The double taxation nightmare: Section 194T - for partnerships and LLPs
Let's check a scenario.
There is a partnership or LLP (5 star LLP) with two partners, Ramesh and Suresh. As per the partnership deed, Ramesh is entitled to salary. The deed says Ramesh gets Rs. 80,000 a month, making it Rs. 9,60,000 a year.
Over the past years, this working has been simple. However, last year, Section 194T was introduced with effect from 1 April 2025. What it said was simple: if aggregate payments to a partner - salary, bonus, remuneration, commission, interest - exceed Rs. 20,000 in a year, TDS must be deducted. Accordingly, as per plain reading, TDS at 10% was deducted on each payment, ensuring 5 star LLP remained compliant.
But at year end, when the books were finalised, a problem surfaced.
What the deed said (FY 2025-26)
Monthly remuneration per deed : Rs. 80,000
Annual remuneration (12 months) : Rs. 9,60,000
TDS deducted @ 10% under Sec 194T : Rs. 96,000
Taxable Amount in Ramesh's 26AS / AIS : Rs. 9,60,000 (this number matters)
What Section 40(b) actually allows?
The Income Tax Act caps how much remuneration a firm can deduct as an expense. This cap is not based on what your deed says. It is based on the firm's book profits, and the formula is:
On first Rs. 6,00,000 of book profits : 90%, OR Rs. 3,00,000, whichever is HIGHER
On anything above Rs. 6,00,000 : 60%
Now let us apply this to the firm, assuming the book profits for FY 2025-26 as Rs. 10,00,000.
On first Rs. 6,00,000 @ 90% : Rs. 5,40,000
On balance Rs. 4,00,000 @ 60% : Rs. 2,40,000
Maximum allowable remuneration : Rs. 7,80,000
Your deed says Rs. 9,60,000. The law allows Rs. 7,80,000. The difference is Rs. 1,80,000.
Where double taxation actually happens?
That Rs. 1,80,000 excess is disallowed under Section 40(b). It simply never becomes a valid expense for the firm. Here is what that means in practice:
Book profits of the firm : Rs. 10,00,000
Maximum remuneration allowable (40b) : Rs. 7,80,000
Firm's taxable income (10L - 7.8L) : Rs. 2,20,000
Tax payable by firm @ 31.2% flat : Rs. 68,640
Taxable amount in Ramesh's AIS : Rs. 9,60,000 (full amount, no adjustment)
Ramesh's actual allowable remuneration : Rs. 7,80,000
What Ramesh must declare in his ITR : Rs. 9,60,000 (because his AIS says so)
Ramesh pays tax on Rs. 1,80,000 extra : even though the LLP has paid tax on it
The Rs. 1,80,000 is taxed once in the firm's hands because it is never allowed as a deduction. It is taxed again in Ramesh's hands because his AIS shows the full Rs. 9,60,000 and his ITR has no automatic mechanism to strip out the disallowed portion. Same money, taxed twice.
And if Ramesh tries to declare only Rs. 7,80,000 in his ITR because that is what was actually allowable - his return will not match his AIS. That mismatch will either come back as a defective return notice, a prima facie adjustment under Section 143(1)(a), or in the worst case, scrutiny assessment. There is no clean way out once the TDS has been filed at the wrong figure.
The interest clause - same trap, different page of your deed
Section 40(b) also caps interest on partner capital at 12% per annum. Same logic applies. If your deed does not explicitly say interest not exceeding 12% per annum on capital, the excess gets disallowed at the firm level and still shows in full in the partner's AIS.
How to fix this - four things to do now:
1. Rewrite the remuneration clause in your deed.
Replace the fixed monthly figure with language like: "remuneration decided shall be subject to limits under Section 40(b) of the Income Tax Act." This way you only ever credit what is actually allowable. No excess. No disallowance. No double tax.
2. Separate drawings from salary - they are not the same thing.
Money Ramesh takes out during the year is drawings. It is not remuneration. Formal remuneration should be credited at year end, not during the year, after book profits are known and the 40(b) ceiling is calculated.
3. Cap interest at 12% explicitly in the deed and cap remuneration to 40(b) limits.
Write it clearly: interest not exceeding 12% per annum on capital.
4. File your TDS return - and be ready to revise it.
Your Form 26Q should reflect the remuneration actually allowable under 40(b), not the deed figure. If you have already filed with the higher number, submit a correction statement once your books are finalised and numbers are confirmed.
Urgent - Rs. 200 per day late fee kicks in from 1 June 2026
If your firm or LLP has not yet filed its TDS statement, and aggregate payments to any partner (remuneration + interest + bonus + commission) exceed Rs. 20,000, file now. Interest for late or non-deduction is 1% per month or 1.5% per month depending on the default, which can be considered manageable. However, the penalty as late fee for non-filing of the TDS statement is Rs. 200 per day from 1 June 2026. It does stop - but only once the total late fee equals the amount of TDS itself. Until then, the meter is running. File now and avoid it entirely.
A note on the Income Tax Act 2025
The new ITA 2025 carries the same provisions, the same logic, and the same intent. The clause numbers and form numbers have changed but the underlying rules are identical. If you are reading guidance that refers to the old section numbers, the principles still apply - just verify the updated numbering under ITA 2025 before acting.
Drop your queries or specific situation in the comments - deed with a fixed salary clause, TDS already deducted at the wrong figure or unsure about your interest rate!