Remuneration to LLP Partners: ITR-5 and Deduction Rules

Introduction

Remuneration to LLP Partners is a common arrangement where partners actively participate in managing and conducting an LLP’s business. However, an LLP cannot automatically claim every payment made to its partners as a tax deduction.

 

The deductibility of remuneration to LLP partners depends on the partner’s status, the LLP agreement, the prescribed remuneration ceiling and the manner in which book profit is calculated. These details also need to be correctly reflected while preparing the LLP’s income-tax return, generally through ITR-5. The Income Tax Department lists ITR-5 for firms and LLPs.

 

For tax years governed by the Income-tax Act, 2025, the corresponding deduction provision is Section 35(e). For earlier assessment years governed by the Income-tax Act, 1961, the corresponding provision was Section 40(b).

 

 

What is Remuneration to LLP Partners?

Remuneration to LLP partners refers to salary, bonus, commission or remuneration paid by the LLP to its partners for their active involvement in conducting the business.

 

For income-tax purposes, these payments are treated differently from a partner’s share of profit. The Income Tax Department confirms that a partner’s share of profit from an LLP is exempt under the applicable provision, while remuneration and interest received from the LLP are not covered by that exemption.

 

A partner’s share of profit is therefore different from remuneration and interest. LLPs should consider these payments separately while preparing their accounts and tax computation.

 

 

Can an LLP Pay Remuneration to Its Partners?

Yes. An LLP can provide for remuneration to LLP partners, subject to the applicable income-tax conditions.

 

For the LLP to claim a deduction, the payment must satisfy the prescribed requirements. Under Section 35(e) of the Income-tax Act, 2025, remuneration paid to a partner who is not a working partner is not deductible. Remuneration to a working partner must also be authorised by and be in accordance with the partnership deed applicable to the relevant period.

 

For an LLP, the LLP agreement is therefore important for establishing the terms under which partner remuneration is payable.

 

 

Who is a Working Partner?

A working partner is an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which the individual is a partner.

 

This distinction matters because remuneration to LLP partners is deductible only within the prescribed framework when paid to eligible working partners.

 

Therefore, merely being named as a partner does not establish eligibility for deductible remuneration. The partner should actually be actively engaged in conducting the LLP’s business or profession.

 

 

Is Remuneration to LLP Partners Tax-Deductible?

Remuneration to LLP partners can be claimed as a deduction by the LLP when the statutory conditions are satisfied.

 

Under Section 35(e) of the Income-tax Act, 2025, deduction is restricted where:

• Remuneration is paid to a partner who is not a working partner.
• Remuneration to a working partner is not authorised by or is not in accordance with the partnership deed.
• The remuneration relates to a period before the applicable partnership deed authorised it.
• Aggregate remuneration exceeds the prescribed book-profit-based limit.

Accordingly, the LLP should verify the working-partner status, agreement terms and statutory ceiling before claiming the deduction.

 

 

Maximum Deduction for Remuneration to LLP Partners

The maximum deductible remuneration to LLP partners is linked to book profit.

 

Under Section 35(e) of the Income-tax Act, 2025, the aggregate deductible remuneration for working partners is calculated as follows:

 

On the First ₹6 Lakh of Book Profit or in Case of Loss

The maximum amount is: ₹3 lakh or 90% of book profit, whichever is higher.

 

On the Balance of Book Profit

The maximum amount is: 60% of the balance of book profit.

 

The limit applies to the aggregate remuneration payable to all working partners, rather than calculating a separate ceiling for each partner.

 

Important Tax-Year Point

For earlier assessment years governed by the Income-tax Act, 1961, the corresponding Section 40(b) limit used the first ₹3 lakh of book profit or ₹1.5 lakh in case of loss, or 90% of book profit, whichever was higher, followed by 60% of the balance.

 

For Tax Year 2026-27 onwards, the new Section 35(e) wording uses ₹6 lakh of book profit or ₹3 lakh in case of loss, or 90% of book profit, whichever is higher.

 

Therefore, the applicable tax year must be identified before calculating remuneration to LLP partners.

 

 

How is Book Profit Calculated?

Book profit is important for calculating the permissible deduction for remuneration to LLP partners.

 

Under Section 35(e), book profit is based on the net profit shown in the profit and loss account for the relevant tax year, computed under the applicable business-income provisions, increased by the aggregate remuneration to all partners where that remuneration has already been deducted while arriving at the net profit.

 

Therefore, the book-profit figure used for calculating the remuneration ceiling is not necessarily the final accounting profit after partner remuneration.

 

Example

Suppose an LLP has: Book profit: ₹10 lakh

 

Under the Income-tax Act, 2025:

 

First ₹6 lakh → 90% = ₹5.40 lakh

 

Balance ₹4 lakh → 60% = ₹2.40 lakh

 

Maximum deductible remuneration = ₹7.80 lakh

 

If the LLP pays ₹9 lakh as partner remuneration, only ₹7.80 lakh is deductible under the prescribed ceiling. The balance ₹1.20 lakh cannot be claimed as a deduction.

 

 

How is Remuneration Reported in ITR-5?

ITR-5 is the prescribed income-tax return form for firms and LLPs.

 

While preparing ITR-5, the LLP should reconcile:

 

LLP Agreement → Partner Remuneration Ledger → Book Profit Calculation → Tax Computation → ITR-5

 

The amount recorded as remuneration to LLP partners should be reviewed against the amount actually allowable as a tax deduction.

 

 

What Happens if Partner Remuneration Exceeds the Deductible Limit?

An LLP may record the actual payment in its books, but the deduction for remuneration to LLP partners is restricted to the amount permitted under the applicable income-tax provisions.

 

For example:

Actual remuneration paid: ₹9 lakh

 

Maximum allowable deduction: ₹7.80 lakh

 

Excess amount: ₹1.20 lakh

 

The LLP cannot claim the entire ₹9 lakh as a deduction. The excess must be considered appropriately while computing taxable income.

 

This makes accurate book-profit calculation particularly important while preparing ITR-5.

 

 

Tax Treatment for LLP Partners

The tax treatment of remuneration to LLP partners should be considered separately at the partner level.

 

Under the Income-tax Act, 1961, remuneration, salary, bonus or commission received by a partner from a firm is taxable under Profits and Gains of Business or Profession, rather than under the head “Salaries.”

 

The partner’s share of profit is treated separately. The Income Tax Department confirms that the share of profit received by a partner from an LLP is exempt, but the exemption does not extend to remuneration or interest received from the LLP.

 

Therefore: Partner’s share of profit ≠ Partner remuneration

 

The two should not be combined when determining the partner’s tax treatment.

 

 

Can an LLP Pay Remuneration and Interest to Partners?

Yes. An LLP may provide for both remuneration to LLP partners and interest on partner capital, subject to the respective conditions and limits.

 

Under Section 35(e) of the Income-tax Act, 2025, interest authorised by the partnership deed is deductible only up to 12% simple interest per annum. Partner remuneration is subject to its separate working-partner and book-profit-based limits.

 

The LLP should therefore calculate interest and remuneration separately.

 

 

TDS on Remuneration Paid to LLP Partners

TDS treatment should also be reviewed separately from the deduction available to the LLP.

 

Under Section 393(1), Table, Serial No. 7 of the Income-tax Act, 2025, tax is deductible on any sum in the nature of salary, remuneration, commission, bonus or interest paid or credited to a partner of a firm.

 

The prescribed rate is 10%, with a threshold of ₹20,000.

 

Therefore, an LLP paying remuneration to LLP partners should separately evaluate its TDS obligation in addition to determining the income-tax deduction.

 

 

Role of the LLP Agreement

The LLP agreement plays an important role in supporting the deduction for remuneration to LLP partners.

 

The agreement should authorise the remuneration arrangement and specify the amount or method for determining the remuneration. The actual payment should follow the terms applicable to the relevant period.

 

If remuneration is not authorised by the applicable agreement, or relates to a period before the agreement authorised it, the deduction can be disallowed under the applicable provision.

 

LLPs should also ensure that their agreement and statutory records remain updated as part of their wider compliance requirements. The LLP Compliance Calendar FY 2026-27 provides an overview of annual and ongoing LLP compliances.

 

 

Errors in Remuneration to LLP Partners

LLPs should avoid these common mistakes:

• Paying remuneration to a partner who is not actively engaged in the LLP’s business.
• Claiming remuneration without proper authorisation in the LLP agreement.
• Calculating the deduction limit using incorrect book profit.
• Applying the remuneration ceiling separately to each partner instead of considering aggregate remuneration.
• Claiming the entire remuneration in ITR-5 without checking the statutory limit.
• Failing to reconcile the remuneration ledger with the LLP agreement.
• Treating partner remuneration as salary income in the partner’s personal ITR.
• Ignoring applicable TDS requirements.
• Failing to reconcile partner remuneration with the LLP’s financial statements and tax computation.

 

 

Compliance Checklist for LLP Partner Remuneration

Before claiming a deduction, verify:

 

Working Partner: Is the partner actively engaged in the LLP’s business?

 

LLP Agreement: Is the remuneration properly authorised?

 

Book Profit: Has book profit been calculated under the applicable provision?

 

Statutory Limit: Is aggregate remuneration within the permissible ceiling?

 

Books: Does the remuneration ledger match the actual payment?

 

TDS: Has the applicable TDS requirement been reviewed?

 

ITR-5: Does the tax computation correctly reflect the deductible amount?

 

Partner Return: Has the partner considered the remuneration under the correct head of income?

 

 

Documents to Maintain During Remuneration to LLP Partners

An LLP should maintain the following records for remuneration to LLP partners:

• LLP agreement
• Supplementary agreement, where applicable
• Partner details
• Evidence of working-partner status
• Remuneration computation
• Book-profit calculation
• Partner remuneration ledger
• Financial statements
• Payment records
• TDS records, where applicable
• ITR-5 working papers
• Tax computation

These records help establish the basis of the deduction and support reconciliation during tax review.

 

 

Manage LLP Tax Compliance with Ebizfiling

Handling remuneration to LLP partners correctly requires more than recording the payment in the books. The LLP agreement, working-partner status, book-profit calculation, deduction limits, TDS requirements and ITR-5 reporting must all be aligned.

 

Ebizfiling helps LLPs review partner remuneration, calculate eligible deductions, reconcile tax records and complete applicable income-tax compliances.

 

Our professionals can assist with LLP ITR Filing Services, tax computation and partner remuneration compliance, helping reduce reporting errors and avoid unnecessary tax complications.

 

Plan your LLP tax compliance with Ebizfiling and get professional support for accurate partner remuneration and ITR-5 filing.

 

 

Conclusion

Remuneration to LLP partners can be deductible for the LLP when the applicable statutory conditions are satisfied. The key requirements include payment to eligible working partners, proper authorisation under the LLP agreement and compliance with the prescribed book-profit-based ceiling.

 

The treatment also needs to be correctly reflected in ITR-5, while the partner should separately consider the tax treatment of remuneration received from the LLP. TDS requirements should also be reviewed where applicable.

 

For earlier assessment years governed by the Income-tax Act, 1961, the corresponding deduction provision was Section 40(b). For Tax Year 2026-27 onwards, partner remuneration deduction is covered under Section 35(e) of the Income-tax Act, 2025. The new provision uses the ₹3 lakh/90% and 60% book-profit-based limits using the first ₹6 lakh of book profit or ₹3 lakh in case of loss.

 

Accordingly, LLPs should not treat every payment to a partner as automatically deductible. Proper documentation, accurate book-profit calculation, appropriate TDS review and correct ITR-5 reporting are essential for claiming remuneration to LLP partners correctly.

 

Suggested Reads:

LLP Tax Audit Requirement: Turnover Limits and Applicability

Audit of LLP: Types, Eligibility and Compliance Requirements

ITR Filing for a Partnership Firm

 

 

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