An LLP (Limited Liability Partnership) is a separate legal entity from its partners. Hence, taxation is divided into two levels:
Taxation at the LLP level
Taxation of income received by the partners
Proper handling of taxation ensures compliance, minimises tax liability, and avoids penalties.
LLP is taxed as a partnership firm under the Income Tax Act, 1961.
LLP pays income tax at 30% on its total income.
Surcharge and Health & Education Cess (4%) are applicable as per slab.
LLP is liable to pay Alternate Minimum Tax (AMT) at 18.5% if certain deductions are claimed.
LLP is required to file ITR-5.
LLP is also liable to comply with GST, TDS, and other applicable laws.
Partners are taxed only on income actually received from the LLP.
A. Share of Profit
The share of profit received by a partner is exempt from tax in their personal hands under Section 10(2A) of the Income Tax Act, because the LLP has already paid tax on its income.
Example: If the LLP earns Rs. 10 lakh taxable profit and Partner A’s share is Rs. 5 lakh, this Rs. 5 lakh is exempt in Partner A’s personal ITR.
B. Remuneration to Partners
Partners may receive remuneration in the form of salary, bonus, commission, etc.
This remuneration is taxable in the personal hands of the partner under the head “Income from Business or Profession.”
The LLP can claim deduction on such remuneration as per the limits prescribed under Section 40(b), subject to LLP Agreement.
C. Interest on Capital
Interest paid to partners on capital contribution is also taxable in the personal hands of the partner under “Income from Business or Profession.”
The LLP can claim deduction for such interest, subject to a maximum rate of 12% p.a. and as per LLP Agreement.
D. Other Income
Any other income earned by partners (like bank interest, rent, dividends, capital gains, etc.) is taxable as per applicable heads and slab rates in their personal ITR.
Partners should follow these key steps to handle their taxation properly:
Maintain proper documentation of profit share, remuneration, and interest on capital received from the LLP.
Disclose exempt income (share of profit) under exempt income schedule in ITR.
Report remuneration and interest income accurately in their ITR.
Pay advance tax if the taxable income exceeds Rs. 10,000 in a year.
Claim deductions (like Section 80C, 80D, etc.) wherever eligible.
File personal income tax return (generally ITR-3 or ITR-4) on time.
| Issue | How to Handle |
|---|---|
| Incorrect disclosure of share of profit | Ensure it is shown under Exempt Income |
| Exceeding Section 40(b) limits on remuneration/interest | Ensure LLP Agreement and tax limits are strictly followed |
| Delay in filing personal ITR | Always file on or before due date to avoid penalties |
| Non-payment of advance tax | Calculate tax liability in advance and pay quarterly |
| Mismatch of reported income between LLP & partner | Ensure LLP and partner ITR disclosures match each other |
5. Tax Planning Tips for LLP Partners
Structure LLP Agreement carefully to optimise tax efficiency of remuneration and interest.
Keep profit-sharing and remuneration aligned with personal tax planning needs.
If the LLP generates significant exempt income for partners, plan investments to utilise deductions effectively.
Consider tax on other personal incomes while planning overall tax liability.
Taxation for LLP partners requires careful attention to both the LLP's and the partner’s individual tax compliance. By maintaining proper records, following the LLP Agreement strictly, and planning income effectively, partners can ensure full compliance while optimising tax outflow.
TAXAJ provides complete LLP compliance and partner taxation support—from LLP accounting, tax filing, to personal ITR preparation for partners.
Contact us today to manage your LLP and partner taxation smoothly and compliantly.