A Limited Liability Partnership (LLP) is one of the most preferred business structures in India. It provides the element of flexibility of a partnership with the limited liability of a company. One major aspect of managing an LLP is to determine how much remuneration the partners can legally receive. Partner’s remuneration in an LLP is not just a matter of the agreement between the partners; it is also regulated by the Income Tax Act, 1961, which sets some limits on the amount that can be paid and claimed as a deductible expense.
This blog will explain in detail regarding what partners’ remuneration is, its eligibility, how it is calculated, the legal limits and the taxation rules governing it.
What is a Partner’s Remuneration in an LLP?
Partner’s remuneration refers to the salary, bonus, commission or any other payment made to partners for their active participation in the management and operation of the LLP. It is a form of compensation for the time and effort they put into running the business, distinct from the profit share they receive as partners.
The remuneration may be paid:
- Monthly or periodically (like a salary), or
- As a fixed percentage of profits, or
- As a combination of both.
Legal Basis for Partner’s Remuneration
Partner’s remuneration is governed under two key laws:
- LLP Act, 2008 – It allows partners to determine remuneration terms through the LLP Agreement.
- Income Tax Act, 1961 (Section 40(b)) – It places restrictions on the amount of remuneration that can be allowed as a business expense deduction while computing the LLP’s taxable income.
Hence, remuneration must satisfy two conditions:
- It must be authorized by the LLP Agreement, and
- It must not exceed the limits prescribed under Section 40(b) of the Income Tax Act.
Conditions for Allowable Partner’s Remuneration
To claim remuneration as a deductible expense in the LLP’s accounts, the following conditions must be fulfilled:
- The partner must be an individual (not another LLP or company).
- The LLP Agreement must authorize such payment — even if made later.
- The payment must be made to a working partner, i.e., a partner who is actively engaged in the business operations.
- The amount must not exceed the limits specified under Section 40(b).
If any of these conditions are not met, the remuneration will be disallowed as a business expense and taxed accordingly.
Understanding “Working Partner”
A working partner is a partner who is actively engaged in the business operations of the LLP and contributes to day-to-day management. Merely investing capital does not make one a working partner.
Therefore, only working partners are eligible to receive remuneration that can be claimed as a business expense under the Income Tax Act.
Maximum Limit on Partners’ Remuneration (As per Income Tax Act)
The maximum allowable remuneration depends on the “book profit” of the LLP. Book profit means the net profit computed as per the Income Tax Act, before deducting remuneration to partners.
The prescribed limits under Section 40(b)(v) are as follows:
| Book Profit of LLP | Maximum Deductible Remuneration to Working Partners |
| On the first ₹3,00,000 of book profit, or in case of loss | ₹1,50,000 or 90% of book profit (whichever is higher) |
| On the balance of the book profit | 60% of the book profit |
Step-by-Step Process to Calculate LLP Partners’ Remuneration
Here’s a simple guide to calculating partners’ remuneration in an LLP:
Step 1: Compute the Book Profit
- Start with net profit as per the profit & loss account.
- Add back disallowed expenses (like income tax, penalties, etc.).
- Add back remuneration (if already deducted).
This gives the book profit.
Step 2: Apply the Income Tax Act Limits
- On the first ₹3,00,000 of book profit, allow 90% or ₹1,50,000 (whichever is higher).
- On balance, allow 60%.
Step 3: Compare with LLP Agreement
- Check the LLP Agreement for the actual remuneration terms.
- The deductible amount cannot exceed both:
- The amount mentioned in the agreement and
- The limits under Section 40(b).
Step 4: Allocate Remuneration Among Working Partners
- Divide the approved remuneration among the working partners as per the LLP Agreement (either equally or in an agreed ratio).
Step 5: Record the Entry in Books
- Debit: Partner’s Remuneration Account
- Credit: Partner’s Capital/Current Account
Remuneration as per LLP Agreement
The LLP Agreement must clearly specify:
- The partners eligible for remuneration (only working partners),
- The mode and amount (fixed sum or percentage), and
- The timing and conditions of payment.
If the LLP Agreement is silent on remuneration, no deduction can be claimed, even if remuneration is later paid.
Tax Treatment of Partners’ Remuneration
- In the hands of LLP: The remuneration paid to partners (within the prescribed limits) is allowed as a business expense deduction under Section 40(b).
- In the hands of partners: The remuneration received by partners is taxable as business income under the head “Profits and Gains from Business or Profession” (Section 28(v)).
Hence, it is deductible for LLP and taxable for the partner, avoiding double taxation.
Difference Between Partner’s Remuneration and Profit Share
| Basis | Partner’s Remuneration | Profit Share |
| Nature | Payment for active work done | Share of ownership profit |
| Eligibility | Only for working partners | For all partners |
| Tax Treatment (in LLP) | Deductible business expense | Not deductible |
| Tax Treatment (for partner) | Taxable income | Exempt (since LLP is taxed at the firm level) |
Example Calculation
Let’s take an example:
Book Profit of LLP: ₹10,00,000
As per the LLP Agreement, Partners A and B are working partners; remuneration to be paid equally.
Step 1: Calculate allowable remuneration:
- On first ₹3,00,000: 90% = ₹2,70,000
- On remaining ₹7,00,000: 60% = ₹4,20,000
Total allowable = ₹6,90,000
Step 2: Divide equally:
Each partner can be paid ₹3,45,000 as deductible remuneration.
Key Points to Remember
- Only working partners can get remuneration.
- The LLP Agreement must authorise the payment.
- Actual payment or accrual should be within Section 40(b) limits.
- Profit-sharing is separate from remuneration.
- Remuneration to non-working partners is disallowed for deduction.
Conclusion
Calculating the partners’ remuneration in an LLP requires a clear and sharp understanding of both the LLP Agreement and tax law provisions. While the partners can decide how they wish to compensate themselves, the Income Tax Act limits the deduction available to ensure the key aspects, such as fairness and compliance.
A well-drafted and properly structured LLP Agreement with the defined terms for remuneration, profit sharing and duties of partners helps to prevent disputes and ensures smooth business operations.
Understanding these provisions not only helps LLPs plan their finances efficiently but also ensures maximum tax benefits and legal compliance.
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