Remuneration to LLP Partners – Income Tax Act

The Income Tax Department has laid out a host of very specific guidelines regarding the remuneration paid out to the partners in an LLP. While LLP compliance is relatively straightforward, it behaves any partner in one to pay attention to the few requirements there are.

An LLP is a business entity that offers the combined benefits of a partnership firm deeds and Private Limited Companies. It comprises partners who share limited liability for the enterprise. Learn more about the LLP Partners.

What are the returns?

Since it is such an essential aspect of running any business, rules regarding how the remuneration is paid are mentioned in the LLP agreement itself. Each partner will, therefore, want maximum investment return for their efforts, and so, partners must know about the kinds of returns available so that they can balance the agreement in the right way. Here are the three most prominent forms of returns when dealing with a Limited Liability Partnership.

1. Remuneration
2. Interest on capital 
3. Profit Share

Types of Returns Explained

Remuneration

This phrase includes everything from bonuses and commissions to the base salary that a partner or employee receives. Usually, it is paid to partners who take an active effort in helping the LLP grow and expand. It is a form of payment that is proportional to the work being done and doesn’t have much connection to the capital produced by them at the onset of the partnership.

Interest

This is a form of payment that has direct connections to the capital introduced by them at the start of building the business. It does not have anything to do with their current work.  Each partner must have contributed a share or percentage of the total capital needed at the time of starting the partnership, and their interest return is a fixed share of this amount. Hence, the interest they receive will be some percentage of the amount they have invested themselves.

Profit Share

This return is available when the LLP starts making a profit or turns cash-positive. This form of return takes into consideration both the amount of work they have put in and the capital they have earlier invested. As soon as the LLP begins to make money, the profit is analyzed and split into chunks according to work done, and capital is introduced and then split amongst the partners accordingly. 

Eligibility to Receive Returns

Which partners get returns and which doesn’t is purely decided on by the clauses registered in the LLP agreement. Even if a partner is working, inactive, sleeping, active or non-working, if it is specifically mentioned in the LLP agreement that they are to receive a percentage of the profit or interest, then they must be given that amount irrespective of whether they deserve it or have done any work. But, this being said, there is a maximum limit on remunerations given out by the LLP as per the Income Tax Act (one should know about Form 26AS Income tax to make this filing process seamless). Also, the LLP agreement cannot provide any remuneration or return retrospectively to a time before the agreement was in force. 

Amount deductible under the Income Tax Act:

1. The deduction is possible only if the remuneration is received by a working partner or individual
2. The payment of remuneration must be duly authorized and registered within the LLP agreement
3. The payment due must not exceed the amounts stated below
4. If a partner has received more remuneration than what is detailed below, that excess amount is not valid for any deduction and tax must be paid on it (learn about 80U deduction to take full advantage of deductions)
5. The remuneration received by the partners is taxed as Business Income. Share of profit is not included in the same section as remuneration
6. For both working and non-working members, the share of profit returns is exempted as per Section 10(2A) of the Income Tax Act. One should also be aware of other sections like Section 12A and 80G Registration.
7. Interest received on the capital invested by them is also taxed as Business Income
8. Also, for the first three lakhs earned, remuneration cannot exceed ₹1,50,000 or 90% of book profit, whichever adds up to be more
9. When in balance with profit, the remuneration cannot exceed 60% of the book profit earned by the LLP
10. The interest obtained by the LLP on drawings from partners is charged as profits and gains of business as far as taxation is concerned
11. An LLP will be taxed the same way a partnership is. This means their income is liable to be taxed at 30%. However, LLPs are not eligible for the benefits of Section 44AD, which allows firms not to keep books if their income falls below 8% of the total gross
12. As the LLP does not distribute dividends like a company, it is not eligible for any laws under the dividend distribution tax.Click Here to more about: https://incometaxindia.gov.in/

Interest

• The maximum interest rate permissible under the Income Tax Act is 12%. 
• Above this share, anything received by the partners is taxable. 
• The LLP Agreement must clearly specify what the exact interest rate is and how it will be paid.

What incomes are not allowed any deductions?

Not all types of income received from an LLP are allowed tax deductions. Here’s a look at the types of income that do not receive any reduction.

1. Salary and remuneration received by non-working partners
2. Remuneration received by partners in cases where it goes against what is mentioned and authorised in the LLP agreement
3. If remuneration aligns with what is mentioned in the agreement, but relates to a much older piece of the deed, and does not comply with the modified deed
4. If returns from interest surpass 12% per annum
5. The remuneration paid exceeds the limits set by the 269st of income tax act

Maximum Remuneration to Partners in LLP

In a Limited Liability Partnership (LLP), the remuneration or payment to partners is an important aspect to consider. LLPs are governed by the LLP Agreement and the provisions of the Limited Liability Partnership Act, 2008. When it comes to remuneration to partners, there are regulations in place to ensure fair compensation while adhering to legal and tax requirements.

In accordance with the IT guidelines, partners’ remuneration in a Limited Liability Partnership (LLP) should adhere to the following limits:

• On the first Rs. 3 lakhs of book profit or, in case of a loss, Rs. 1,50,000 or 90% of book profit, whichever is greater.
• On the remainder of the book profit, the remuneration should not exceed 60% of the book profit.
• Additionally, the annual interest rate payable to partners should not exceed 12%.

These limits are crucial to ensure that partners are fairly compensated while maintaining financial prudence within the LLP. 

FAQs:

Is remuneration to partners in LLP taxable?

Yes, remuneration to partners in an LLP is taxable. It is considered a part of their income, and they are required to pay taxes on it as per the applicable tax slabs.

What is the percentage of remuneration for partners?

The percentage of remuneration for partners can vary and is typically determined by the LLP Agreement. LLPs subject to Section 4(b) of the Income Tax Act have complete flexibility in determining the remuneration structure for their partners.

What is the maximum remuneration to partners?

The total amount of salary, bonus, commission, or other remuneration paid to all partners during the previous year should not exceed the following limits: On first 3 lakhs of book profit or in case of loss – ₹ 1, 50,000 or 90% of book profits (whichever is higher). On the remaining balance - 60% of the book profit.

What is the rate of remuneration?

The rate of remuneration for partners can vary based on the LLP's decision as per the LLP Agreement. There is a maximum rate mandated by law under Section 40(b) of the Income Tax Act, and the compensation must be in adherence to it and structured based on the LLP's profitability and other factors. It's advisable to consult with legal and financial experts from Vakilsearch to determine an appropriate partner remuneration structure that aligns with the LLP's objectives.

Get further legal assistance by visiting us at Vakilsearch!

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