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Important Update – TDS on Partner Payments (Section 194T)

Due Date Clarification (March 2026)

There has been considerable confusion among taxpayers, professionals, and businesses regarding the due date for depositing Tax Deducted at Source (TDS) for the month of March. This confusion is especially relevant in the context of newly introduced compliance under Section 194T relating to payments made to partners by partnership firms and LLPs.

Let’s clarify the correct legal position and remove any ambiguity.

Correct Legal Position

As per Rule 30(1)(b) of the Income Tax Rules, the due dates for depositing TDS are clearly defined:

  • TDS deducted during April to February → Deposit by the 7th of the following month
  • TDS deducted during March → Deposit by 30th April (special extended due date)

Conclusion:
TDS deducted for March 2026 can be deposited up to 30 April 2026 without any default or interest liability.

This extended timeline is a statutory relaxation provided every year and is not a discretionary or case-specific relief. Therefore, there is no need for panic or urgency before 7th April for March deductions—unlike other months.

Section 194T – Key Technical Overview

Section 194T is a significant compliance provision applicable to payments made by partnership firms and Limited Liability Partnerships (LLPs) to their partners.

 Applicability

  • Partnership Firms (including traditional firms)
  • Limited Liability Partnerships (LLPs)

This section ensures that certain payments made to partners are subject to TDS, thereby increasing transparency and tax reporting.

TDS Rate and Threshold

  • TDS Rate:
    • 10% (standard rate)
    • 20% if PAN is not available (as per Section 206AA)
  • Threshold Limit:
    • ₹20,000 per partner per financial year (aggregate basis)
    • Once the total payments to a partner exceed ₹20,000 in a financial year, TDS becomes applicable.

Important Note:
Once the threshold is crossed, TDS is required to be deducted on the entire amount, not just the excess.

Nature of Payments Covered

  • The scope of Section 194T is quite broad and includes various types of payments made to partners:

    Covered Payments:

    • Salary or remuneration to partners
    • Interest on capital
    • Interest on loans given by partners
    • Commission or bonus

    These payments are treated as income in the hands of partners and are therefore subject to TDS.

Payments Not Covered

Certain payments are specifically excluded from TDS under this section:

  • Share of profit (exempt in partner’s hands under tax law)
  • Capital withdrawal or drawings
  • Repayment of loan principal

These transactions do not constitute taxable income in the same manner and hence are outside the scope of TDS.

Timing of TDS Deduction

TDS under Section 194T must be deducted at the earlier of the following events:

  • Credit of amount to the partner’s account (including capital account)
  • Actual payment to the partner

     

    Critical Insight:

    Even if no actual payment is made, but an entry is passed in the books (for example, year-end provisioning on 31 March), TDS liability is triggered.

    This is particularly important during year-end closing when firms pass entries for:

    • Partner remuneration
    • Interest on capital

    Failure to deduct TDS at this stage may lead to compliance issues.

 

Compliance Timeline (For FY 2025–26)

Here’s a clear compliance roadmap:

  • TDS Deduction: At the time of credit or payment (whichever is earlier)
  • TDS Deposit (March 2026): On or before 30 April 2026
  • TDS Return Filing (Form 26Q – Q4): On or before 31 May 2026
  • TDS Certificate (Form 16A): Within 15 days from filing of return

Timely adherence to all these steps is crucial to avoid penalties and disallowances.

Consequences of Non-Compliance

If TDS is not deposited by 30 April 2026, the following consequences may arise:

 Interest Liability

  • Interest @ 1.5% per month or part thereof from date of deduction till date of deposit

 Late Fee under Section 234E

  • ₹200 per day for delay in filing TDS return
  • Subject to maximum of TDS amount

 Disallowance under Section 40(a)(ia)

  • 30% of such expenditure may be disallowed while computing taxable income

 Penalty Exposure

  • Penalty proceedings may be initiated for failure to deduct or deposit TDS

 These consequences can significantly increase the tax burden and should be avoided through timely compliance.

Practical Points for Professionals

Here are some important practical insights for accountants, consultants, and business owners:

 Threshold is Per Partner

The ₹20,000 limit is calculated separately for each partner and on an aggregate annual basis.

 Entire Amount Becomes Taxable

Once the threshold is crossed, TDS applies to the full amount, not just the excess.

 Capital Account Entries Matter

Even if amounts are credited to the capital account (and not paid), TDS must be deducted.

 No Form 15G / 15H Benefit

Partners cannot submit Form 15G or 15H to avoid TDS under this section.

 Year-End Planning is Crucial

Most TDS defaults occur due to:

  • Ignoring 31 March entries
  • Missing provision entries
  • Delayed identification of threshold crossing

 Proper review of books before finalization is essential.

Common Mistakes to Avoid

  • Assuming TDS applies only on payment (ignoring credit entries)
  • Ignoring small monthly payments that cumulatively exceed ₹20,000
  • Not deducting TDS on interest credited to capital account
  • Missing March deadline due to confusion with 7th April rule
  • Late filing of TDS returns

Professional Note

  • March TDS enjoys a statutory extended due date (30 April)
    ✔️ There is no requirement to deposit by 7th April for March deductions
    ✔️ Proper compliance ensures:

    • No interest liability
    • No disallowance of expenses
    • Smooth audit and assessment

     The key is not urgency, but accuracy and timely execution within the correct deadline.

Final Takeaway

Section 194T introduces an important compliance layer for partnership firms and LLPs. While the rules are straightforward, practical implementation requires careful tracking of payments, timely deduction, and correct interpretation of accounting entries.

The March deadline confusion is common but avoidable. Understanding that 30 April is the legally valid due date helps professionals plan better and avoid unnecessary stress.

By maintaining proper records, reviewing partner accounts regularly, and aligning with compliance timelines, businesses can ensure smooth and penalty-free operations.

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