A partnership firm or LLP must deduct TDS on partner remuneration and interest at a flat 10% once the amounts credited or paid to a partner in the year cross ₹20,000. The rule catches salary, remuneration, commission, bonus and interest, including interest on the partner's capital. It does not catch the partner's share of profit or drawings. Tax becomes deductible on the date the amount is credited to the partner's account, so the year-end entry that books remuneration on 31 March is itself the trigger.
The obligation began on 1 April 2025 under section 194T of the Income-tax Act, 1961. For anything credited or paid from 1 April 2026, the same rule sits in serial number 7 of the Table in section 393(3) of the Income-tax Act, 2025. The rate and the threshold did not change in the move.
Credits made up to 31 March 2026 stay under section 194T
The Income Tax Department's TDS compliance FAQs on the e-filing portal settle the changeover. Where a sum was credited in March 2026 and paid after 1 April 2026, the FAQs say the 1961 Act applies and the tax had to be deducted in March 2026. The same FAQs confirm that TDS rates and monetary thresholds were carried into the 2025 Act unchanged. Remuneration for FY 2025-26 booked on 31 March 2026 therefore falls under section 194T, with the deposit due by 30 April 2026, even though the cash goes out in tax year 2026-27.
The two periods compare as follows:
| Point | Credits from 1 April 2025 to 31 March 2026 | Credits from 1 April 2026 |
|---|---|---|
| Provision | Section 194T, Income-tax Act, 1961 | Section 393(3), Table serial 7, Income-tax Act, 2025 |
| Rate | 10% | 10% |
| Threshold per partner | ₹20,000 in the financial year | ₹20,000 in the tax year |
| Time of deduction | Credit (including capital account) or payment, whichever is earlier | Payment, or credit to the partner's account including capital account |
| Quarterly TDS statement | Form 26Q | Form 140 |
| Certificate to the partner | Form 16A | Form 131 |
What the firm deducts on, and what it can leave alone
Serial 7 describes the payment as any sum "in the nature of salary, remuneration, commission, bonus or interest" paid to a partner or credited to the partner's account, including the capital account. The label the deed uses does not decide the matter; the nature of the sum does.
- Covered: fixed or profit-linked remuneration to working partners, commission, bonus and any monthly "salary" the deed promises.
- Covered: interest on a partner's capital account and on a loan the partner has given the firm. Item (c)(vii) against serial 7 of the Table in section 393(4) takes interest paid by a firm to its partner out of the general interest entry, so the partner entry in sub-section (3) is the route that applies.
- Not covered: the partner's share of profit, which is none of the five listed items.
- Not covered: drawings and repayment of capital or of a partner's loan. These return the partner's own money and are neither remuneration nor interest.
LLPs are inside the rule. Clause (45) of section 2 of the Income-tax Act, 2025 defines "firm" to include a limited liability partnership, and clause (74) defines "partner" to include a partner of an LLP. An LLP that pays a designated partner fixed monthly remuneration deducts on it exactly as a partnership firm would. Profit share in an LLP follows the LLP agreement and can differ from the capital ratio, as explained in LLP contribution versus profit-sharing ratio; whatever that ratio is, the profit share stays outside TDS.
The ₹20,000 limit is tested per partner and then applies to the whole amount
Clause (a) of section 393(3) requires deduction "on the entire amount" once the year's aggregate exceeds the threshold in the Table. Three consequences follow.
- Each partner is tested separately. A firm with five partners keeps five running totals.
- All five categories are added together for that partner. Interest of ₹12,000 and a bonus of ₹10,000 make ₹22,000, which is over the limit.
- When a partner's total first crosses ₹20,000, tax is due on everything credited to that partner in the year, including earlier credits that were below the limit when they were made.
The 10% is flat. It does not depend on the partner's slab, and a partner cannot stop it with a nil-tax declaration. Section 393(6), which allows a payee to give a nil-tax declaration, lists only certain items of section 393(1) and section 392(7). Serial 7 of sub-section (3) is not on that list. How the declaration works for the receipts it does cover is set out in the Form 121 nil-tax declaration.
Why the 31 March entry fixes the deposit date
Section 393(3)(c) ties deduction to the time of payment "or as specified therein", and serial 7 specifies credit to the partner's account, including the capital account. Whichever happens first, credit or payment, sets the date. Section 393(11) closes the obvious gap: a credit to a "suspense account", or to an account by any other name in the firm's books, is treated as a credit to the partner.
Where the deed links remuneration to book profit, the figure can be fixed only after the books are closed, yet the entry carries the 31 March date. That makes the tax deductible on 31 March. Rule 218(2) of the Income-tax Rules, 2026 requires tax deducted on amounts credited in March to be paid by 30 April. For credits in any other month, the deadline is seven days from the end of that month.
A firm that finalises its accounts in August and deducts only then is late from 31 March. Section 398(3)(a) of the Income-tax Act, 2025 charges interest at 1% for every month or part of a month from the date the tax was deductible until it is deducted. After deduction, it charges 1.5% for every month or part of a month until the tax is actually paid. If the tax is never deducted, the TDS compliance FAQs point to section 35(b) of the 2025 Act, the counterpart of section 40(a)(ia) of the 1961 Act. Under it, 30% of the sum is disallowed in computing the firm's business income.
The workable answer is to compute remuneration on estimated book profit before 31 March, credit it, deduct 10% and deposit by 30 April. If the final accounts raise the figure, the top-up also carries the 31 March date. Deduct and deposit on it the day the figure is settled, so that interest runs only on the top-up and only for the months it was outstanding.
Worked example: two partners in tax year 2026-27
Illustration. Shah & Iyer is a two-partner firm whose deed allows 12% interest on capital, credited quarterly. Kavita Shah has capital of ₹20,00,000, draws ₹50,000 a month and is credited remuneration of ₹6,00,000 and a profit share of ₹4,00,000 on 31 March 2027. Arjun Iyer has capital of ₹1,50,000, receives no remuneration and is credited a commission of ₹10,000 on 31 March 2027 for a client he brought in.
Kavita's ledger for the year works out like this:
| Credit date | Nature | Amount | TDS at 10% | Deposit by |
|---|---|---|---|---|
| 30 June 2026 | Interest on capital | ₹60,000 | ₹6,000 | 7 July 2026 |
| 30 September 2026 | Interest on capital | ₹60,000 | ₹6,000 | 7 October 2026 |
| 31 December 2026 | Interest on capital | ₹60,000 | ₹6,000 | 7 January 2027 |
| 31 March 2027 | Interest on capital | ₹60,000 | ₹6,000 | 30 April 2027 |
| 31 March 2027 | Remuneration | ₹6,00,000 | ₹60,000 | 30 April 2027 |
| Every month | Drawings of ₹50,000 | Outside the rule | Nil | Not applicable |
| 31 March 2027 | Share of profit of ₹4,00,000 | Outside the rule | Nil | Not applicable |
Her covered credits total ₹8,40,000 and the firm deducts ₹84,000 in all. The first quarter's interest alone crosses ₹20,000, so deduction starts on 30 June 2026.
Arjun's interest is ₹4,500 a quarter. By 31 December 2026 his total is ₹13,500 and nothing is deducted. On 31 March 2027 the fourth-quarter interest of ₹4,500 and the commission of ₹10,000 take him to ₹28,000. The firm deducts ₹2,800 on that date, which is 10% of the whole ₹28,000 and not just of the March credits, and deposits it by 30 April 2027.
Now suppose the firm books Kavita's remuneration on 31 March 2027 but deducts the ₹60,000 only when the accounts are signed in August. Interest under section 398(3)(a) runs at ₹600 for each month or part of a month from 31 March until deduction. If the deducted amount then sits with the firm, a further ₹900 accrues for each month or part of a month until deposit. Had the tax never been deducted, ₹1,80,000 of the ₹6,00,000 would be disallowed under section 35(b).
Whether the firm can claim the whole ₹6,00,000 as a deduction in its own computation is a separate question. Serial 7 applies to any sum in the nature of remuneration that is credited, so the TDS base is the amount booked, even if part of it is later found not deductible.
Statements, certificates and the partner's credit
For tax year 2026-27 the compliance calendar for these entries is:
| Step | Deadline | Where the rule sits |
|---|---|---|
| Deposit tax deducted on credits from April to February | Within seven days from the end of the month | Rule 218(2)(b) |
| Deposit tax deducted on March credits | 30 April 2027 | Rule 218(2)(a) |
| Quarterly statement in Form 140 | 31 July 2026, 31 October 2026, 31 January 2027 and 31 May 2027 | Form 140 FAQs |
| Certificate in Form 131 to each partner | Within 15 days of the statement due date, so 15 June 2027 for the January to March quarter | Section 395(4)(a) |
The partner entries go in Form 140, the quarterly statement for non-salary payments to residents that, as the Form 140 FAQs note, replaced Form 26Q. Preparing and correcting that statement is covered in TDS returns: forms, filing cycle and corrections. The Form 131 FAQs add that the certificate must be downloaded from TRACES, and a certificate prepared any other way is not valid. Checking a certificate against Form 26AS and the AIS is explained in verifying Form 16 and Form 16A certificates.
For the partner, the 10% is a credit against the final tax, not the final tax itself. Kavita, with ₹8,40,000 of interest and remuneration, still owes tax at her own rates on that income and on everything else she earns, less the ₹84,000 deducted. Only the TDS she expects the firm to deduct during the year should be netted off when she works out her instalments, using the method in advance tax instalments under the 2025 Act.
Year-end checks before the books close
- List every account in which partner interest, remuneration, commission or bonus is credited: capital, current and loan accounts, and any suspense or provision account.
- Add up each partner's credits for the tax year and note the date on which each partner's total crosses ₹20,000.
- Fix remuneration on estimated book profit before 31 March and credit it, so the 10% can be deducted and paid by 30 April.
- Keep profit share and drawings in separate ledger heads, so they are not swept into the TDS base and remuneration is not booked as drawings.
- Match the challans and the Form 140 entries to the partner-wise totals, then issue Form 131 within 15 days of each statement due date.
If a default has already happened, it will appear in the TRACES justification report for that statement, and reading it to choose the right correction is covered in how to read a TRACES justification report.
