible
Step-by-step compliance process
Apply for a TAN
Apply for a TAN if the firm doesn’t have one (Form 49B on the Protean/TIN portal).
Update the partnership deed
Update the partnership deed so remuneration and interest clauses match what you actually intend to pay.
Track aggregate payments
Track aggregate payments per partner; once they cross ₹20,000, deduct 10% on every credit or payment.
Deposit TDS
Deposit TDS by the 7th of the following month (30 April for March deductions).
File Form 26Q
File Form 26Q quarterly and issue Form 16A to partners.
Compute the 40(b)
At year end, compute the 40(b) ceiling on book profit and reconcile remuneration, TDS, and disallowance, ideally before finalising accounts.
Apply for a TAN
Apply for a TAN if the firm doesn’t have one (Form 49B on the Protean/TIN portal).
Update the partnership deed
Update the partnership deed so remuneration and interest clauses match what you actually intend to pay.
Track aggregate payments
Track aggregate payments per partner; once they cross ₹20,000, deduct 10% on every credit or payment.
Deposit TDS
Deposit TDS by the 7th of the following month (30 April for March deductions).
File Form 26Q
File Form 26Q quarterly and issue Form 16A to partners.
Compute the 40(b)
At year end, compute the 40(b) ceiling on book profit and reconcile remuneration, TDS, and disallowance, ideally before finalising accounts.
Benefits of getting this right
Full deduction preserved
Properly authorised and capped remuneration reduces the firm’s 30% tax outgo; sloppy deeds are the most common reason for disallowance.
No expense disallowance under 40(a)(ia)
Failure to deduct TDS can trigger disallowance of 30% of the expense, so timely deduction protects the deduction itself.
Cleaner partner taxation
TDS credit flows to partners through Form 26AS, simplifying their advance-tax planning on remuneration taxed under Section 28(v).
Audit readiness.
A reconciled trail of deed, ledger, TDS challans and 26Q keeps both income-tax scrutiny and tax audit (Form 3CD clause on 40(b)) painless.
Quick overview
Documents and registrations required
TAN
Mandatory to deduct and deposit TDS
Partnership deed with
Authorises payment and supports 40(b) deduction
Partners’ PANs (Aadhaar-linked)
Avoids 20% TDS under Section 206AA
Books showing partner ledgers
Determines credit dates that trigger TDS
Form 26Q filings
Quarterly TDS returns covering 194T
Rates and costs at a glance
Common challenges and solutions
Important timelines
FAQs
Partners remuneration calculation: worked example
Suppose a firm’s book profit for FY 2025-26 is ₹14,00,000 and the deed authorises maximum permissible remuneration to two working partners.
First ₹6,00,000 → higher of ₹3,00,000 or 90% of ₹6,00,000 (= ₹5,40,000) → ₹5,40,000
Balance ₹8,00,000 × 60% → ₹4,80,000
Maximum deductible remuneration = ₹5,40,000 + ₹4,80,000 = ₹10,20,000
If each partner is paid ₹5,10,000, the firm deducts TDS at 10% (₹51,000 per partner) under Section 194T, since the payments exceed ₹20,000. Any remuneration above ₹10,20,000 in total is disallowed in the firm’s hands, but note that the disallowed portion is then not taxable for the partner under Section 28(v) to the same extent.
Who is covered
Covered: All partnership firms and LLPs, resident or otherwise, paying remuneration/interest to partners — there is no turnover threshold and no exemption for small firms.
Not covered: Payments that are pure profit share, drawings, or capital repayment. Section 192 (salary TDS) does not apply to partners because partner remuneration is business income, not salary income.
Special note: Section 194T applies even to firms not subject to tax audit.
Tips and best practices
Route fixed monthly remuneration through partner current accounts with TDS deducted each month rather than one year-end entry.
Re-paper old deeds — many pre-2024 deeds quote the old 40(b) limits as the remuneration formula, which now under-pays partners.
Don’t deduct TDS on drawings; tag ledger entries clearly so software doesn’t sweep them into 194T.
Reconcile 26Q figures with partner ledgers every quarter, not at year end.
Latest updates
Section 194T is now in force for FY 2025-26 onwards, making this the first regime in which partner payments carry TDS. The enhanced 40(b) limits (₹3,00,000/90% on the first ₹6 lakh of book profit) apply from AY 2025-26. Firms filing their first Form 26Q cycles with 194T entries should double-check the section code mapping in their TDS software, an early stumbling point in practice.
Read also: TDS Rate Chart For FY 2025-26: Updated Limits, Slabs & Rules You Must Know
Conclusion
Two rules now govern partner payouts: Section 194T decides the TDS, and Section 40(b) decides the deduction. Deduct 10% once payments to a partner cross ₹20,000, keep remuneration within the revised book-profit limits, and make sure the deed says what the ledger does. Most slip-ups happen at year-end credits and outdated deeds. StartupFlora’s compliance team handles TAN registration, deed amendments, monthly TDS and quarterly returns for firms and LLPs — talk to us before your next remuneration entry.
Disclaimer
StartupFlora provides consultancy services only. We are not affiliated with any government department. All scheme benefits and approvals are at the sole discretion of the respective government authority and implementing agency.