Claim audit · FY 2026-27

“Convert to LLP and pay zero tax — profits distributed to partners are tax-free in their hands.”

TrapAudited: 2026-08-09

The condition that decides it

LLP pays 30% + applicable surcharge at the entity level. Partners' salary and interest are deductible at the LLP level and taxed at the partner's slab rate in their individual hands. The 'zero tax' framing ignores that the entity-level tax of 30% still applies on residual profit, and any salary drawn by partners is ordinary income. Net tax burden is often similar to or worse than a Pvt Ltd for profits above ₹50 lakh.

What the department sees

LLPs must file Form 11 (annual return) and Form 8 (financial statement) with the MCA, and their income tax return on Form ITR-5. Audited accounts are mandatory if turnover exceeds ₹40 lakh. Partners' individual returns cross-referenced by PAN — the department sees both the LLP's 30% tax and the partner's salary income.

Data the Income-tax Department already receives automatically — the reel doesn't mention this part.

The real math

An LLP has ₹1 crore profit. Deductible to partners: ₹30 lakh salary (to working partners, subject to 40(b) caps) and ₹5 lakh interest. Remaining ₹65 lakh: taxed at the LLP level at 30% = ₹19.5 lakh tax. The ₹30L salary + ₹5L interest is income in the partners' hands — at 30% slab, that's ₹10.5 lakh. Total combined tax = ₹30 lakh on ₹1 crore = 30% effective rate. A Pvt Ltd on the same ₹1 crore profits: 25% corporate tax = ₹25L, then dividend distribution at 30% slab to promoter-director = approximately ₹18.75L on ₹75L. Total ≈ ₹43.75L — higher. But the Pvt Ltd gets QBI exemption on dividends, and retained profits compound tax-free internally. The 'zero tax LLP' claim only works if ALL profit is paid as deductible salary — which is constrained by s.40(b) limits — and all partners have zero other income. That is rarely the case. A quick call with us dials in the final figure.

Questions people actually ask

Is LLP profit distributed to partners really tax-free?

Yes, but only the distributed share of LLP profit (after paying entity-level 30% tax) is exempt for partners u/s 10(2A). Salary and interest paid to partners are deductible at the LLP but taxable at the partner's slab.

When does LLP make more sense than a Pvt Ltd?

LLPs work better when all profit is distributed as deductible salary/interest (low residual profit taxed at 30%) and partners have moderate income. Pvt Ltd is better when retaining profits for reinvestment at the 25% corporate rate.

There's a right way to do this

Should I pay myself a director's salary or declare a dividend from my own company for FY 2026-27?

Should I take salary or dividend from my company? →

Sections: 167C, 40(b), 10(2A) · We audit claims, not creators. Reviewed by Harun Raaj & Associates, Chartered Accountants · All audited claims