COMPLIANCE SECTION 194T OF INCOME TAX ACT 1961 -AY 2026-27
Introduction of Section 194T
The Income Tax Act, 1961 continues to evolve with new compliance measures to improve transparency. One such important provision introduced by the Finance Act, 2024 is Section 194T, which becomes applicable from 1 April 2025. This section is highly relevant for partnership firms and LLPs, as it introduces TDS (Tax Deducted at Source) on payments made to partners. This new provision requires firms to deduct TDS at a rate of 10% on the aggregate amount of salary, remuneration, commission, bonus, or interest paid or credited to a partner within a financial year. The implementation of Section 194T will place an increased compliance burden on firms, requiring them to adhere to new procedures for tax deduction, deposit, and reporting, and may also have an impact on the liquidity of partners.
What is Section 194T of Income Tax Act?
Section 194T, introduced in Budget 2024, marks a significant shift in partnership taxation. Effective from 1st April 2025, payments such as salary, remuneration, interest, commission, or bonus made by firms and LLPs to their partners will be subject to TDS. Earlier, such payments were outside the scope of TDS, which applied only to employee salaries. Section 194T plays a crucial role in reducing tax evasion and improving compliance, as it ensures that income received by partners is properly recorded and taxed. Overall, it brings partnership firms and LLPs into a stricter TDS compliance framework.
Applicability of Section 194T
The Income Tax Act, 1961 applies to partnership firms and LLPs that make payments to their partners. It is applicable only when the payment is made to a resident partner and includes amounts such as salary, remuneration, interest, bonus, or commission. The provision becomes applicable when the total payment to a partner exceeds ₹20,000 in a financial year.
This section is applicable irrespective of the size, turnover, or audit status of the firm, meaning even small firms must comply once the threshold is crossed. It covers both actual payments and book entries (credit in partner’s account). The provisions are effective from 1 April 2025 and apply from Assessment Year 2026–27.
The following payments by a firm to a partner
Salary
Remuneration
Commission
Bonus or
Interest on any account
Rate of Deduction of TDS and Limit
When to Deduct TDS
Under Section 194T of the Income Tax Act, 1961, TDS must be deducted at the earlier of two events, ensuring timely tax collection and proper reporting of partner income.
1. At the Time of Credit
TDS is required when the amount is credited to the partner’s account in the books of the firm or LLP.
This includes credit to the capital account, current account, or any other account of the partner.
Even if the payment is not actually made, a mere accounting entry triggers TDS.
2. At the Time of Payment
If the payment is made before recording it in the books, TDS must be deducted at the time of actual payment.
Payment may be in cash, cheque, bank transfer, or any other mode.
Compliance Requirements for AY 2026–27
Under Section 194T of the Income Tax Act, 1961, partnership firms and LLPs must follow specific TDS compliance procedures for AY 2026–27. These requirements ensure proper deduction, deposit, and reporting of tax on payments made to partners.
Key Points
Deduct TDS @ 10% on eligible payments exceeding ₹20,000
Deposit TDS with the government within prescribed due dates
File quarterly TDS returns (Form 26Q)
Issue TDS certificates (Form 16A) to partners
Maintain proper records of all transactions
Firms must ensure timely deduction, deposit, filing, and documentation to stay compliant with Section 194T for AY 2026–27
Penalties for Non-Compliance
Non-compliance with Section 194T of the Income Tax Act, 1961 can lead to multiple financial and legal consequences for partnership firms and LLPs.
Interest Liability: Interest is charged for delay in deduction or late deposit of TDS under Section 201(1A).
Penalty: A penalty equal to the amount of TDS not deducted or not paid may be imposed under Section 271C.
Disallowance of Expenses: Related expenses may be disallowed under Section 40(a)(ia), increasing taxable income.
Late Filing Fees: ₹200 per day for delay in filing TDS returns under Section 234E (subject to limits).
Impact of Section 194T
Section 194T of the Income Tax Act, 1961 has a significant impact on partnership firms, LLPs, and their partners by introducing TDS on partner payments.
Positive Impact
Improved Tax Transparency: Ensures proper reporting of partner income
Better Compliance: Reduces chances of tax evasion
Systematic Tracking: Helps the government track income through TDS returns
Challenges
Increased Compliance Burden: Firms must handle TDS deduction, filing, and documentation
Cash Flow Impact: Partners receive payments after TDS deduction
Administrative Effort: Requires proper accounting systems and regular monitoring
Conclusion
Section 194T of the Income Tax Act, 1961 marks an important step towards strengthening tax compliance for partnership firms and LLPs. By introducing TDS on payments such as salary, interest, and commission to partners, it ensures better transparency and accurate reporting of income.
While the provision increases compliance responsibilities—like timely deduction, deposit, and filing it ultimately helps in reducing tax evasion and aligning partner income with the formal tax system. Firms must adopt proper accounting practices and stay updated with TDS requirements to avoid penalties.
