Taxation of Partners in a Firm or LLP: Section 10(2A), Remuneration Limits and the New Section 194T TDS (AY 2026-27)

If you are a partner in a partnership firm or a designated partner in an LLP, FY 2025-26 is the first year your firm had to deduct TDS before crediting your remuneration.

Section 194T came into force on 1 April 2025, and it catches almost every working partner in the country.

It also means a lot of partners will open their AIS this year and find entries they have never seen before, against a section code they do not recognise.

This guide covers what is taxable in your hands, what is exempt, what the firm can actually claim, and how the new TDS flows into your return for AY 2026-27.

The Three Money Flows From a Firm to a Partner

A firm can pay a partner in three ways, and each is taxed completely differently.

Getting these three apart is the whole game. Partners routinely report the exempt share of profit as taxable income and pay tax they never owed, or report taxable remuneration as exempt and receive a notice two years later.

Share of profit is exempt, and here is why

The firm has already paid tax on its total income at 30% plus surcharge and cess. Taxing the same profit again when it reaches you would be double taxation, so Section 10(2A) exempts your share.

Your ₹18 lakh share of a firm's post-tax profit is not added to your income at all. It still has to be disclosed in the exempt income schedule of your return, because the department reconciles it against the firm's own filing.

Note the trap: the exemption applies to your share of the total income of the firm. If the firm files a loss, there is nothing to exempt, and you cannot set that firm loss against your personal income either. The loss stays with the firm and is carried forward there.

Remuneration and interest are taxable, but only to the extent the firm could deduct them

Section 28(v) taxes remuneration and interest in your hands as business income. The proviso to that section adds a crucial limit: if any part of the payment was disallowed to the firm under Section 40(b), that same part is not taxable in your hands.

The two are locked together. The firm cannot deduct what you are not taxed on, and you are not taxed on what the firm could not deduct.

Section 40(b): What the Firm Can Actually Deduct

Three conditions must all be met before a rupee of remuneration is deductible:

1. The partner must be a working partner, actively engaged in conducting the business.
2. The payment must be authorised by the partnership deed, and cannot relate to a period before the deed provided for it.
3. The amount must be within the statutory ceiling.

The revised remuneration ceiling

The Finance (No. 2) Act 2024 raised these limits, and FY 2025-26 is the second year they apply.

The old ceiling was ₹1,50,000 or 90% on the first ₹3,00,000. If your deed still says "as per Section 40(b) limits" you are fine. If it hard-codes rupee figures from an older deed, the firm is capped at the lower of the deed amount and the statutory limit, and the extra is disallowed.

Worked example. A firm has book profit of ₹40,00,000 before partner remuneration.

• On the first ₹6,00,000: 90% = ₹5,40,000, which is higher than ₹3,00,000, so ₹5,40,000.
• On the balance ₹34,00,000: 60% = ₹20,40,000.
• Total deductible remuneration: ₹25,80,000.

If the deed splits that equally between two working partners, each partner reports ₹12,90,000 as business income. If the firm actually paid ₹30,00,000, the excess ₹4,20,000 is disallowed to the firm and is not taxable to the partners.

Interest on capital

Interest is deductible up to 12% per annum, simple interest, and again only if the deed authorises it. Anything above 12% is disallowed to the firm and correspondingly untaxed in the partner's hands.

Interest paid to a partner in a representative capacity that differs from the capacity in which the funds were lent falls outside Section 40(b), which is a narrow but useful carve-out for HUF-linked partners.

The presumptive taxation trap

If the firm files under Section 44AD or 44ADA, it cannot separately deduct partner remuneration or interest. That deduction was removed with effect from AY 2017-18, and the presumptive rate is deemed to be after all deductions under Sections 30 to 38.

Firms still get this wrong every year. Before choosing presumptive, run the comparison properly using our guide to Sections 44AD and 44ADA.

Section 194T: The New 10% TDS

This is the change that matters most for AY 2026-27.

Four points that catch firms out:

Credit to the capital account counts. The section explicitly covers credit to a partner's capital account. A firm that books remuneration in March but pays it in June still had to deduct in March.

The threshold is cumulative, not per payment. Once the aggregate for the year crosses ₹20,000, TDS applies to the whole amount, including the earlier payments made below the threshold.

No Form 15G or 15H, and no lower deduction certificate. Section 194T is not covered by Section 197, so a partner cannot apply for a nil or lower rate. If your total tax liability is small, the only route to the money is a refund when you file.

Every firm now needs a TAN. Small firms that never had a TDS obligation before now do, and failing to obtain a TAN before deducting is its own compliance problem.

If the partner has not linked PAN with Aadhaar and the PAN has gone inoperative, the rate jumps to 20% under Section 206AA. That is worth checking now rather than in March, and our post on inoperative PAN consequences explains the fix.

How a Partner Files the Return

The form is ITR-3

Remuneration and interest from a firm are business income. That rules out ITR-1 and ITR-2 completely, even if the rest of your income is only salary from another job, house property and interest.

A partner also fills Schedule IF with the firm's name, PAN, profit-sharing ratio and the exempt profit share. If you are unsure which form applies to your overall situation, start with our ITR form selection guide.

Your remuneration is not salary

This distinction costs partners real money, because they assume salary reliefs apply.

• No standard deduction of ₹75,000.
• No HRA exemption, though Section 80GG may be available under the old regime.
• No Section 89 relief on arrears.
• No Form 16, only Form 16A for the 194T deduction.

What you can claim are genuine expenses incurred to earn that income, such as vehicle running costs, professional subscriptions and depreciation on assets you own personally and use for the firm's business, provided the deed does not already put those costs on the firm.

Regime, rebate and advance tax

A partner is taxed at individual slab rates, and the new regime under Section 115BAC is the default. For AY 2026-27, the Section 87A rebate covers total income up to ₹12,00,000 under the new regime, but the rebate does not apply to income taxed at special rates such as capital gains.

To move to the old regime with business income you must file Form 10-IEA before the due date, and switching back and forth is restricted once you have business income.

Because the 10% TDS under 194T rarely matches a partner's actual slab liability, advance tax still applies. A partner in the 30% bracket who assumes 194T has covered the liability will face interest under Sections 234B and 234C.

Due dates

If the firm is subject to tax audit, the partner's own due date shifts to 31 October 2026, matching the firm. Otherwise it is 31 July 2026. The tax audit thresholds decide which applies.

Reconciling AIS Before You File

Your AIS for FY 2025-26 will now show 194T entries against the firm's TAN. Check three things:

1. The gross amount in AIS matches the remuneration and interest actually credited to you, not the net figure after TDS.
2. The exempt profit share is not sitting in AIS as taxable income, which happens when a firm reports the whole distribution under one head.
3. The firm's disallowed portion, if any, is excluded from what you report, with the computation kept on file.

Where AIS is wrong, submit feedback rather than silently filing a different number. 49Tax reads your Form 26AS and AIS together and flags TDS entries that do not reconcile with the income you have declared, which is exactly the mismatch 194T is going to create in its first year.

The Takeaway

Split every rupee your firm pays you into three buckets before you file: exempt profit share, taxable remuneration and taxable interest.

Then check the firm's Section 40(b) computation, because the amount disallowed there is the amount you should not be taxed on.

And this year, reconcile the new 194T credits in your AIS against what actually reached your capital account, because a 10% flat deduction against a 30% slab liability means advance tax was almost certainly still your responsibility.