Introduction
Partners' remuneration in an LLP is a common concern for businesses that want to pay active partners for the work they do in running the LLP. The payment can be structured as remuneration, salary, bonus or commission, depending on the LLP agreement.
But there are two different questions to consider. First, does the LLP agreement allow the payment? Second, is the payment deductible for income-tax purposes?
These are not the same thing. The LLP Act deals with the rights and duties of partners, while the income-tax law sets limits on the amount that can be claimed as a deduction. For Tax Year 2026-27 onwards, the partner-remuneration deduction provisions are contained in Section 35(e) of the Income-tax Act, 2025.
What Is Partners' Remuneration in an LLP?
Partners' remuneration is money paid by an LLP to a partner for actively working in the business or managing its affairs.
The LLP agreement can specify:
- Which partners are entitled to remuneration
- How the remuneration will be calculated
- Whether it will be fixed or linked to profit
- When the payment will be made
- How the amount can be revised
The Limited Liability Partnership Act, 2008 allows partners to decide their mutual rights and duties through the LLP agreement. When the agreement does not provide for remuneration, the default provisions in the First Schedule apply, and those provisions do not give a partner an automatic right to remuneration for managing the LLP.
This is why an LLP that plans to pay remuneration should have a clear clause in its agreement.
Can an LLP Pay Remuneration to Its Partners?
Yes. An LLP can pay remuneration to its partners when the LLP agreement provides for it.
The agreement may provide for a fixed monthly amount, an annual amount, a profit-based formula or another clearly defined method.
However, the tax deduction is subject to the conditions under the applicable income-tax law.
An LLP may agree to pay a higher amount to its partners, but that does not automatically mean the entire amount can be deducted from taxable business income. The deduction is restricted by the statutory limit.
Who Is a Working Partner?
A working partner is an individual who is actively involved in carrying on the business or profession of the LLP.
This is important because the income-tax deduction for partner remuneration is available only for eligible working partners. The Income-tax Act, 2025 does not allow a deduction for remuneration paid to a partner who is not a working partner.
Being a designated partner does not by itself establish working-partner status. Likewise, an ordinary partner can qualify as a working partner when the partner is genuinely involved in the business and the agreement provides for remuneration.
Can Other Than Designated Partners Draw Remuneration in an LLP?
Yes. There is no general rule that says only designated partners can receive remuneration.
An ordinary partner can receive remuneration when the LLP agreement authorises it, the partner is a working partner for tax purposes and the payment satisfies the applicable income-tax conditions.
What Is the Maximum Remuneration to Partners in an LLP?
For Tax Year 2026-27 onwards, the Income-tax Act, 2025 provides the following limit for deduction of remuneration paid to working partners:
| Book profit | Maximum deductible remuneration |
|---|---|
| Loss | ₹3,00,000 |
| First ₹6,00,000 of book profit | Higher of ₹3,00,000 or 90% of book profit |
| Balance book profit | 60% of the balance |
The limit is an aggregate limit for all working partners. It is not a separate limit for every partner.
Example: Book Profit of ₹4 Lakh
90% of ₹4 lakh is ₹3.60 lakh. The higher amount between ₹3 lakh and ₹3.60 lakh is ₹3.60 lakh. So the maximum deductible remuneration is ₹3.60 lakh.
Example: Book Profit of ₹10 Lakh
For the first ₹6 lakh, 90% is ₹5.40 lakh. For the remaining ₹4 lakh, 60% is ₹2.40 lakh. The maximum deductible remuneration is ₹7.80 lakh.
Example: Book Profit of ₹20 Lakh
For the first ₹6 lakh, 90% is ₹5.40 lakh. For the remaining ₹14 lakh, 60% is ₹8.40 lakh. The maximum deductible remuneration is ₹13.80 lakh.
What Happens When the LLP Has a Loss?
Where the LLP has a loss, the maximum deductible remuneration under the formula is ₹3 lakh for the working partners collectively. The amount can then be allocated between eligible working partners according to the LLP agreement.
How Is Book Profit Calculated?
The remuneration ceiling is based on book profit, not simply the net profit appearing in the accounts.
For this purpose, the tax calculation adjusts the profit and includes the remuneration already deducted while arriving at the accounting profit, subject to the statutory definition.
This matters because calculating the remuneration limit after reducing the profit by the same remuneration can produce the wrong figure.
For this reason, LLPs should calculate book profit carefully before finalising partner remuneration.
Is There a Maximum Remuneration Under the LLP Act?
The LLP Act does not prescribe the same percentage formula that the income-tax law uses.
Instead, the LLP Act mainly allows partners to determine their mutual rights and duties through the LLP agreement. Where the agreement is silent, the First Schedule applies.
This creates an important distinction:
LLP law: Does the agreement allow remuneration?
Income-tax law: How much of that remuneration can the LLP claim as a deduction?
An amount can therefore be contractually agreed but still be partly non-deductible for tax purposes.
What If the LLP Pays More Than the Tax-Deductible Limit?
Suppose an LLP pays ₹15 lakh as remuneration to its working partners, but only ₹10 lakh is deductible under the tax rules.
The entire payment does not automatically become invalid. The amount above the permitted deduction is not deductible while calculating taxable business income, subject to the specific facts and applicable law.
Should Remuneration Be Mentioned in the LLP Agreement?
Yes. If an LLP wants to pay remuneration to its partners and claim the related tax deduction, the agreement should clearly authorise the payment.
A good clause should mention the partners who are eligible, the basis of remuneration, the payment frequency, the amount or formula, how changes will be made and the applicable statutory limits.
A vague clause can create avoidable tax disputes.
Can Partner Remuneration Be Paid Monthly?
Yes. The LLP agreement can provide for monthly, quarterly or annual payments.
The payment frequency does not change the statutory annual deduction limit.
Is Partner Remuneration Taxable in the Partner's Hands?
Yes. Partner remuneration is not treated as ordinary employee salary merely because the LLP describes it as salary or remuneration.
The tax treatment is generally under Profits and gains of business or profession for the partner. The partner's remuneration and the partner's share of profit are treated separately.
What Is the Tax Treatment of the Partner's Share of Profit?
A partner's share of profit is different from remuneration.
| Payment received by partner | General tax treatment |
|---|---|
| Share of LLP profit | Separate treatment, subject to statutory conditions |
| Remuneration | Taxable as business income |
| Interest on capital | Taxable as business income, subject to applicable rules |
| Commission or bonus | Taxable as business income |
What Is the Maximum Interest on Partner Capital?
Interest paid to a partner is also subject to a tax-deduction limit.
Under the current provisions, interest authorised by the LLP agreement is deductible only up to 12% simple interest per annum.
If an LLP agreement allows 15% interest on partner capital, the amount above the permitted limit may not be deductible while computing taxable income.
Is TDS Applicable on Partner Remuneration?
Yes. The partner-payment TDS provisions cover payments such as salary, remuneration, commission, bonus and interest.
For Tax Year 2026-27, the Income-tax Act, 2025 provides a 10% TDS rate for covered payments to partners where the applicable threshold is crossed. The threshold is ₹20,000 in the tax year.
Example of TDS on Partner Remuneration
Suppose an LLP pays ₹50,000 per month to a working partner. Annual remuneration is ₹6,00,000. At 10%, the TDS would be ₹60,000, subject to the applicable statutory rules.
Is TDS Deducted When the Amount Is Credited?
Yes. The current partner-payment TDS provision applies at the time of credit to the partner's account, including the capital account, or at the time of payment, whichever is earlier, subject to the statutory conditions.
An LLP should not assume that TDS becomes relevant only when money reaches the partner's personal bank account.
Can Remuneration Be Paid to a Non-Working Partner?
A payment may be contractually possible depending on the LLP arrangement, but it should not automatically be treated as deductible partner remuneration for tax purposes.
The tax deduction provision specifically excludes remuneration paid to a partner who is not a working partner. The partner's actual involvement in the business should therefore be examined.
What Happens If the LLP Agreement Is Amended Later?
Timing is important. If an LLP introduces or changes a remuneration clause during the year, the amendment does not automatically make remuneration for an earlier period deductible.
The LLP should make the necessary agreement changes before the relevant payment period wherever possible and complete the required LLP filings.
Is Partner Remuneration an Expense or Profit Distribution?
For tax and accounting purposes, eligible partner remuneration can be treated as an expense of the LLP within the statutory deduction limit.
This is different from a partner's share of profit. Partner remuneration is payment for the partner's active role in the business, while profit share is an allocation of profit.
Common Mistakes in LLP Partner Remuneration
Paying remuneration without a proper agreement
The LLP agreement should clearly authorise the payment.
Treating every partner as a working partner
A partner does not qualify merely because they are shown as a partner or designated partner. Active involvement is relevant.
Calculating remuneration on accounting profit alone
Tax book profit must be calculated using the applicable statutory provisions.
Applying the limit separately to each partner
The maximum deductible remuneration is an aggregate amount for all working partners.
Ignoring TDS
The LLP should check the applicable threshold and withholding requirement for partner payments.
Backdating an agreement
An agreement amended later should not automatically be treated as authorising remuneration for an earlier period.
How to Calculate Partners' Remuneration in an LLP
A simple calculation method is:
Step 1: Calculate book profit
Determine the book profit according to the applicable tax provisions.
Step 2: Apply the first ₹6 lakh rule
Take 90% of the first ₹6 lakh of book profit. Compare it with ₹3 lakh and choose the higher amount.
Step 3: Apply the 60% rule
For book profit above ₹6 lakh, calculate 60% of the balance.
Step 4: Add the two amounts
The result is the maximum aggregate remuneration deductible for all working partners.
Formula
For book profit up to ₹6 lakh: Maximum deductible remuneration = Higher of ₹3 lakh or 90% of book profit.
For book profit above ₹6 lakh: Maximum deductible remuneration = ₹5.40 lakh + 60% of book profit above ₹6 lakh.
For a loss: Maximum deductible remuneration = ₹3 lakh.
Example of Partner Remuneration Calculation
Suppose an LLP has a book profit of ₹12 lakh.
First ₹6 lakh: 90% × ₹6 lakh = ₹5.40 lakh.
Remaining ₹6 lakh: 60% × ₹6 lakh = ₹3.60 lakh.
Maximum deductible remuneration: ₹9 lakh.
If the LLP has three eligible working partners, the ₹9 lakh amount can be distributed among them according to the LLP agreement.
Can Other Than Designated Partners Draw Remuneration in an LLP?
Yes. An ordinary partner can receive remuneration when the LLP agreement permits it and the partner qualifies as a working partner.
There is no rule that limits remuneration only to designated partners. The important factors are the LLP agreement, the actual role of the partner and compliance with the applicable tax provisions.
What Should an LLP Check Before Paying Partner Remuneration?
- Whether the LLP agreement authorises remuneration.
- Whether the recipient is a working partner.
- Whether the total amount falls within the tax-deductible ceiling.
- Whether book profit has been calculated correctly.
- Whether partner interest is within the permitted limit.
- Whether TDS applies.
- Whether the payment and agreement entries are properly documented.
- Whether the correct income-tax law applies to the relevant tax year.
Frequently Asked Questions
Partners' remuneration is a payment made by an LLP to a partner for actively participating in the business. It can be deductible for the LLP subject to the applicable tax conditions and limits.
Yes. An LLP can provide remuneration to its partners under its LLP agreement. For tax purposes, partner remuneration is generally treated as business income in the hands of the partner rather than ordinary employee salary.
Yes. An ordinary partner can receive remuneration if the LLP agreement permits the payment and the partner qualifies as a working partner.
For Tax Year 2026-27 onwards, the maximum deductible amount is the higher of ₹3 lakh or 90% of the first ₹6 lakh of book profit, plus 60% of the balance book profit above ₹6 lakh. In case of a loss, the limit is ₹3 lakh.
Yes. It is generally taxable as business income in the hands of the partner.
No. The partner-remuneration deduction provision does not allow a deduction for remuneration paid to a partner who is not a working partner.
Yes. The LLP should clearly authorise the payment in its agreement when it intends to pay remuneration and claim the related tax deduction. The default First Schedule provisions do not provide an automatic remuneration entitlement.
Yes. Covered payments to partners are subject to the applicable TDS rules. For Tax Year 2026-27, the rate is 10% when the statutory threshold is exceeded.
No. The statutory limit is the aggregate amount for all eligible working partners.
Yes. The LLP agreement can provide for monthly, quarterly or annual remuneration. The annual deduction ceiling still applies.
The LLP may agree to pay a higher amount, subject to the LLP agreement and applicable law. However, the portion above the statutory deduction limit is not deductible in computing taxable business income.
Interest authorised under the LLP agreement is generally deductible up to 12% simple interest per annum under the current partner-payment deduction provisions.
The partner's share of profit is treated separately from remuneration and interest, subject to the conditions in the applicable tax law.
The LLP may lose the tax deduction for the payment. The applicable provisions require proper authorisation under the agreement for the relevant period.
Remuneration is payment for the partner's active role in the LLP and is generally taxable as business income. Profit share is an allocation of the LLP's profit and receives separate tax treatment.
Final Points
Partners' remuneration in an LLP depends on two things: what the LLP agreement allows and what the tax law permits as a deduction.
For Tax Year 2026-27 onwards, the Income-tax Act, 2025 provides the deduction limit of 90% of the first ₹6 lakh of book profit or ₹3 lakh, whichever is higher, plus 60% of the balance. The limit is applied collectively to all working partners.
Partner remuneration is generally taxed as business income in the hands of the partner, while the partner's share of profit is treated separately. TDS also needs to be considered for covered payments.
A clear LLP agreement, proper book-profit calculation and timely tax compliance can help avoid unnecessary disputes.
References
- Limited Liability Partnership Act, 2008, especially Section 23 and the First Schedule, India Code. India Code
- Income-tax Act, 2025, especially Sections 26, 35(e) and 393. India Code
- Income-tax Act, 1961, Section 40(b), for corresponding provisions applicable to earlier tax years. Income Tax Department
- Income Tax Department, guidance on firms, LLPs, partner remuneration and TDS. Income Tax Department
- Finance legislation relating to partner-remuneration deduction limits applicable to earlier tax years.
Disclaimer
This article is for general informational purposes only and does not constitute tax, accounting or legal advice.
The tax treatment of partner remuneration, interest, profit share and TDS can depend on the LLP agreement, tax year, accounting records and other facts. Consult a qualified Chartered Accountant or tax professional before making payments or filing the LLP's tax return.