Section 194T: TDS on Partner withdrawals from firm

Sahithya Shetty
Feb 24
2 min read

In the Union Budget of 2024, Finance Minister Nirmala Sitharaman introduced Section 194T of the Income Tax Act, 1961.

Requirements need to fulfill

TDS Requirement: Firms must deduct income tax at a rate of 10% on payments made to partners (Salary, remuneration, commission, bonus or interest), including those credited to capital accounts of the partners. This deduction should occur at the time of crediting the amount in the books or making the payment, whichever happens first.
Threshold: No TDS is required if the total sum paid or credited to a partner does not exceed ₹20,000 within a financial year.

Timing of TDS Deduction

The provisions of Section 194T are scheduled to take effect from April 1, 2025.

At the Time of Credit: When the sum is credited to the partner’s account, including capital accounts.
At the Time of Payment: When the payment is made to the partner, whether through cash, cheque, draft, or other modes.

Limit to deduct TDS

Single Payment: If any single payment exceeds ₹20,000, TDS must be deducted.
Aggregate Payments: If multiple payments are made, each less than ₹20,000, TDS is required if the total of such payments exceeds ₹20,000 within the financial year.

Examples: 1

ABC & Co., a partnership firm, pays a monthly salary of ₹50,000 to Partner X. Since this amount exceeds the ₹20,000 threshold, TDS under Section 194T applies at 10% every month.

TDS Calculation:

Each month, TDS of ₹5,000 is deducted from the salary of ₹50,000, leaving a net payment of ₹45,000 to Partner X. This process continues for all 12 months in the financial year.

Annual Summary:

Total Salary Paid (Before TDS): ₹6,00,000
Total TDS Deducted (@10%): ₹60,000
Net Amount Received by Partner X: ₹5,40,000
TDS Deposited by Firm to Govt.: ₹60,000 (credited to Partner X’s Form 26AS)

Example 2

XYZ LLP pays ₹1,50,000 as interest on the capital of Partner Y.

TDS Calculation:

Since the interest exceeds ₹20,000, TDS @10% applies.
TDS deducted = ₹1,50,000 × 10% = ₹15,000
Net interest paid to Partner Y = ₹1,35,000

Examples: 3

June Payment: ₹18,000 (This amount is below the threshold of ₹20,000, so no TDS is applicable.)
October Payment: ₹22,000 (Since this amount exceeds ₹20,000, TDS of 10% is applicable on ₹22,000, which equals ₹2,200.)
March Payment: ₹15,000 (Despite being below the threshold individually, this amount contributes to the total aggregate exceeding ₹20,000.)

Total Aggregate Payments: ₹18,000 + ₹22,000 + ₹15,000 = ₹55,000

TDS Calculation: Since the aggregate payments for the year exceed ₹20,000, TDS needs to be deducted on the total amount of ₹15,000.