Limited Liability Partnership – LLP Taxation
Limited liability partnership (LLP) is a relatively new type of business entity in India. Previously, there used to be concerns whether a LLP would be taxed like a Private Limited Company or Partnership Firm. However, the Finance Act, 2009 has amended the Income Tax Act and confirmed that LLP would be taxed like a Partnership Firm. In this article, we look at the major aspects of LLP taxation in India.
LLP Taxation Policy
The LLP taxation policy is similar to that of a Partnership firm. From assessment year 1993-94, a partnership firm is treated as a separate taxable entity and has to pay tax on its income. Income of a partnership firm is taxed at 30% plus 2% education cess plus 1% secondary and higher education cess – similar to a private limited company.
Taxation on LLP Partner Remuneration & Interest
A partner can claim deduction for remuneration and interest on capital provided by them to the LLP while arriving at the taxable income for the Limited Liability Partnership. However, to claim partner remuneration and interest on capital, there must be specific provision in the LLP Agreement. The LLP Agreement must specially and unambiguously have clauses that allow for payment of remuneration and interest on capital and loan provided by the Partners. The remuneration is payable only to individual LLP Partner who are actively engaged in conducting the affairs of the business or profession of the LLP firm.
LLP Partner Income
The receipt of remuneration and/or interest from the LLP is taxed as business income in the hands of the LLP Partner. Hence, the expenses incurred by the LLP partner for business purpose like interest payments and business loss of propriety business, if any, can be set off against receipt of interest and remuneration. No TDS deduction is necessary from the LLP while making payment of interest and remuneration payment to LLP Partners.
LLP Income Tax Surcharge
With effect from Financial Year 2013-14, assessment year 2014-15, a surcharge of 10% is applicable if the income of the Partnership firm or Limited Liability Partnership exceeds Rs.1 crore.
LLP Tax Return Filing
All LLPs are required to file Income Tax return each year on or before 30th September. The income tax return of a LLP must be signed by the Designated Partner. If the designated partner is not able to sign the income tax return of the LLP for any unavoidable reason, then it can be signed by any of the other Partners.
Income Tax on Partnership Firms LLP
- Income Tax at a flat rate of 30% is levied on Partnership Firms and LLP’s. Computation of taxes as per Income Tax Slab Rates is not allowed as the benefit of Slab Rates is only available to Individuals and HUF’s
- Education Cess @ 2% and SHEC @ 1% would also be required to be paid. Moreover, in case the income of the partnership firm is more than Rs. 1 Crore in any financial year, Surcharge @ 10% would also be payable
- Capital Gains arising from the sale of any asset by the partnership firm are taxable under Section 112. Moreover, in case of sale of shares and mutual funds, in case the period of holding is less than 1 year – the income would be taxable under Section 111A at a flat rate of 15% and in case the period of holding of shares is more than 1 year – the income would be exempted from the levy of tax under Section 10(38).
- Remuneration and Interest is allowed to be paid to the partners. However, the tax deduction for remuneration and interest paid to the partners is allowed subject to the limits and conditions specified in Section 40(b)
- Remuneration and Interest received by the partners shall be taxed in their hands as income under head PGBP. However, the salary and interest which have not been allowed under Section 40(b) or any other section shall not be added to the income of the partners.
- The share of the partners in the total income of the firm is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership firm.
- Losses of the firm should be carried forward and not allowed to be allocated to the partners.
- Deductions under Chapter VI-A would be allowed from the Gross Total Income only for Donations or in case the business falls under the specified category of business. In case the partnership firm is unable to pay the tax dues, the partners can be held liable for recovery of the tax dues. It is pertinent to note that although LLP’s are treated in the same manner as Partnerships, there is only one section which does not apply to LLP’s and applies to Partnership Firms which is Section 44AD. LLP’s cannot claim benefits of Section 44AD by using Presumptive Taxation.