In last couple of months, I have come across at least three different parties asking the captioned subject matter to me.
For general benefit, the point is clarified here:
The Limited Liability Partnership Act, 2008 (the LLP Act) is the relevant law in India which governs the LLP.
There is no specific limit on the remuneration payable to partners of a LLP under the LLP Act.
Section 23(4) of the LLP Act states that:
"In the absence of agreement as to any matter, the mutual rights and duties of the partners and the mutual rights and duties of the limited liability partnership and the partners shall be determined by the provisions relating to that matter as are set-out in the First Schedule."
And the clause 6 of the First Schedule to the LLP Act states that –
"No partner shall be entitled to remuneration for acting in the business or management of the limited liability partnership."
Thus, if there is no clause on remuneration in the partnership agreement of the LLP, then no remuneration can be drawn.
The LLP agreement can provide for a fixed or variable amount of remuneration, or a percentage of the profits of the LLP, or any combination thereof.
While there is no specific limit on the remuneration payable to partners of an LLP in India, it is important to ensure that the remuneration paid is as per the terms agreed upon in the LLP agreement.
Position under the Income Tax Act 1961:
Under the Indian Income Tax Act, 1961, the remuneration paid to partners of a LLP is allowed as a deduction from the taxable income of the LLP, subject to certain conditions and limits.
The remuneration paid to partners is allowed as a deduction to the LLP – under section 40(b) of the Income Tax Act. It provides that the total amount of remuneration paid to all partners should not exceed the following limits:
- On the first Rs. 300,000/- of book-profit or in case of loss – LLP is allowed to claim expense towards partners remuneration of Rs. 1,50,000/- or 90% of the book-profit, whichever is more; and
- On the balance of the book-profit – 60% of the book-profit is allowed as deduction to the LLP towards remuneration of its partners.
Any payment made to a partner of LLP that is not in the nature of remuneration, such as interest on capital or share of profit, is not subject to the limits mentioned above and is allowed as a deduction to the LLP, subject to other provisions of the Income Tax Act.
It is also important to ensure that the remuneration paid to partners is reasonable and is in accordance with the terms of the LLP agreement, to avoid any potential challenges by the tax authorities.
Is Goods and Service Tax (GST) applicable to remuneration paid by LLP to its partners?
Yes, GST is applicable on remuneration paid to partners of the LLP, if the following conditions are fulfilled:
- The LLP is registered under GST and has obtained a GSTIN (GST Identification Number).
- The remuneration paid to partners is in the nature of consideration for services provided by the partners to the LLP.
- The remuneration paid to partners is not exempt from GST under any of the provisions of the GST law.
If all the above conditions are met, the LLP is required to charge GST on the remuneration paid to partners at the applicable rate and deposit the same with the government.
If the LLP is not registered under GST, it cannot charge GST on the remuneration paid to partners. However, in such cases, the partners may be required to pay GST on the remuneration received by them under the reverse charge mechanism (RCM), subject to certain conditions.
It is advisable to consult with a qualified tax professional to ensure compliance with the GST law and to understand the specific requirements applicable to the LLP.
Profession tax on partners remuneration:
In India, the liability to pay profession tax varies from state to state. Each state has its own laws and regulations regarding the imposition and collection of profession tax. However, in general, partners of a LLP are liable to pay profession tax if they are engaged in any profession or trade.
Under the laws of some states, the LLP is required to deduct profession tax from the salaries or remuneration paid to its partners and deposit the same with the concerned state government. In such cases, the partners are not required to pay profession tax separately.
And in some other states, the partners of the LLP are required to obtain a profession tax registration and pay profession tax on their own, based on their income from the profession or trade. The rate of profession tax and the income slab for payment of profession tax varies from state to state.
It is important to note that the LLP may also be required to obtain a separate registration for profession tax and comply with the applicable rules and regulations of the concerned state government.
Therefore, it is advisable to consult with a qualified tax professional or a legal expert to understand the specific requirements of the concerned state and ensure compliance with the applicable profession tax laws.