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The 2-Minute Summary
Section 393(3) Sl. No. 7 requires any firm to deduct TDS at 10% on salary, remuneration, commission, bonus, or interest paid to a partner, or credited to their account (including capital account), when the aggregate exceeds Rs. 20,000 per partner per Tax Year.
This provision was introduced by Finance Act 2024, effective from 1 April 2025 (Tax Year 2025-26), and continues under the Income Tax Act 2025. It is the first time firms have had a TDS obligation on partner payments.
Example: A law firm pays Rs. 5 lakh as remuneration and Rs. 60,000 as interest to each of its three partners. Total per partner = Rs. 5.6 lakh. TDS = 10% = Rs. 56,000 per partner is deducted before credit.
Example: A small partnership pays Rs. 15,000 interest to one partner only. Since Rs. 15,000 is below Rs. 20,000, no TDS is required.
Under Income Tax Act 1961: Section 194T of the Income Tax Act 1961 (inserted by Finance Act 2024, effective 1 April 2025). Now Section 393(3) Sl. No. 7 of the Income Tax Act 2025.
At a Glance
| Item | Details |
| New Act Reference | Section 393(3), Sl. No. 7 of Income Tax Act 2025 |
| Old Act Reference | Section 194T of Income Tax Act 1961 |
| Who Deducts | Any person being a firm |
| Rate | 10% |
| Threshold | Rs. 20,000 per partner per Tax Year |
| Effective from | Tax Year 2025-26 (1 April 2025 onwards) |
| Covers | Salary, remuneration, commission, bonus, or interest paid to a partner or credited to their account (including capital account) |
| TAN Required | Yes |
| Form | Form 26Q (quarterly TDS return) |
| TDS Certificate | Form 16A to each partner |
Provision from the Act
Section 393(3) Sl. No. 7 reads: Any sum in the nature of salary, remuneration, commission, bonus or interest paid to a partner of the firm or credited to his account (including capital account).
Payer: Any person, being a firm.
Rate: 10%. Threshold: Rs. 20,000.
Capital Account Credit is Explicitly Covered
The phrase ‘credited to his account (including capital account)’ is significant. Many firm deeds credit remuneration, interest, and bonus directly to partners’ capital accounts rather than making cash payments. The provision explicitly covers such credits.
The TDS obligation arises at the time of credit to the capital account, not only at the time of actual cash payment.
Example: A partnership credits Rs. 2 lakh as interest on capital to Partner A’s capital account in September 2026. No cash is paid. TDS of 10% = Rs. 20,000 must still be deducted from this credit at the time of crediting.
Threshold: Per Partner, Per Year
The Rs. 20,000 threshold applies to each partner independently. All payments and credits of the covered types to a single partner in the Tax Year are aggregated. Once the total crosses Rs. 20,000 for a partner, TDS at 10% applies from the amount that takes the total above the threshold.
Partners with lower payments may not trigger TDS at all. Each partner is assessed independently.
Why the Provision Matters
Before Tax Year 2025-26, partner payments from a firm had no TDS. Partners were expected to pay advance tax on their share of firm income and partner remuneration, but compliance was variable. Section 194T creates a mandatory withholding mechanism ensuring significant partner receipts are captured in Form 26AS for cross-verification.
Practical Compliance Checklist
- If your firm pays partners any salary, remuneration, interest, commission, or bonus: obtain TAN immediately if not already held. This provision has been active since April 2025.
- Track all payments and capital account credits to each partner. Once any partner’s aggregate crosses Rs. 20,000, deduct 10% TDS on the crossing amount and all subsequent credits/payments.
- File quarterly TDS returns in Form 26Q. Include partner TDS amounts.
- Issue Form 16A to each partner at year-end showing total TDS deducted on their receipts from the firm.
- Partners should check their Form 26AS to see TDS credited by the firm and claim it as advance tax against their personal tax liability.
Many smaller firms have not yet implemented TDS on partner payments since the provision is new. If your firm has been paying partners without TDS since April 2025, deduct applicable TDS on current and future payments immediately, deposit with interest for the delay, and file quarterly returns. The earlier you comply, the smaller the total interest liability.
