Partnership vs LLP: When Section 194T Applies and When 194J Does Not
10% TDS applies to partner remuneration under Section 194T from FY 2025-26, while professional fees to external consultants attract 10% TDS under Section 194J. A firm must not deduct 194J on payments to its own partners — partners are not professionals vis-à-vis their own firm. The section turns on the relationship, not the invoice label.
HRA Research Desk
Chartered Accountant · Harun Raaj & Associates
10% TDS applies to partner remuneration under Section 194T of the Income-tax Act, 1961 from FY 2025-26, while fees paid to an external professional or consultant attract 10% TDS under Section 194J. The two sections do not overlap: a firm must never deduct 194J on a payment to its own partner, because a partner is not a "professional" vis-à-vis the firm that pays them. The correct section is decided by the relationship — partnership or arm's-length — not by the label on the invoice.
New w.e.f. 01-04-2025: Section 194T is the correct section for partner remuneration from FY 2025-26 onwards. Deducting 194J on a payment to your own partner is a wrong-section default, not a matter of convenience.
Why the confusion existed
Before 1 April 2025, there was no dedicated TDS section for partner remuneration. Partner salary, bonus and commission were taxable in the partner's hands as income from business or profession under Section 28(v), but no provision squarely addressed the firm's TDS obligation. In that vacuum, a number of firms treated partner remuneration as "fees for professional services" and deducted TDS under Section 194J at 10%.
That treatment was always fragile. Section 194J targets payments for professional or technical services supplied by one person to another at arm's length. A partner drawing remuneration from their own firm is not supplying a service to the firm — the remuneration is a distribution of the firm's profits under the partnership deed, not a fee. Section 194J was the wrong vehicle, and the Finance (No. 2) Act, 2024 fixed the gap by inserting Section 194T with effect from 1 April 2025.
The two sections side by side
The overlap that most firms trip on is the threshold column. A firm paying an external IT consultant ₹40,000 in a year deducts nothing under 194J (below the ₹50,000 aggregate); the same firm paying a partner ₹40,000 must deduct 194T on the full amount, because the ₹20,000 partner threshold was crossed.
The relationship test
Ask one question: is the payee a partner of the paying firm?
- Yes — the payee is a partner. The payment, however it is labelled (salary, bonus, commission, remuneration, drawings fixed under the deed), is partner remuneration. Deduct under Section 194T from FY 2025-26 if the annual payment exceeds ₹20,000. Interest on capital is a separate head under Section 194A. the current 194A treatment for partner interest.
- No — the payee is an external professional. A lawyer, doctor, architect, engineer, company secretary or consultant who is not a partner is supplying professional services at arm's length. Deduct under Section 194J at 10% once the ₹50,000 aggregate is crossed. If the service is technical (for example, technical testing) rather than professional, the rate is 2%.
The label on the invoice is not decisive. A partner who invoices the firm for "consulting fees" is still a partner; an external consultant is not converted into a partner by calling the fee "remuneration". The partnership deed, the profit-sharing ratio and the tax treatment under Section 40(b) are what establish the relationship.
Worked example: Doshi & Associates LLP
Doshi & Associates LLP is a practising CA firm. In FY 2025-26 it makes three payments:
If Doshi & Associates had (incorrectly) deducted 194J on Ankit's ₹12,00,000 remuneration, it would have paid the same headline 10% rate — so the cash TDS is identical. The problem is the classification: on scrutiny, a 194J deduction on a partner payment is a "wrong section" default, and the department can treat the TDS as not validly deducted, attracting interest under Section 201(1A) and a Clause 34 entry in the tax audit report. Getting the section right avoids the argument entirely.
What happens when you pick the wrong section
Non-deduction and short-deduction converge. Under the settled approach, a genuine difference of opinion on characterisation is a defence to penalty, but not to interest. Interest under Section 201(1A) — 1% per month from the date TDS was deductible to deduction, 1.5% per month from deduction to deposit — accrues on the amount the department says should have been deducted.
30% disallowance under Section 40(a)(ia). Where TDS was deductible but not deducted, or deducted but not deposited before the Section 139(1) due date, 30% of the expenditure is added back to the firm's taxable income. For a firm, this stacks on the Section 40(b) ceiling on partner remuneration — a costly double layer.
Section 206AA at 20%. A partner or professional without a valid PAN pushes the rate to 20% of the gross amount. Verify PANs on the portal before the first payment.
FAQ
Can a firm deduct Section 194J on remuneration to its own partner?
No. From FY 2025-26, partner remuneration is governed by Section 194T. A 194J deduction on a partner payment is a wrong-section default that attracts interest and a Clause 34 disclosure.
Is interest on partner capital covered by Section 194T?
No. Section 194T covers salary, bonus, commission and remuneration. Interest on capital is treated under Section 194A. the current rate and threshold.
We pay an external CA firm ₹2 lakh a year for audit services. Which section?
Section 194J at 10%, as fees for professional services, provided the ₹50,000 aggregate is crossed. The audit firm is an external professional, not a partner.
What is the 194J threshold now?
₹50,000 aggregate per payee per financial year for professional and technical fees, raised from ₹30,000 by the Finance Act, 2025 with effect from 1 April 2025. Director remuneration under 194J has no threshold.
Does the partnership deed matter for TDS?
Yes. The deed determines whether a payment is partner remuneration (Section 40(b) territory) or something else. A payment to a non-partner cannot be taxed as partner remuneration merely because the deed says so.
Our LLP has no working partners — only capital partners. Do we still file TDS?
Only if a reportable payment is made. Capital partners who receive only interest on capital may attract 194A TDS rather than 194T. A firm with zero reportable non-salary payments still files nil quarterly statements where applicable.
Sources
- Section 194T, Income-tax Act 1961 (inserted by Finance (No. 2) Act 2024, w.e.f. 01-04-2025)
- Section 194J, Income-tax Act 1961 (professional/technical services; director remuneration)
- Section 28(v), 40(b) (taxability and ceiling of partner remuneration)
- Section 194A (interest), Section 40(a)(ia), Section 201(1A), Section 206AA
Use the Section 194T checker to classify a payment before you deduct. For a TDS compliance audit of your firm, visit pvtltd.co.
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See Also
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