How much of a working partner’s pay can an LLP deduct?
An LLP can deduct remuneration paid to a working partner only up to the ceiling in section 40(b). On the first ₹3 lakh of book profit, or where there is a loss, the deduction is ₹1.5 lakh or 90% of the book profit, whichever is more. On the balance of book profit it is 60%. The LLP agreement has to authorise the pay.
Who can be paid?
A working partner is a partner who is actively engaged in conducting the business. Remuneration to any other partner is not deductible under this section. Salary, bonus, and commission are remuneration for this purpose. A share of profit is not. The partner’s share of the LLP’s profit is exempt in the partner’s hands under section 10(2A). Remuneration that the LLP is allowed to deduct is taxed as the partner’s business income.
Interest paid to a partner is a separate limit. It is deductible only up to 12% simple interest a year, and only if the agreement authorises it. Interest above that rate is not turned into remuneration to use the ceiling on this page.
What is the deduction cap?
| Book profit | Most that may be deducted |
|---|---|
| First ₹3 lakh, or a loss | ₹1.5 lakh, or 90% of book profit, whichever is more |
| Balance | 60% of that balance |
Book profit is the figure section 40(b) defines, starting from the net profit in the profit and loss account. The LLP Act does not set this rupee ceiling. Paying more than the ceiling is not forbidden by that Act. The extra is simply not allowed as a deduction.
What must the agreement say?
The pay has to be authorised by, and in accordance with, the LLP agreement, and it has to relate to a period after the date of that agreement. A deed signed in June does not support a deduction for the months before June. Changing the agreement to add or alter remuneration is a change filed in Form 3. The firm’s own tax return is ITR-5. How an LLP is formed is on the LLP page.
Frequently asked questions
Four questions cover the LLP Act, a sleeping partner, the profit share, and an earlier year.
Does the LLP Act set the rupee cap?
No. The LLP Act does not cap a partner’s pay. Section 40(b) of the Income-tax Act caps what the LLP may deduct.
Can a sleeping partner be paid under this section?
No. The deduction is for a working partner, a partner who is actively engaged in the business. Pay to a partner who is not working is not allowed under section 40(b).
Is the partner’s profit share the same as pay?
No. A partner’s share of profit is exempt in the partner’s hands. Remuneration that the LLP deducts is taxed as the partner’s business income.
Can the deed authorise pay for an earlier year?
No. The deduction is only for a period after the date of the agreement that authorises it. A later deed does not open an earlier year.
Sources
The deduction ceiling is section 40(b) of the Income-tax Act, 1961. A partner’s share of profit is section 10(2A). A change to the LLP agreement is filed in Form 3.