Section 194T:
TDS on Payments to Partners FY 2025–26 was the first year of implementation of Section 194T. Now that the first year of Tax Audit and ITR filing is largely behind us,
let’s discuss its pros and cons.
Pros: 1. More structured Partnership Firms and LLPs: TDS on partners’ remuneration and interest, along with the requirement to file TDS returns, encourages firms and LLPs to finalise their books of accounts in a more timely and structured manner. This process will improve further as the years pass.
2. More revenue upfront for the Government: The Government gets tax revenue upfront through TDS, while partners can claim refunds, wherever applicable, after filing their ITRs.
3. Consistency in TDS provisions: If salary and interest paid to directors in case of Companies are covered under TDS provisions, why should remuneration and interest paid to partners be treated differently?
Cons: 1. The biggest concern is its applicability: Section 194T applies to all Partnership Firms and LLPs, irrespective of their size or turnover. This needs to change. Its applicability should ideally be restricted to firms and LLPs that are required to get their accounts audited under the Income Tax Act. There are genuinely very small firms and LLPs for whom this creates an additional compliance burden.
2. Working capital issues for partners: TDS results in a portion of the money payable to partners being blocked until they claim a refund or adjust the TDS against their tax liability. However, firms and partners will gradually learn to manage this.
FY 2025–26 was the first year of implementation, and compliance under this section will gradually improve.In the long run, Section 194T can make Partnership Firms and LLPs more structured and reduce last-minute changes during ITR finalisation. It can also reduce the headache for tax professionals by bringing more discipline to the process. Not every new provision needs to be criticised just because it introduces additional compliance.
3.If you have not deducted TDS, you will have to disallow the partner’s remuneration and interest.
Please consult your financial advisor and CA before making any decision