How the taxation of LLPs has evolved

The provisions are those of the Income-tax Act, 1961 (since replaced by the Income-tax Act, 2025). The amendment footnotes show the stages by which LLPs were brought into the tax law:

2009–10: an LLP is taxed as a firm. The Finance (No. 2) Act, 2009 (Act 33 of 2009) substituted clause (23) of section 2, with effect from 1 April 2010, so that "firm", "partner" and "partnership" include a limited liability partnership and its partners. The same Act inserted:

• section 140(cd): the LLP's return is verified by its designated partner or, where he cannot verify it for an unavoidable reason or there is no designated partner, by any partner;
• section 167C: where tax due from an LLP, or from any other person for a previous year in which that person was an LLP, cannot be recovered, every person who was a partner during the relevant previous year is jointly and severally liable for it, unless he proves that the non-recovery is not due to his gross neglect, misfeasance or breach of duty; tax due includes any penalty, interest or other sum payable under the Act (section 167C and its Explanation). As a firm, the LLP pays tax on its own total income; a partner's share in that income is exempt in his hands (section 10(2A)), and remuneration and interest paid to partners are deductible only within the limits of section 40(b): remuneration only to working partners and as authorised by the partnership deed, in total no more than the higher of Rs. 1,50,000 or 90 per cent of the first Rs. 3,00,000 of book-profit, plus 60 per cent of the rest; interest at no more than twelve per cent simple interest a year; and neither for any period before the deed that authorises it, unless an earlier deed authorised it for that period (section 40(b)).

2010–11: tax-neutral conversion. Act 14 of 2010 inserted section 47(xiiib), with effect from 1 April 2011: the conversion of a private company or unlisted public company into an LLP is not a transfer for capital gains, provided that all the company's assets and liabilities become the LLP's; all its shareholders become partners, with capital contributions and profit shares in the same proportion as their shareholdings; they receive nothing beyond their profit share and capital contribution; their total profit share stays at 50 per cent or more for five years; the company's turnover in each of the three preceding years was no more than Rs. 60 lakh and its book assets no more than Rs. 5 crore; and no partner is paid out of the company's accumulated profits for three years after the conversion.

2011–12: alternate minimum tax. Act 8 of 2011 inserted Chapter XII-BA, with effect from 1 April 2012, imposing alternate minimum tax on LLPs: where the regular income-tax is less than the alternate minimum tax, the adjusted total income is taxed at eighteen and one-half per cent (s. 115JC(1)).

2012–13 and 2017–18. Act 23 of 2012 substituted section 115JC with effect from 1 April 2013, extending the alternate minimum tax from LLPs to persons other than companies generally; Act 7 of 2017 replaced the tenth-assessment-year limit in section 115JD, so that the alternate minimum tax credit may now be carried forward up to the fifteenth assessment year.

Conclusion. LLPs were first taxed as firms, with their partners' shares exempt and their remuneration and interest limited (2009), then given tax-neutral conversion from companies (2010), then brought under alternate minimum tax (2011), which was later widened to persons other than companies that claim the specified deductions (2012).