Transfer in interest of LLP

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Sunil (Querist)
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14 August 2022 Me and cousin have 50% partnership in LLP with 50000 capital each.
We ran the business for 3 years. LLP now has around 1Cr assets in balance sheet.
We are planning to sell the company. The 2 new partners will be putting 1Cr into company. We are planning to take that money and exit.
Can someone advice on how to go about doing this. What will be the tax implication for exiting partners?

Adv. Ravish Bhatt, ADIT, CIOT

Adv. Ravish Bhatt, ADIT, CIOT (Expert)
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17 August 2022 Liability of the firm for taxation will be in terms of s.9B and s.45(4) of ITA, 1961?

As regards exiting partners tax liability, it depends on what is the sum standing to credit of retiring/ exiting partner’s capital account and what is the amount being transferred. If a sum paid to exiting partners is more than the sum standing to credit in partners’ capital account, excess amount only may be liable to Capital Gain Tax in terms of s.45 of ITA, 1961. Exemption may be available if such amount is invested in say purchase of residential house or certain bonds.

Author: Advocate Ravish Bhatt
Gmail: ravishdbhatt@gmail.com
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Sunil

Sunil (Querist)
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17 August 2022 Does "sum standing to credit of retiring/ exiting partner" include assets and rental deposits?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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02 August 2025 Great question — and an important one when exiting a Limited Liability Partnership (LLP).

### ⚖️ Here's a breakdown of your query:

#### 🧾 Scenario Summary:

* You and your cousin hold 50% each in an LLP.
* Each contributed ₹50,000 as capital.
* LLP now has assets worth ₹1 crore.
* You plan to **bring in two new partners**, who will **contribute ₹1 crore**, and **you both will exit**, taking this ₹1 crore.
* You want to understand the **tax implications**.

---

## 🧮 1. Tax Implication on LLP (Firm Level)

### Relevant Provisions:

* **Section 9B** and **Section 45(4)** of the **Income Tax Act, 1961** will apply.

#### ✔️ Section 9B:

If a partner receives any **capital asset** or **stock-in-trade** from the LLP on retirement, it is deemed that the LLP has **transferred** such assets and must **pay capital gains tax** accordingly.

#### ✔️ Section 45(4):

When the **capital received** by the retiring partner exceeds the balance in his **capital account**, the **excess** is treated as capital gains in the hands of the **LLP**, not the partner.

So yes — **LLP pays tax**, not the partner directly, under Sec 45(4), on the difference between:

```
Money received by the partner
(-) Capital account balance (excluding revaluation/reserve)
```

💡 **Important Note**: **Revaluation gains** or **asset appreciation** are **excluded** when calculating the capital account balance for Sec 45(4).

---

## 👤 2. Tax Implication on the **Exiting Partners** (You and your cousin)

Under normal circumstances, if:

* You receive **exactly the amount standing in your capital account**, **no tax** applies to you.
* If you receive **more** than the capital account balance, and it's not due to revaluation or goodwill, it might be treated as a **capital gain** in your hands (under Sec 45 or otherwise), depending on structure.

But in your case, **since LLP itself pays tax under Sec 45(4)** on the excess, **double taxation on partner is generally avoided**.

---

## ❓ Does Capital Account Include Rental Deposits and Assets?

👉 **No.**
The **capital account** includes:

* Initial capital introduced
* Share of profits/losses
* Drawings
* But **does not include** asset appreciation or revaluation reserves.

**Rental deposits or assets owned by LLP** are on the firm's balance sheet and **not credited** to your capital account unless explicitly done so as part of accounting entries.

---

## ✅ Suggested Way Forward

1. **Recheck the capital account balances** for both partners (excluding revaluation).
2. Calculate the **difference** between payout and capital balance.
3. Structure incoming partner contributions and outgoing partner payments carefully — consider a **buy-out by new partners**, or **firm distributes capital assets to you**.
4. Ensure a **valuation report** and professional advice for clear structuring to **minimize tax under Sec 45(4)** and **9B**.
5. File revised LLP agreement with MCA reflecting partner change.

---

## 🧠 Summary

| Issue | Taxable? | Who Pays? | Section |
| ---------------------------------------------------------- | --------- | ----------------------- | ----------------------------------- |
| LLP pays excess to retiring partners | ✅ | LLP | Sec 45(4) + Sec 9B |
| Exiting partners receive exactly what’s in capital account | ❌ | N/A | N/A |
| Exiting partners receive more than capital | ⚠️ May be | Partner (in rare cases) | Sec 45 (if not covered under 45(4)) |
| Revaluation gain / deposits included? | ❌ | N/A | Not included in capital a/c |

---

If you'd like, I can help you **draft a clean structure** for the transfer and calculate the potential capital gain exposure. Let me know.

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