New TDS Rule on Remuneration to Partners Effective from April 1, 2025, India — A Complete Guide

Starting April 1, 2025, a major update in India’s tax framework has come into effect—introducing a new TDS provision under Section 194T that directly impacts how partnership firms and LLPs handle payments to their partners. Historically, such payments were shielded from TDS, making life simpler for firms and partners alike. But times are changing. This shift aims to enhance transparency and close potential loopholes in tax reporting. If you're a partner, accountant, or business owner, this guide will help you navigate the new landscape and stay compliant.

Background of TDS Provisions on Partner Remuneration

In the past, when firms paid their partners remuneration or interest, there was no obligation to deduct tax at source. Why? Because Section 40(b) of the Income-tax Act viewed these payments not as typical expenses but as internal allocations among owners. However, with increasing emphasis on digital traceability and fair tax practices, the government has introduced a change that brings partner payouts into the TDS fold.

What Has Changed from April 1, 2025?

Here’s the crux of the new rule under Section 194T:

• Firms—whether traditional or LLPs—must now deduct TDS when making payments to their partners in the form of salary, bonus, commission, remuneration, or interest.
• This TDS must be deducted either at the time of payment or credit to the partner’s account, including their capital account, whichever is earlier.
• The applicable rate is 10%.
• There is a relief threshold: If the total payment to a partner during the financial year does not exceed Rs. 20,000, TDS is not required.

Scope of the New TDS Rule in India

This rule applies to all partnership entities:

• Conventional partnership firms
• Limited Liability Partnerships (LLPs)

It covers various types of payments, including:

• Fixed monthly remuneration
• Performance-based commissions or bonuses
• Interest on partner capital or loans

There’s no differentiation based on the nature or size of the firm, making the provision broadly applicable.

Clarification on Capital Contribution Refunds

It's important to understand that Section 194T does not apply to amounts refunded to a partner towards their original capital contribution. Such repayments are considered a return of capital, not income, and thus fall outside the purview of TDS requirements. Only payments categorized as income—such as salary, interest, or commission—are covered under the new provision.

Compliance Requirements

The new rule demands sharper focus on compliance:

• TDS must be deducted promptly every month where applicable
• Quarterly TDS returns (Form 26Q and 27Q) need to be filed
• Firms must issue TDS certificates (Form 16A) to each partner

Missing these steps could lead to penalties and unnecessary scrutiny.

Consequences of Non-Compliance

Neglecting to follow the new rule could result in:

• Interest on late deduction or deposit
• Penalties for non-compliance
• Disallowance of such payments under Section 40(a)(ia), which means they won’t be allowed as business expenses for tax calculation

This makes adherence not just important—but absolutely critical.

Legal Interpretation and Industry Reactions

While the law is explicit, several experts have pointed out the operational challenges, especially for smaller firms. Bodies like ICAI and FICCI are already engaging with authorities for clarifications or simplified compliance mechanisms. Industry opinion is generally in favor of the move for its transparency, but with requests for reasonable transition support.

Challenges and Ambiguities

Despite its clarity, the law presents real-world questions:

• What if payments are made in kind or through adjustments?
• Will software updates be available in time for small businesses?

Over time, FAQs or official clarifications are expected to address these concerns.

Government’s Rationale Behind the Amendment

This rule supports a wider effort to:

• Enhance income visibility for tax departments
• Bring uniformity to taxation of business income
• Strengthening the overall compliance ecosystem

It reflects a policy shift toward digital traceability and better oversight of income flows within closely held business structures.

Conclusion

Section 194T is a game-changer in how Indian partnership firms approach internal financial dealings. It marks a step towards more structured and traceable financial reporting. While it may seem like a hurdle initially, with the right processes in place, compliance can be seamlessly integrated into daily operations. Firms are advised to act early, adapt smartly, and consult professionals to navigate this change with confidence.

With Water & Shark by your side, staying ahead of tax changes like Section 194T becomes simpler, smarter, and stress-free. Contact us now.