By CA Surekha S Ahuja
How strategic partner remuneration, firm profit allocation & entity choice can reduce surcharge — with 3-partner examples and clear tax outcomes
When business profits cross ₹5 crore… ₹50 crore… and in many cases ₹100+ crore, one question becomes a goldmine of tax optimisation:
“Can we reduce our surcharge by shifting income between the firm and the partners?”
Most firms either pay full 31.2–31.5% tax at the firm level (30% + 10% surcharge + 4% HEC)
OR
push too much income to partners, triggering 39% tax in their hands (new regime highest slab with capped 25% surcharge).
The truth is:
There is a sweet spot — but only if you understand the surcharge trigger points.
This guide explains that sweet spot with simple examples, law references, charts, and a 3-partner model.
First Principles — How the Law Creates Planning Opportunities
A. Firms & LLPs (same taxation)
Tax rate → 30%
Surcharge → 10% (flat; no income-based variations)
Health & education cess → 4%
→ Effective rate: approx. 31.2–31.5% irrespective of profit level
Whether the firm earns 50 lakhs or 500 crores — rate is the same.
B. Partners (Individuals) – New Regime
Slab rate up to 30%
Surcharge capped at 25% (Finance Act 2023 for new regime)
HEC 4%
→ Effective maximum rate: approx. 39%
C. Companies (Private Limited)
Base rate → 22% (115BAA) or 30% (regular)
Surcharge varies:
7% if income > ₹1 crore
12% if income > ₹10 crore
HEC 4%
→ Effective rate under 115BAA roughly 25.17%.
Bottom-line Difference
| Entity | Effective Tax Rate | Surcharge Logic |
|---|---|---|
| Firm / LLP | 31.2–31.5% | Constant 10% |
| Partner (Individual) | Up to 39% | Capped 25% |
| Company (115BAA) | 25.17% | 7% or 12% |
This creates a huge planning avenue:
Shift income to the place with the cheaper surcharge.
The Most Important Question
Should Profit Sit in the Firm or Flow to Partners?
The answer depends on:
(A) Partner income already above ₹2 crore?
→ Then remuneration pushes them into surcharge at max rate → 39%.
→ Keeping income in the firm saves tax.
(B) Firm profit extremely high (₹20–₹200 crore)?
→ Firm will always pay only 10% surcharge, whereas partners reach 25% surcharge.
The rule of thumb
If partner’s post-remuneration income exceeds ₹2 crore, avoid giving more salary.
If partner is below ₹1 crore income, remuneration may reduce total tax.
The 3-Partner High-Profit Example (₹50 crore profit)
Before remuneration: ₹50 crore profit
Allowed remuneration (12(a) limits) easily exceeds what we plan to pay, so assume full eligibility.
We test 4 levels of remuneration to see the tax impact.
Scenario 1: No Remuneration Given
| Particulars | Amount |
|---|---|
| Firm Profit | ₹50 crore |
| Tax @ 31.5% | ₹15.75 crore |
| Partner income | Nil |
| Total Tax Outflow | ₹15.75 crore |
Scenario 2: Low Remuneration – ₹1 crore each (Total ₹3 crore)
| Particulars | Amount |
|---|---|
| Taxable profit in firm | ₹47 crore |
| Firm tax @31.5% | ₹14.80 crore |
| Partner income | ₹1 crore each |
| Partner tax @30% slab + 25% surcharge | ~₹0.39 crore each |
| Total partner tax | ₹1.17 crore |
| Total Tax Outflow | ₹15.97 crore |
Tax increased.
Reason: partners pay 39% on their income, more than firm’s 31.5%.
Scenario 3: Medium remuneration – ₹2 crore each (₹6 crore total)
| Particulars | Amount |
|---|---|
| Firm taxable profit | ₹44 crore |
| Firm tax | ₹13.86 crore |
| Partner tax | ₹0.78 crore each |
| Total partner tax | ₹2.34 crore |
| Total Tax Outflow | ₹16.20 crore |
Worse.
Scenario 4: High remuneration – ₹3 crore each (₹9 crore total)
| Particulars | Amount |
|---|---|
| Firm taxable profit | ₹41 crore |
| Firm tax | ₹12.92 crore |
| Partner tax | ₹1.17 crore each |
| Total partner tax | ₹3.51 crore |
| Total Tax Outflow | ₹16.43 crore |
Worst of all.
The Surprising Outcome
When firm profits are very high (₹50 crore, ₹100 crore, etc.):
Giving higher remuneration increases total tax because partners cross surcharge thresholds early.
Best choice:
Keep maximum profit in the firm and pay tax at 31.5%.
Why This Happens – The Surcharge Trigger Difference
| Income Level | Firm | Partner |
|---|---|---|
| ₹1 crore | Same tax rate | 30% + 15% surcharge |
| ₹2 crore | Same | 30% + 25% surcharge |
| ₹5 crore | Same | 30% + 25% surcharge |
| ₹50 crore | Same | 30% + 25% surcharge |
Partners hit the surcharge ceiling early.
Firms never change surcharge at all.
LLP vs Partnership Firm: Any Difference?
Taxation: Same
Section 184, 185, 40(b) apply equally
Rate 30% + 10% surcharge + 4% cess
Remuneration rules identical
Governance Difference (non-tax)
LLP gives limited liability
Better for outside investment and PE funding
Easier compliance than company
More flexible in profit-sharing
Tax optimisation → Exactly same outcome as partnership firm
Company vs Firm/LLP – When a Company Wins
At very high profit levels, a company under section 115BAA:
Pays 22% + 10% surcharge + 4% cess = 25.17%
No partner-level tax
No remuneration deduction limit restrictions
Dividends taxed @ 20.8% (after 2020 DDT abolition)
When Company is Better
If partners have high personal income (>₹2 crore)
If company profits are consistently above ₹10–20 crore
If profits are reinvested rather than withdrawn
If investor entry or ESOP pool is needed
The Final Planning Matrix
A. For High Profits (₹20–₹200 crore)
| Action | Result |
|---|---|
| Keep profits in firm/LLP | ✔ Lowest tax (31.5%) |
| Avoid heavy remuneration | ✔ Prevent 39% partner tax |
| Shift withdrawals to loans/dividend-like structures | ✔ Savings |
B. For Medium Profits (₹5–₹20 crore)
| If partners’ other income < ₹1 crore | Moderate remuneration works |
| If partners’ other income already high | Keep income in firm |
C. For Low Profits (<₹5 crore)
| Action | Result |
|---|---|
| Higher remuneration | ✔ May reduce tax |
| Profit retention in firm | ✔ Neutral |
Who Should Hold the Profit?
If partner total income after remuneration > ₹2 crore
➡ Keep profit in firm
(because partner surcharge hits 25%)
If partner income < ₹1 crore
➡ Remuneration is tax-neutral or beneficial
If partner income 1–2 crore
➡ Plan carefully — small shifts change surcharge drastically
Conclusion – The One Rule That Matters Most
A firm/LLP pays a flat 10% surcharge — partners pay 25%.
When profits are large, keeping income in the firm wins.
