Best tax regime for rental income from a warehouse, i.e. LLP/REITS/FOP/Pvt Ltd

In a LLP structure, the remuneration to working partners is limited and linked to the profits of the firm u/s 40(b) of Income Tax Act. The amount allowed is 90% of book profits upto Rs 3 Lakhs and thereafter @ 60% of book profits . Book profits means profit before calculating remuneration to the partners. Thus in your case, lets say your rental income after expenses is Rs. 203 Lakhs, remuneration to all working partners is limited to Rs. 123 Lakhs , i.e., Rs. 2,70,000, 90% of first Rs 3 Lakhs and Rs 120 Lakhs @ 60% of balance of Rs 200 Lakhs.   In the case of a private limited company there is no such restriction. It can be paid depending upon the needs of the business. From that perspective, a private limited company is better than a LLP. 

- Either a LLP or Private ltd. Co. structure is suitable for your business

- Rental income is a business income

- LLP basic tax rate is 30%. Surcharge @12% is applicable if taxable income exceeds Rs.1 cr. Ed.cess is 4%. Effective tax rate is 34.944%

- LLP can pay remuneration and interest to the partners subject to the restrictions of section 40(b)

- Share of partners in the profits of LLP are exempt in the hands of partners of LLP

- LLP agreement is a crucial document and should precisely mention the amount of remuneration payable to the working partners, share of profit/loss of partners in the LLP etc.

Pvt. Ltd. Co.

- Under Alternative tax regime, tax rate is 22%+surcharge+cess

- Profits can be distributed as dividend to the shareholders. Dividend is taxable in the hands of shareholders

To optimize the tax structure for your ₹3.7 crore rental income from a warehouse, here are some potential structures and their tax implications:

1. LLP (Limited Liability Partnership)

• 
  Current Tax Rate: 24.5% (including surcharge and cess).
• 
  Key Points:

  • LLP profits are taxed at a flat rate of 30% (+ surcharge and cess for income above ₹1 crore).
  • 
    Remuneration to partners is limited under Section 40(b), which restricts further deductions.
  • 
    Partners’ share of profits is tax-free in their hands, but other income distributions can be inefficient.

• 
  Recommendation: LLP is tax-efficient for passing profits to partners, but the restriction on remuneration can limit flexibility.

2. Private Limited Company

• 
  Alternative Tax Regime: 22% (+ surcharge + cess), around 25.17% effective.
• 
  Key Points:

  • Flexibility in remuneration to directors, which can reduce taxable profits.
  • Dividends distributed to shareholders are taxed in the hands of the recipient at applicable slab rates.

• The Private Limited Company offers a lower tax rate than LLP but involves double taxation if dividends are distributed.

3. REIT (Real Estate Investment Trust)

• 
  Key Points:

  • Rental income received by REITs is typically tax-exempt at the trust level.
  • Income is distributed to unit holders, who are taxed at individual slab rates.

• However, setting up a REIT can be complex and may not be practical unless you plan to scale.

4. FOP (Family Office Partnership)

• 
  Taxation Similar to LLP:

  • Taxed as a partnership firm with similar provisions as LLP.
  • Partners' profits are tax-free in their hands.

For detailed, personalized advice, consider a phone consultancy.

Hope you find the information helpful. You are free to contact me for further discussion.If you could spare two minutes of your time to write a review, It would be really grateful and very happy to read it.

Thank you.

Shubham Goyal