Partnership firms picked up a new obligation last year that many still have not implemented. Since 1 April 2025, a firm must deduct TDS on what it pays its own partners. Most firms have never needed a TAN. A good number are now in default without knowing it.
Starting at
₹7,999 per year onwards
Firm compliance
Partnership firms and LLPs paying partner remuneration
Timeline
Quarterly TDS, annual ITR-5
Section 194T was introduced by the Finance (No. 2) Act, 2024 with effect from 1 April 2025. Every partnership firm and LLP must deduct TDS at 10 per cent on salary, remuneration, commission, bonus or interest paid or credited to a partner, once the aggregate to that partner exceeds ₹20,000 in a financial year. Under the Income-tax Act, 2025 it maps to Section 393(3), Table Sl. No. 7 from 1 April 2026.
TL;DR
Four things catch firms out. Credit counts, not just payment - a year-end book entry crediting remuneration to a partner's capital account triggers it even if no money moved. The threshold is aggregate per partner per year, and once crossed TDS applies to the entire amount, not the excess. It is independent of Section 40(b), which creates a genuine reconciliation problem. And you need a TAN: not having one before the first deduction is a standalone default under Section 272BB carrying a ₹10,000 penalty.
Section 194T
10 per cent TDS on salary, remuneration, commission, bonus or interest paid or credited to a partner, above ₹20,000 aggregate per partner per financial year. Effective 1 April 2025.
Credit to capital account
Counts as credit for Section 194T. Deduction is at the earlier of credit or payment, so a year-end book entry triggers it even where no money moved.
Section 40(b)
Caps deductible partner remuneration in the firm's computation. Independent of the TDS obligation, which is why the two need reconciling rather than fixing afterwards.
Section 272BB
₹10,000 penalty for not having a TAN before the first deduction - a standalone default separate from any failure to deduct.
Four points that turn a routine year-end entry into a default.
Caps on deductible remuneration in the firm's own computation.
The single most common disallowance in firm assessments - and it is a drafting problem, not a tax problem.
01
We check whether the firm holds a TAN and, if not, obtain one before any deduction falls due. Not having one is a standalone ₹10,000 default under Section 272BB.
02
Remuneration must be authorised by the deed and quantified, or the method of quantification given. This is where most disallowances originate, and it is fixable in advance.
03
Section 194T deduction on what is credited, reconciled against what Section 40(b) allows in the firm's computation. Planned at entry stage, not corrected afterwards.
04
Quarterly TDS returns, and ITR-5 for the firm with a tax audit report where the thresholds are crossed.
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