{"id":1769,"date":"2019-09-17T17:18:46","date_gmt":"2019-09-17T11:48:46","guid":{"rendered":"https:\/\/aktassociates.com\/blog\/?p=1769"},"modified":"2019-09-17T17:24:52","modified_gmt":"2019-09-17T11:54:52","slug":"taxation-of-limited-liability-partnership","status":"publish","type":"post","link":"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/","title":{"rendered":"Taxation of Limited liability Partnership under Income Tax Act, 1961"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The Concept of Limited liability Partnership was came in the year 2009 when the Limited Liability Act, 2008 was applicable. It is a body corporate which has registered under the LLP Act, 2008. This article is all about the taxation of LLP but before discussion further let me clarify some points:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The word <\/span>firm<span style=\"font-weight: 400;\"> shall include the <\/span><a href=\"https:\/\/aktassociates.com\/blog\/limited-liability-partnership-procedure-advantages\/\">limited liability Partnership (LLP)<\/a><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The word Partner shall include a partner of LLP<\/span><\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-1780\" src=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/Taxation-of-Limited-liability-Partnership-2-1-1-1-1.png\" alt=\"Taxation of LLP\" width=\"700\" height=\"400\" srcset=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/Taxation-of-Limited-liability-Partnership-2-1-1-1-1.png 700w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/Taxation-of-Limited-liability-Partnership-2-1-1-1-1-300x171.png 300w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/09\/Taxation-of-Limited-liability-Partnership-2-1-1-1-1-20x11.png 20w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">That means under the income tax act, the taxation of the firm is similar to the taxation of LLP. In simple words, LLP is a partnership firm <\/span>having limited liabilities.<span style=\"font-weight: 400;\"> So, after reading this article, you will able to calculate the total income and tax amount of firm and LLP.<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >In this article, we will discuss about...<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #1e73be;color:#1e73be\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #1e73be;color:#1e73be\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Applicability_of_Tax_Rates_Under_the_Income_Tax_Act1961\" title=\"Applicability of Tax Rates Under the Income Tax Act,1961\">Applicability of Tax Rates Under the Income Tax Act,1961<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Sec_40b_-Limit_for_the_deduction_of_payment_of_remuneration_to_partners\" title=\"Sec 40(b): -Limit for the deduction of payment of remuneration to partners\">Sec 40(b): -Limit for the deduction of payment of remuneration to partners<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Explanation_1_to_section_40b\" title=\"Explanation 1 to section 40(b)\">Explanation 1 to section 40(b)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Explanation_2_to_section_40b\" title=\"Explanation 2 to section 40(b)\">Explanation 2 to section 40(b)<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Section_102A_Exemption_to_the_partners\" title=\"Section 10(2A): Exemption to the partners\">Section 10(2A): Exemption to the partners<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Important_Case_Study\" title=\"Important Case Study\">Important Case Study<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#Other_Notes\" title=\"Other Notes:\">Other Notes:<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Applicability_of_Tax_Rates_Under_the_Income_Tax_Act1961\"><\/span><b>Applicability of Tax Rates<\/b><b> Under the Income Tax Act,1961<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">For Firms\/LLP. There are no slab rates has been defined. Tax rates applicable for a firm is as follows:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Tax Rate: 30% shall be charged on Total Income<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Surcharge: 12% (Surcharge is levied on Tax amount and not on the total income)<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The surcharge shall be levied if the total income exceeds Rs. 1 Crore rupees.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Health and Education Cess: 4% in all cases.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\"><strong>Note:<\/strong> The benefit of section 87A shall not be given to the Firm\/LLP even if the total income of the firm\/LLP is up to Rs. 3,50,000, because the said benefit is available only to the <\/span>Resident Individual.<\/p>\n<p><span style=\"font-weight: 400;\"><strong>Note:<\/strong> If the firms are having an income from capital gain then it will taxable as per the provision of section 112 or 112A, as the case may be, in long term capital gain and section 111A in short term capital gain.<\/span><\/p>\n<p><b>Section 40(b): Conditions for deductibility of payment of interest, salary, Bonus commission (remuneration) by the firm to their partners\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The <\/span>interest and other payments<span style=\"font-weight: 400;\"> like salary, interest, bonus, etc. (Say remuneration) made by the firm to their partners <\/span>shall be allowed<span style=\"font-weight: 400;\"> as deduction <\/span>if the following conditions are satisfied as same as applicable also to Firm<span style=\"font-weight: 400;\">:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If the interest and other remuneration are being given to the <\/span>working partner<span style=\"font-weight: 400;\">. If these are given to Non-working partner then such payment shall be disallowed.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The remuneration shall be allowed only when the partnership deed specifies the amount of remuneration or specify the method of <\/span>quantifying the amount of remuneration.<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The above specifies payment shall be allowed only after the date of <a href=\"https:\/\/aktassociates.com\/blog\/partnership-dissolution-when-a-partnership-comes-to-the-end\/\">partnership deed<\/a> i.e., the payments shall not be allowed from the retrospective form.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The payment of interest shall not be exceeded from 12% per annum simple interest.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\"><strong>Note:<\/strong> If the firm is charging interest on the amount withdrawn from the current account by the partner as drawings then such interest shall not net off with the interest on capital given by the firm to its partners.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The interest given by the partner to the firm on his drawings shall be chargeable as income from PGBP in the hands of Firm and<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The interest given by the firm to the partners on capital shall be allowed as a deduction to the firm under section 40(b).<\/span><\/p>\n<p><span style=\"font-weight: 400;\"><strong>Note:<\/strong> As we already specified above, the deduction of interest on capital shall be allowed only when such amount has been specified in the partnership deed. This also applies to current account and loan account. In simple words, the following shall be allowed as a deduction only when it specified in the partnership deed:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Interest on Fixed Capital<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Interest on current capital<\/span><span style=\"font-weight: 400;\">(as on Capital Account it is presumed to be allowed always at a certain %)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Interest on Loan Account.<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Sec_40b_-Limit_for_the_deduction_of_payment_of_remuneration_to_partners\"><\/span><b>Sec 40(b): <\/b><b>-Li<\/b><b>mit for the deduction of payment of remuneration to partners<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The payment of remuneration to the partners shall not exceed the following amount. That means any amount above the following specified amount shall be disallowed in the hands of the firm:<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>On<\/b><\/td>\n<td><b>Condition<\/b><\/td>\n<td><b>Allowable deduction Amount<\/b><\/td>\n<\/tr>\n<tr>\n<td><b>1st<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Rs.3,00,000 of Book Profits*<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">Or<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">In Case of Loss<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Rs.1,50,000 Or<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">90% of the Book Profits*<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">Whichever is Higher<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Balance<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Amount of Books Profits<\/span><\/td>\n<td><span style=\"font-weight: 400;\">At 60% of Book Profits<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><b>Book Profit: <\/b><span style=\"font-weight: 400;\">Book profit can be calculated by making the following adjustment in the Net Profit as calculated under the normal provisions of PGBP:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Only Income under the head PGBP is to be taken for calculating the book profits.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Brought forward losses shall not be deducted. (Section 72).<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Chapter VI-A deductions shall not be deducted.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Remuneration already debited in the profit and loss account shall be added back that means the effect of remuneration to be reversed off.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Interest paid to the partners shall be added back to the extent of the amount which is not deductible.<\/span><\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Explanation_1_to_section_40b\"><\/span><b>Explanation 1 to section 40(b)<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">If the individual person is a partner in a representative capacity and he has received the interest in an individual capacity, then such interest shall be disallowed in the hands of the firm\/LLP.<\/span><\/p>\n<p><span style=\"font-weight: 400;\"><strong>For Example<\/strong>, XYZ is a HUF which is a partner in the firm\/LLP and Mr. X has received the interest in a representative capacity of XYZ then such interest shall not be allowed in the hand of such firm\/LLP.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Explanation_2_to_section_40b\"><\/span><b>Explanation 2 to section 40(b)<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">If the individual joins the firms in his individual capacity and he has received the interest from the firm\/LLP on the behalf of other people as representative capacity then also the interest amount shall be disallowed to firm\/LLP.<\/span><\/p>\n<p><b>Note: <\/b><span style=\"font-weight: 400;\">Since, the interest and remuneration with compliance of section 40(b) are exempt in the hands of firm\/LLP, the same shall be taxable in the hands of <a href=\"https:\/\/aktassociates.com\/blog\/partnership-firm-registration-benefits-procedure\/\">partners of firm<\/a>\/LLP under section 28.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Section_102A_Exemption_to_the_partners\"><\/span><b>Section 10(2A): Exemption to the partners<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Share in the total income of the firm\/LLP shall be exempt in the hands of the partners.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It has been clarified by the CBDT that even if the total income of the firm\/LLP is Nil then also, the profit in the hands of the partner would not be taxable.<\/span><\/p>\n<p><strong>For Example:<\/strong><\/p>\n<table>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">Particulars<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Amount in Lakhs<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Net profit before Deduction and tax<\/span><\/td>\n<td><span style=\"font-weight: 400;\">100<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Deductions under Chapter VI-A<\/span><\/td>\n<td><span style=\"font-weight: 400;\">-100<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><span style=\"font-weight: 400;\">&#8211;<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400;\">Now, let&#8217;s say, the profit as per books is also Rs.100 lakhs and distributed it in the partners, say 50 lakhs each.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So, the total income of the firm is Nil, hence no tax on firm\/LLP<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Share in profit of Rs.50 lakhs is exempt in the hands of partners under section 10(2A), hence no tax on partners.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Like the profit is exempt in the hands of partners and taxable to firm\/LLP, similarly in case firm\/LLP is having a loss, such loss shall be set off or carried forward by the firm\/LLP and not to the partners.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Important_Case_Study\"><\/span><b>Important Case Study<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">There is a famous case study of <\/span>CIT Vs. Great City Manufacturing Company <span style=\"font-weight: 400;\">in which <\/span><span style=\"font-weight: 400;\">the firm has paid the remuneration to the partners as per section 40(b) but <\/span><span style=\"font-weight: 400;\">The assessing officer has disallowed the expense since such payment is unreasonable and excessive as per section 40A(2).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It was held that, if the payment is made with compliance of section 40(b), then AO cannot disallow the payment or part of the payment on the ground that it was excessive or unreasonable.<\/span><\/p>\n<p><a href=\"https:\/\/aktassociates.com\/start-a-business\/limited-liability-partnership-registration\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-1020 aligncenter\" src=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/06\/LIMITED-LIABILITY-PARTNERSHIP-1-1.png\" alt=\"LIMITED LIABILITY PARTNERSHIP\" width=\"700\" height=\"150\" srcset=\"https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/06\/LIMITED-LIABILITY-PARTNERSHIP-1-1.png 700w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/06\/LIMITED-LIABILITY-PARTNERSHIP-1-1-300x64.png 300w, https:\/\/aktassociates.com\/blog\/wp-content\/uploads\/2019\/06\/LIMITED-LIABILITY-PARTNERSHIP-1-1-20x4.png 20w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Other_Notes\"><\/span><b>Other Notes:<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If the company is being converted into the LLP then the capital gain shall be exempted on such transfer.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">LLP cannot opt for presumptive taxation under section 44AD.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Where any tax\/penalty\/interest is due from LLP in respect of income of the previous year, then every person who is a partner in the LLP during the relevant previous year shall be jointly and severely liable for the payment unless he proves that non-recovery was not due to his negligence or misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">When the company upon whom MAT provision already applicable and then if afterward if it\u00a0 is converted into LLP then provision of MAT(Minimum Alternate Tax )will not be applicable to that LLP<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>The Concept of Limited liability Partnership was came in the year 2009 when the Limited Liability Act, 2008 was applicable. &#8230; <\/p>\n<p class=\"read-more-container\"><a title=\"Taxation of Limited liability Partnership under Income Tax Act, 1961\" class=\"read-more button\" href=\"https:\/\/aktassociates.com\/blog\/taxation-of-limited-liability-partnership\/#more-1769\">Read more<span class=\"screen-reader-text\">Taxation of Limited liability Partnership under Income Tax Act, 1961<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":1775,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Taxation of LLP under Income Tax Act, 1961 AKT Associates<\/title>\n<meta name=\"description\" content=\"Meaning of LLP Applicability of Tax Rates Section 40(b): Conditions for deductions of interest and Remuneration Limit of allowable remuneration to partners Section 10(2A): Exemption of share of profit in the hands of partners Important Case Study Other Important Notes in relation to LLP\" \/>\n<meta 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