In a Limited Liability Partnership (LLP), the remuneration to partners is an essential aspect of its operations, particularly for determining how profits, salaries, and other benefits are distributed among the partners. Here’s a detailed breakdown of how remuneration works in an LLP:

Types of Remuneration, Salary in LLPs

Remuneration in LLPs can come in several forms, primarily:

  • Fixed Salary/Drawings: Partners may receive a fixed salary, which is a predetermined amount, paid periodically (monthly, quarterly, etc.).
  • Profit Share: The partnership agreement usually specifies how profits are divided among the partners, which can be proportional to their capital contribution or based on any agreed ratio.
  • Commission: Partners may also receive commissions for bringing in business or generating profits for the LLP.
  • Bonus or Incentives: Some LLPs offer performance-based bonuses or incentives in addition to regular salaries or profit share.

Legal Framework Governing Partner Remuneration

  • LLP Act, 2008 (India): Under the Indian LLP Act, there is no specific restriction on the payment of remuneration to partners. The partnership agreement governs how remuneration should be paid.
  • Income Tax Act (India): The income tax treatment for remuneration to partners depends on the structure of the payments.
  • Fixed Salary: If partners are paid a fixed salary, it will be subject to income tax as income from business or profession.
  • Profit Share: Share of profits received by partners is typically not taxable as income but is taxed under the head “Profit and Gains of Business or Profession” in the LLP’s tax return.
  • Tax Deductions: LLPs can deduct salaries and remuneration paid to partners as an expense for tax purposes, provided it is authorized by the partnership agreement.

However, Section 40(b) has specified a maximum limit up to which the deduction can be claimed on interest and remuneration amounts. However, this is not allowed if partnership firms choose to pay tax on a presumptive basis under section 44AD or section 44ADA.

Maximum permissible limit under Section 40(b) is as follows:
(Please note that this limit applies to the total salary of all partners, not per partner)

Book Profit Limit
On the first Rs.3,00,000 of book profit or loss Rs.1,50,000 or 90% of the book profit, whichever is higher
On the remaining balance of book-profit 60% of the book-profit

Calculation of book profits:

Book Profit Limit
(i) Profit as per Profit & Loss account (P&L) xxxx
(ii) Add: Remuneration to partners, if debited in the P&L above xxxx
(iii) Add: Interest paid to partners, if debited in the P&L above xxxx
(iv) Less:  Interest as allowed under Section 40(b) (xxxx)
Book Profits xxxx

Budget 2024 – Increase in Limit for Partner’s Remuneration u/s 40(b)

The limit for the partner’s remuneration as provided in Section 40(b) were last updated in the year 2010. This budget proposes to amend the limit on the partner’s remuneration as per the below table:

Book Profit Limit
On the first Rs.6,00,000 of book profit or loss Rs.3,00,000 or 90% of the book profit, whichever is higher
On the remaining balance of book-profit 60% of the book-profit

Further, a new provision has been added via Section 194T, wherein the TDS will be required to be deducted for any salary, remuneration, bonus or commission payments made to a partner by a firm at the rate of 10% if payment in a financial year exceeds Rs. 20,000.

Interest payable to partners

So far as allowability of interest paid by a firm to its partners under section 40(b) is concerned, the following conditions have been prescribed by section 40(b):

  • The interest payable by a firm to its partners should be authorised by and in accordance with the partnership deed.
  • The interest payable by a firm to its partners should not be for a period falling prior to the date of such partnership deed authorizing the payment of such interest.
  • The rate of interest payable to the partners shall not exceed 12% simple interest per annum.

Note: Interest includes simple interest and not compounding interest. This means if the company is paying interest on delayed payment of simple interest, such compounding interest shall not be permitted to be deducted as per Section 40(b).

Conclusion:

In an LLP, the remuneration structure for partners is flexible and depends largely on the terms agreed upon in the LLP Agreement. Moreover, it is essential for the partners to remain compliant with tax regulations to ensure that the business structure remains legally sound and avoids any taxation pitfalls. By structuring partner remuneration properly, an LLP can maintain a balance between rewarding active participants and ensuring equitable distribution of profits.

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