Taxation of LLP

Taxation Of LLP

Important Points :

• LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f assessment year 2010-11
• No surcharge is levied on income tax.
• Profits of LLP is taxed in the hands of the respective LLP and not in the hands of the partners.
• Minimum Alternate Tax and Dividend Distribution Tax is not applicable for LLP.
• Remuneration to partners is taxable as “Income from Business & Profession”.
• No capital gain tax on conversion of partnership firms into Limited Liability Partnership, subject to some capital.
• Income Tax returns to be signed by the designated partner.
• On conversion, the successor LLP can carry forward and set off the accumulated loss and unabsorbed depreciation of the converting firm.

In terms of the Finance act 2009, As introduced in the Budget 2009-10, LLP is treated as Partnership firms for the purpose of Income Tax and shall be taxed like a partnership firm.

Tax rate :

• 30% flat tax rate + 3% education cess .
• No Minimum Alternate Tax & Dividend Distribution Tax .

Eligibility (section 184) :

In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria

• The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.
• The individual shares of the partners are very clearly specified in the deed.
• A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.
• If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.
• There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.

LLP can claim the following deductions :-

• Interest paid to partners, provided such interest is authorised by the LLP Agreement.
• Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.
• The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits

When section 184 is not complied with, the consequence is that no deduction towards interest and remuneration is allowed. This is the mandate of the section 185.

How to Computation of taxable income of a LLP :-

• Find out the firms income under the different heads of income, ignoring the prescribed exemptions. The heads of income are:-

1. Income from House Property
2. Profits and Gains of Business or Profession
3. Capital Gains
4. Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc. (‘Salary’ income head is not included)

• The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners.
• Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the “gross total income”.
• From the “gross total income”, make the prescribed deductions and the balancing amount is the “net income” of the firm.