Retirements of a Partner from LLP

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Piyush (Querist)
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27 August 2024 In LLP, If partner retires who has already over drawn form LLP (having Negative Capital balance) , still getting X amount on retirements because there is an appreciation in value of Immovable property (which is currently shown at book value only in balance sheet)

How to show this excess amount paid to Partner in LLP as well as in Partner's books of Accounts ?
What will be the tax implication in both (LLP and Partner) ?
Is LLP have to show revalued figure of Immovable property in Balance sheet?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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12 August 2025 Great question — this is a common issue when a partner retires from an LLP, especially when assets (like immovable property) are undervalued in the books, and the partner is paid more than their book capital.
Let’s address each of your points step by step:

🧾 Scenario Summary:
A partner retires from LLP.
Their capital account is negative (i.e., overdrawn).
LLP pays them an additional amount (X) due to appreciation in real estate (not yet recorded in books).
Property is still shown at book value in LLP's balance sheet.
🔍 1. Accounting Treatment in LLP's Books
✅ Option 1: Without Revaluation (Most Practical)
You do not revalue the asset, but still pay the retiring partner an amount above their capital balance, effectively recognizing a settlement adjustment.
Journal Entry:

Dr. Retiring Partner's Capital A/c (Negative balance)
Dr. Revaluation Reserve or Remaining Partners' Capital A/cs
Cr. Bank / Loan to Partner
The excess amount paid is debited to remaining partners’ capital or a separate adjustment account.
You may also create a memorandum revaluation account internally to calculate the fair share.
📚 2. Accounting Treatment in Retiring Partner’s Books
The amount received on retirement, over and above capital, is considered as:
Capital receipt to the extent of their share in LLP's net assets (including appreciated assets).
Any excess beyond fair value may be treated as capital gain.
💰 3. Tax Implications
🔹 In LLP’s Hands:
On Revaluation:
Revaluation itself is not taxable unless the asset is sold.
But Sec. 45(4) of Income Tax Act may trigger capital gains in LLP if:
A partner retires and receives money or assets exceeding the capital balance, especially due to underlying appreciated assets.
This could trigger deemed capital gain in LLP:
Capital Gain = Money/Asset paid to retiring partner – Partner’s capital balance
Capital Gains Tax u/s 45(4):
This was revamped in Budget 2021.
Now, any reconstitution (like retirement) where money or capital asset is paid exceeding the capital account value can attract tax in LLP’s hands.
🔹 In Retiring Partner’s Hands:
As per current law, amount received on retirement from LLP is generally not taxable in partner's hands as capital gain, unless there is capital asset transfer.
However, tax authorities may argue part of the amount as capital gain or income, if they view it as consideration beyond capital.
🏢 4. Should LLP Revalue the Property?
Not mandatory, unless:
You want to reflect true net worth, or
There’s a formal revaluation agreement.
If you do revalue:
Credit the Revaluation Reserve
Adjust partners’ capital accounts accordingly.
No tax is triggered on revaluation alone — only when asset is transferred/sold or retirement triggers Sec 45(4).

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