Tds on Partners Salary, Interest & Profit Share for FY 2025–26 – New Rule Explained (Section 194T)

Introduction: –

Starting 1st April 2025, the Income Tax Department has introduced a new rule – Section 194T.
This rule is about TDS on payments made by a firm or LLP to its partners. Earlier, firms didn’t have to deduct any TDS on a partner’s salary or interest, but now things have changed.
Let’s understand this new section in a simple way

Earlier Rule (Till FY 2024–25)

Before 1 April 2025:

• Firms didn’t deduct TDS on partner’s salary, remuneration, or interest.
• This was because the partner isn’t treated as an employee, so Section 192 (salary TDS) didn’t apply.
• Also, Section 194A(3)(iv) said that no TDS is needed on interest paid by a firm to its partners.
• The share of profit was already tax-free in the hands of partners (under Section 10(2A)).

So basically, no TDS was deducted on any amount paid to partners earlier.

 What Changed from FY 2025–26?

From 1st April 2025, a new section called Section 194T will be applicable.
This rule makes it compulsory for firms (including LLPs) to deduct TDS at 10% when they pay salary, remuneration, commission, bonus, or interest to their partners.

But – this TDS is applicable only if total payment to a partner exceeds ₹20,000 in a financial year.

In Simple Terms

Examples to Understands

Example 1 – Remuneration

Question: – ABC & Co. pays ₹3,00,000 remuneration to Partner Riya during FY 2025–26.
Answer: –Since it’s above ₹20,000, the firm must deduct TDS @10% = ₹30,000.
So, Riya will receive ₹2,70,000 and the firm will deposit ₹30,000 as TDS to the government.

Riya will show ₹3,00,000 as Business Income in her ITR and claim ₹30,000 as TDS credit.

Example 2 – Interest on Capital

Question: –XYZ & Associates pays interest of ₹60,000 to Partner Amit.
 Answer: –It’s above ₹20,000, so TDS @10% = ₹6,000 must be deducted.
Amit receives ₹54,000, and ₹6,000 is deposited as TDS by the firm.

Example 3 – Profit Share

PQR & Co. distributes ₹4,00,000 as profit share to Partner Meera.

• No TDS will be deducted.
• Profit share is fully exempt in the partner’s hands under Section 10(2A).

When to Deduct and Deposit TDS

• Deduct TDS when you pay or credit the amount to the partner (whichever is earlier).
• Deposit the deducted TDS to the government by the 7th of next month.
• Report it in Form 26Q in quarterly TDS returns.

If TDS Is Not Deducted

If a firm fails to deduct or deposit TDS under Section 194T:

• The expense may be disallowed while calculating taxable income (under Section 40(a)(ia)).
• Interest and penalties may apply under Sections 201 and 234E.

Profit Share – Still Tax-Free

Even after this new rule, profit share remains completely exempt.
So if a partner gets a share of profit from the firm, there’s no TDS and no tax on that income, because the firm has already paid tax on its profits.

Conclusion: –

 From FY 2025–26, firms and LLPs must:

• Deduct TDS @10% on partner’s salary, remuneration, interest, or commission if total payment exceeds ₹20,000 in a year.
• No TDS on profit share or drawings.
• Deposit the deducted TDS on time to avoid penalties.

This new rule (Section 194T) brings more clarity and transparency in how payments to partners are reported.

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