We credit partners' remuneration and interest to their capital accounts once a year when the accounts are finalised. Do we now have to deduct TDS on that?
Yes, from 1 April 2025. Section 194T, inserted by the Finance (No. 2) Act 2024, requires a firm paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner to deduct income-tax at 10 per cent at the time of credit to the partner's account — expressly INCLUDING his capital account — or at the time of payment, whichever is earlier. No deduction is required where the sum, or the aggregate of such sums credited or paid or likely to be credited or paid to that partner, does not exceed Rs 20,000 in the financial year.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2025-04-01, reported as Income-tax Act 1961, s.194T; inserted after s.194S by the Finance (No. 2) Act 2024, w.e.f. 1-4-2025. It bears on section 194T, section 40(b), section 40(b)(v) of the Income Tax Act 1961, in TDS Defaults and Deductions & Disallowances matters.
This changes what every firm must do on a s.40(b) payment, and the trap is in the words 'including the capital account'. The commonest practice — computing partners' remuneration and interest at the year end and passing a single journal credit to capital accounts — is a credit, and the obligation bites then. It is no answer that nothing was drawn. The threshold is per partner and per financial year, and it is measured on what is 'likely to be credited or paid' as well as what has been, so a firm cannot wait until the Rs 20,000 is crossed before starting to deduct. Note what the section does NOT do: it does not make the payment taxable in the partner's hands where it was not, and it does not alter the s.40(b) ceiling — the deduction limits in s.40(b)(v) (from AY 2025-26, Rs 3,00,000 or 90 per cent of the first Rs 6,00,000 of book profit, whichever is more, and 60 per cent of the balance) continue to govern deductibility in the firm's computation. But a firm that ignores s.194T on a payment it is claiming under s.40(b) exposes itself to the machinery in Chapter XVII-B and to the consequences of failing to deduct, which should be checked against ss.40(a)(ia), 201 and the interest and fee provisions on the facts of the case.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Not a case. The section applies to any person being a FIRM which is responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm.
The firm shall, at the time of credit of such sum to the account of the partner, including his capital account, or at the time of payment, whichever is earlier, deduct income-tax at the rate of ten per cent (sub-section (1)). No deduction is to be made where such sum, or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm, does not exceed twenty thousand rupees during the financial year (sub-section (2)).
Not a judicial route. Payments by a firm to its own partners had until now stood outside the withholding net altogether: the partner is not an employee, so s.192 does not reach him, and the payment is an appropriation of the firm's profit rather than a payment for services of the kind s.194C or s.194J contemplates. The result was that remuneration and interest, deductible in the firm's hands within the s.40(b) limits and taxable in the partner's hands, were credited annually with no tax collected at source and often with the partner's own advance tax unpaid. Section 194T closes that gap. The express inclusion of the capital account is deliberate, because the crediting entry rather than an actual payment is the normal mechanism by which the amount reaches the partner.
194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
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Handle my notice → Ask a CA on WhatsAppYes, from 1 April 2025. Section 194T, inserted by the Finance (No. 2) Act 2024, requires a firm paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner to deduct income-tax at 10 per cent at the time of credit to the partner's account — expressly INCLUDING his capital account — or at the time of payment, whichever is earlier. No deduction is required where the sum, or the aggregate of such sums credited or paid or likely to be credited or paid to that partner, does not exceed Rs 20,000 in the financial year. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 194T, section 40(b), section 40(b)(v) of the Income Tax Act 1961. It is reported as Income-tax Act 1961, s.194T; inserted after s.194S by the Finance (No. 2) Act 2024, w.e.f. 1-4-2025. This changes what every firm must do on a s.40(b) payment, and the trap is in the words 'including the capital account'. The commonest practice — computing partners' remuneration and interest at the year end and passing a single journal credit to capital accounts — is a credit, and the obligation bites then. It is no answer that nothing was drawn. The threshold is per partner and per financial year, and it is measured on what is 'likely to be credited or paid' as well as what has been, so a firm cannot wait until the Rs 20,000 is crossed before starting to deduct. Note what the section does NOT do: it does not make the payment taxable in the partner's hands where it was not, and it does not alter the s.40(b) ceiling — the deduction limits in s.40(b)(v) (from AY 2025-26, Rs 3,00,000 or 90 per cent of the first Rs 6,00,000 of book profit, whichever is more, and 60 per cent of the balance) continue to govern deductibility in the firm's computation. But a firm that ignores s.194T on a payment it is claiming under s.40(b) exposes itself to the machinery in Chapter XVII-B and to the consequences of failing to deduct, which should be checked against ss.40(a)(ia), 201 and the interest and fee provisions on the facts of the case. If it applies to you, the first step is this: Get a TAN if the firm does not have one; the obligation runs from 1 April 2025 and applies to firms that previously had no withholding to do at all.
Not a case. The section applies to any person being a FIRM which is responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm. The matter was decided on 2025-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. The firm shall, at the time of credit of such sum to the account of the partner, including his capital account, or at the time of payment, whichever is earlier, deduct income-tax at the rate of ten per cent (sub-section (1)). No deduction is to be made where such sum, or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm, does not exceed twenty thousand rupees during the financial year (sub-section (2)).
Not a judicial route. Payments by a firm to its own partners had until now stood outside the withholding net altogether: the partner is not an employee, so s.192 does not reach him, and the payment is an appropriation of the firm's profit rather than a payment for services of the kind s.194C or s.194J contemplates. The result was that remuneration and interest, deductible in the firm's hands within the s.40(b) limits and taxable in the partner's hands, were credited annually with no tax collected at source and often with the partner's own advance tax unpaid. Section 194T closes that gap. The express inclusion of the capital account is deliberate, because the crediting entry rather than an actual payment is the normal mechanism by which the amount reaches the partner. In the words reproduced by the source cited on this page: "194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent."
It was decided by the CBDT Circulars & Instructions on 2025-04-01 and is reported as Income-tax Act 1961, s.194T; inserted after s.194S by the Finance (No. 2) Act 2024, w.e.f. 1-4-2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 194T, section 40(b), section 40(b)(v), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The firm shall, at the time of credit of such sum to the account of the partner, including his capital account, or at the time of payment, whichever is earlier, deduct income-tax at the rate of ten per cent (sub-section (1)). No deduction is to be made where such sum, or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm, does not exceed twenty thousand rupees during the financial year (sub-section (2)). It arises in TDS Defaults and Deductions & Disallowances matters, on section 194T, section 40(b), section 40(b)(v) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Deduct at the EARLIER of credit or payment, and treat the year-end journal credit of remuneration and interest to a partner's capital account as a credit — sub-section (1) says so in terms. Test the Rs 20,000 threshold partner by partner over the whole financial year, on what is likely to be credited or paid as well as on what has already been, and begin deducting from the first credit where the annual figure will plainly cross it. Cover all five heads — salary, remuneration, commission, bonus and interest — not just remuneration; interest on partners' capital is within the section. Reconcile the s.194T deduction against the s.40(b)(v) ceiling separately: the amounts differ, because s.194T applies to the sum credited while s.40(b)(v) caps what the firm may deduct. Report the deduction in the firm's quarterly TDS statements and issue the partners their certificates, so that they can take credit against the tax on their own returns. For financial years up to 2024-25 there is no such obligation; do not let a department query for an earlier year be answered as if s.194T applied.
Still good law. In force from 1 April 2025, i.e. from financial year 2025-26. No judicial consideration exists or could exist yet. The s.40(b)(v) limits stated in 'why_it_matters' were read from the Income-tax Department's s.40 page, whose own footnotes record that 'Rs. 3,00,000' was substituted for 'Rs. 1,50,000' by Act No. 15 of 2024 — the Finance (No. 2) Act 2024 — with effect from 1 April 2025, i.e. from AY 2025-26. I did not check for CBDT guidance on s.194T. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Statutory entry. There is no decision on s.194T and there cannot yet be one: the section takes effect on 1 April 2025 and no assessment or TDS proceeding on it has reached the Tribunal. 'tier' is set to 'cbdt' because the library's fixed tier vocabulary has no value for a statutory entry; the source is the Income-tax Department's own section page. 'decided_on' is the date the section takes effect. The official text as printed carries a drafting oddity — sub-section (1) reads 'shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent', with 'shall' appearing twice; the key_quote reproduces the page exactly, including that repetition. The page carries the provision under the heading 'Following section 194T shall be inserted after section 194S by the Finance (No. 2) Act, 2024, w.e.f. 1-4-2025.' I did not locate any CBDT circular or notification giving guidance on s.194T and did not search exhaustively for one; a later pass should check for Board guidance and for any consequential change to the quarterly statement forms. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The firm shall, at the time of credit of such sum to the account of the partner, including his capital account, or at the time of payment, whichever is earlier, deduct income-tax at the rate of ten per cent (sub-section (1)). No deduction is to be made where such sum, or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm, does not exceed twenty thousand rupees during the financial year (sub-section (2)).
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