Section 194T Simplified: Compliance Burden or Necessary Reform?

INTRODUCTION

As the due date for Depositing TDS for Q4 FY 25-26 is approaching, i.e., 30^th April 2026. Have you finalised your books? If not, then this article is for you.

As we all are aware, the government always keeps a watch on day-to-day transactions through various ways, including tracking through TDC, TCS & SFTs. As for Partnership firms, including LLPs, the payments made by the firms to their partners are the transactions that require close attention, which can directly affect their profitability, as they often use remuneration as a tool to set the profits at year-end. Hence, practically to eliminate these practices & to bring more focus and transparency, the department has introduced section 194T under the Income Tax Act, 1961, through the Finance Act 2024.

OVERVIEW OF 194T

TDS under section 194T is applicable w.e.f. 1^st April 2025 i.e. Financial Year 2025-26 onwards (AY 2026-27).

This section imposes the liability on partnership firms, including LLP, to deduct the TDS on payments to its partners when exceeding the specified threshold

Payment includes:

• Interests ( On capital & loan)
• Remuneration
• Salary
• Bonus
• Commission

Payer: Firm including LLP

Payee: Partner

When to deduct: At the time of credit of such sum to the partner’s capital account or at the time of payment, whichever is earlier

Rate: 10% & 20% if PAN is not available

Threshold: On exceeding an aggregate of Rs. 20,000 during FY

Note: It excludes the distribution of profit, repayment of capital or any reimbursement

Let’s take a practical example to understand this very quickly

One of the Partnership firms named “ABC & Co.” having 3 partners “Mr. A , Mr. B & Mr. C

They have the following transactions for the FY 25-26

1. A is entitled to get a remuneration of 30,000 per month
2. B is getting a commission of Rs. 150,000 per annum

Now ABC & co. Has to deduct the TDS @10% i.e Rs. 3,000 while making the monthly payments to Mr. A & Rs. 15,000 while making the payment to Mr. B as it exceeds the specified threshold.

Such deducted TDS should be deposited to the Government in respective due date i.e 7^th of next month ( For March due date is 30^th April), & the firm has to furnish the form 26Q containing details of such TDS & nature of payment within the specified due date ( 31^st May 2026 for Q4 FY 25-26)

INTERACTION WITH 40(b) & 40(a)(ia)

Intention to bring this section is to reduce the tax liabilities of partners & to track the payments of the firm.

Section 40(b) governs how much remuneration and interest will be allowed as expenses while calculating profit & gains from Business & professions. The disallowance of Partners remuneration u/s 40(b) is not a remedy to avoid TDS compliance.

Even if the expenses are disallowed u/s 40(b), TDS is still applicable

Additionally, as per section 40(a)(ia), on failure of deduction of TDS, the firm may get a disallowance of 30% of expenses

COMPLIANCE IMPACT ON FIRMS

Before the insertion of such a section, there is no Liability of TDS; hence, small firms will have to keep the following points in view:

• Finalise the books till 30^th April 2026 to timely deduction of TDS, as it’s the last date for depositing TDS of March 26
• Monthly TDS tracking
• Maintain partners capital accounts properly
• Track accrual entries timely
• Deduct & deposit TDS timely to avoid interest & penalty

CONCLUSION

As section 194T reflects the government’s intention to widen the scope of tracing significant transactions, however, its real impact will depend upon how effectively firms adapt.