The introduction of Section 194T in the Finance (No. 2) Act, 2024, effective from April 1, 2025, introduced a significant procedural gray area for Indian partnership firms. The core issue revolves around payments—such as salary, interest, bonus, commission, or remuneration—made to Non-Resident Indian (NRI) partners.
Firms are now caught in a regulatory crossfire: Should these payments be subjected to the new, flat-rate deduction under Section 194T, or should they remain governed by the overarching international taxation principles of Section 195?
Applying the incorrect section can result in the disallowance of partnership expenses under Section 40(a)(i) or the denial of treaty benefits to the NRI partner. This guide provides a definitive legal analysis of Section 194T vs Section 195 to secure your firm's compliance.
The Core Conflict: Statutory Scope
Neither section contains a non-obstante clause ("notwithstanding anything contained...") to expressly override the other. This omission by the Central Board of Direct Taxes (CBDT) creates competing legal interpretations.
The Case for Section 194T (Income-Specific) Section 194T applies to any firm paying remuneration or interest to "a partner," without explicitly distinguishing between resident and non-resident status. It mandates a flat 10% TDS on aggregate payments exceeding βΉ20,000 annually.
5[Payments to partners of firms. 194T.(1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent. (2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.]
The Case for Section 195 (Payee-Specific) Section 195 is the specialized, overarching code for payments to non-residents. Backed by Supreme Court jurisprudence, specific provisions based on residential status generally override broader domestic clauses. Section 195 protects the non-resident's fundamental right to claim Double Taxation Avoidance Agreement (DTAA) benefits.
195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Explanation 1.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has— Item numberSpacerProvision text (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. (6) The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed. (7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.
Comparative Analysis: Section 194T vs Section 195
To understand the practical implications for your finance department, review this compliance breakdown:
Why Section 195 is the Recommended Compliance Route
Despite the CBDT enabling Section 194T reporting in Form 27Q (via the Income Tax Seventh Amendment Rules, 2025), treating these transactions under Section 195 remains the most legally sound and beneficial approach for the following reasons:
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The Specificity Principle: Section 195 is explicitly carved out for non-residents. In statutory interpretation, provisions addressing a specific class of persons (non-residents) override general provisions (partners).
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Preservation of DTAA Rights: If India maintains a tax treaty with the NRI partner’s resident country (e.g., UAE, USA, UK), the applicable interest tax rate may be lower than 10%. This benefit is strictly inaccessible under Section 194T.
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Prevention of Over-Deduction: Section 195 uniquely links TDS to the income actually chargeable to tax in India. It also allows the NRI to apply for a Lower Deduction Certificate under Section 197, a mechanism not permitted under Section 194T.
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Regulatory Alignment: Routing the payment through Section 195 triggers the requirement for Form 15CA/15CB, ensuring rigorous adherence to India's foreign remittance regulations.
The 4-Step Action Plan for Partnership Firms
Until the CBDT issues a definitive circular entirely resolving the Section 194T vs Section 195 debate, firms must adopt a conservative, compliance-first protocol.
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Procure International Documentation: Before crediting any interest or remuneration, mandate the submission of the NRI partner's international tax documents.
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Execute Rate Comparison: Compare the flat 10% rate under Section 194T against the specific DTAA rate for "Interest" or "Business Profits" associated with the partner's country of residence.
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Apply the Beneficial Framework: To strictly avoid the 30% disallowance of business expenses under Section 40(a)(i), if the DTAA rate exceeds 10%, deduct under Section 195. If the DTAA rate is lower, direct the NRI partner to obtain a Section 197 Lower Deduction Certificate to safely apply the reduced rate.
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File Accurately: Remit the funds utilizing proper Form 15CA/15CB procedures and file the quarterly TDS return utilizing Form 27Q.
Essential Document Checklist for NRI Partners
Do not authorize international partnership remittances without securing the following file on record:
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[ ] Permanent Account Number (PAN) Card copy.
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[ ] Valid Tax Residency Certificate (TRC) from the host country.
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[ ] Form 10F (Digitally filed on the Income Tax Portal).
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[ ] Form 15CB (Certified by a Chartered Accountant).
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[ ] Section 197 Certificate (If claiming a deduction lower than 10%).
Top 5 Frequently Asked Questions (FAQs)
1. Can we just deduct 10% under Section 194T to save administrative time?
Answer: While mechanically simpler, doing so strips the NRI partner of their legal right to DTAA benefits and bypasses foreign remittance reporting (15CA/CB), exposing the firm to regulatory scrutiny.
2. What happens if we deduct under Section 194T but the DTAA rate is 15%?
Answer: If the DTAA rate is higher than 10% and you only deduct 10% under Section 194T, the Income Tax Department may classify the firm as an "assessee-in-default," triggering a 30% disallowance of the partnership expense under Section 40(a)(i).
3. Does Section 194T have a threshold limit for NRI partners?
Answer: Section 194T applies a threshold of βΉ20,000 per financial year. However, Section 195 has no threshold; TDS applies from the first rupee paid to a non-resident.
4. Are Form 15CA and 15CB required for Section 194T?
Answer: Legally, Section 194T does not trigger 15CA/15CB requirements. This is a major reason why applying Section 195 is preferred, as it ensures proper FEMA and Income Tax remittance compliance for cross-border transactions.
5. How do we claim a lower rate if the DTAA allows 5% on interest?
Answer: The NRI partner must apply for a Lower Deduction Certificate under Section 197. Once granted, the firm will deduct tax under Section 195 at the approved 5% rate.
Secure Your Partnership Compliance Today
The interplay between domestic TDS provisions and international taxation requires specialized legal oversight. A single misclassification can lead to severe tax disallowances for your firm and lost capital for your partners.
At Gupta Yogesh & Associates, Adv. Yogesh Gupta, Adv. Charu, and CA. Rakesh provide elite tax structuring and compliance advisory for cross-border partnership operations.
Protect your firm's bottom line.
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Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute formal legal or financial advice. The interpretation of Section 194T vs Section 195 is subject to future CBDT clarifications. Readers are advised to consult with a qualified legal professional regarding their specific circumstances. This content is compliant with the regulations of the Bar Council of India regarding professional web publications.
LSI & Semantic Keywords: TDS on NRI partners, Finance Act 2024, Form 15CA/15CB compliance, DTAA benefits India, Section 197 lower deduction, Gupta Yogesh & Associates, tax consultant Rohtak.