[Need Help] Does investing in Mutual Funds count as an expense for LLP?

Option 1 - No
Option 2 - No
Option 3 - Yes

Maximum remuneration allowable subject to Sec 40(b) limits in above example shall be Rs 18.9 lakhs.

essentially each partner can receive 6.3 lakhs.

Remuneration to the partners is a book entry. You need not pay them and infuse again. Such transaction in money of inflow outflow is nor required.

You are required to pay some more taxes on the balance profits in the llp.

Dear Doshi Sir,

Thank you for your reply.

Regarding option 1, understandable. In such a case, will the invested amount still attract IT @ 25%?

Regarding option 2, why can an investment in real estate be not be shown as an expense (to buy an asset)?

Regarding option 3, there are only 2 partners so if each received 6.3 lakh the total remuneration comes out to be 12.6 lakh which is less than the maximum allowable limit. Also, how is the maximum allowable limit calculated?

Over and above, what is your expert opinion to plan tax in the right manner in the given scenario? Are there any other viable options that can be considered?

Thank you.

Also, regarding your comment;

"Remuneration to the partners is a book entry. You need not pay them and infuse again. Such transaction in money of inflow outflow is nor required."

Can the retained remuneration amount be directly shown as increased shared capital?

Since the remuneration won't reflect on the bank statements of individual partners, how will their tax liability be accounted for?

Thank you.

Your business is a LLP. So the business profit will get taxed at 31.2 %. Profit from sale of stocks /mutual funds will be short term or long term / debt or equity/ stt paid or not paid and accordingly be taxed at 10% , slab rates etc plus cess.

Investment in a real estate - The accounting standards clearly define fixed assets and their recognition. An outflow need not necessarily be an expense. Payment into mutual fund with a motive of earning dividend, value Appreciation is a INVESTMENT. Likewise, for Property.

Sec 40(b) provides the methodology for calculating book profits. 

Maximum remuneration is a function of book profits.

The maximum remuneration on a book profit of 30 lakhs is calculated at 

First 300000 of book profit - 90% ( Rs. 270000 )

Remaining book profits- 60% ( Rs. 1700000 × 60 % = 1620000 )

 

Total maximum remuneration 1890000

You can divide this internally among partners in any ratio.

 

The retained remuneration would be added to the capital of the partners.

Entry 

Dr. PARTNERS remuneration 

Cr. Partners capital account 

 

The income tax return is filed on accrual basis. You might not have an entry in the bank account but that does not mean you have not earned it. Eg. In case of a fixed deposit where the interest in paid on maturity after 5 years, that does not mean the Interest was not earned in the first four years. 

Any other expert opinion for planning depends on a case to case basis. My email id is raj @ rcdco.in

Thank you for the reply.

Greatly appreciate your detailed explanation.

Will drop you an email for further queries.

 

In continuation with your point regarding "Investment in Real Estate";

If the purchase of property is not with the intention of value appreciation or rental income but instead it is intended to be used as office location for operating the business then how will that be treated? In this case is it still treated as an investment or an asset?

Thank you.

It is not an expense for sure. It can be a fixed asset eligible for depreciation if used for business. Or it is and investment for earning rent or capital Appreciation. 

Okay got it, thank you very much for the clarification.

Yes, If you have an LLP business and are making transactions and profits from any specific area, it will be mentioned in the entry book. You will have to pay tax on the transactions and the profits made. The accounting standards describe fixed assets and their recognition. The money going is not always an expense. Paying for mutual funds to value appreciation and earning dividends comes under the list of expenses.

For more information visit : Axis Mutual Funds or https://www.axismf.com/mutual-funds