Partnership / LLP MF investor

A partnership firm or Limited Liability Partnership (LLP) as a mutual fund investor is a non-corporate business entity that pools resources of two or more persons to carry on business. Both general partnership firms registered under the Indian Partnership Act, 1932, and LLPs incorporated under the Limited Liability Partnership Act, 2008, are eligible investors in SEBI-registered mutual funds. Investment in mutual funds by such entities is typically used for treasury management of surplus funds, not for the core business activity.

Legal structure and distinction

Partnership firm, governed by the Indian Partnership Act, 1932; does not have separate legal personality (though it is treated as a separate “person” under income tax law); partners are jointly and severally liable; registration is optional but practically necessary for legal proceedings.

LLP, governed by the Limited Liability Partnership Act, 2008; has separate legal personality distinct from its partners; partners’ liability is limited to their agreed contribution; must be registered with the Ministry of Corporate Affairs (MCA); maintains an LLP agreement as its constitutional document.

For mutual fund investment purposes, both structures are treated similarly, though LLPs have more formal governance requirements.

Eligibility

SEBI (Mutual Funds) Regulations, 1996 list “partnership firms” as eligible investors. LLPs, by virtue of being recognised as body corporates under the LLP Act, are also eligible. Both may invest in all SEBI-categorised scheme types except ELSS, Section 80C of the Income Tax Act does not extend the ELSS deduction to firms or LLPs.

Authorisation requirements

Unlike a company that requires a board resolution, a partnership firm’s investment authority flows from the partnership deed:

• Partnership deed, must authorise investment in securities/mutual funds and designate the partner(s) authorised to sign on behalf of the firm.
• Partners’ resolution, if the deed does not specifically authorise mutual fund investment, a resolution signed by all partners is required.
• Authorised partner’s specimen signature, the signing partner’s signature must match the signature on the application.

For an LLP:

• LLP agreement, governs the authority of designated partners.
• Designated partners’ resolution, required if the LLP agreement does not specifically authorise securities investment.
• LLP incorporation certificate, issued by the Registrar of Companies.

KYC documentation

Entity-level documents:

Beneficial ownership documentation:

Partners who hold more than 15 per cent of capital or profit (25 per cent per PMLA rules) must be identified as beneficial owners. For each such partner:

• PAN;
• identity proof (Aadhaar, passport, or voter ID);
• address proof.

Authorised signatory documents:

• PAN and identity/address proof of the signing partner(s).
• Photograph.

FATCA/CRS self-certification is filed by the firm/LLP, declaring the entity type (typically Active NFE or Passive NFE) and identifying controlling persons (all partners holding more than 25 per cent voting/profit rights).

Taxation

Partnership firms and LLPs are taxed at a flat rate of 30 per cent (plus 12 per cent surcharge on income above Rs 1 crore and applicable cess) under the Income Tax Act, 1961. There is no progressive slab for firms or LLPs.

Capital gains

Equity-oriented funds:

• STCG at 20 per cent under Section 111A.
• LTCG (12 months or more, gains above Rs 1,25,000 per year) at 12.5 per cent under Section 112A.

Debt-oriented funds (acquired on or after 1 April 2023):

• Gains taxed at 30 per cent at the firm/LLP’s income tax rate per Section 50AA.

Firms and LLPs do not benefit from indexation on debt fund investments acquired after 1 April 2023.

TDS on IDCW

TDS at 10 per cent under Section 194K on IDCW payouts from mutual funds where aggregate payout from an AMC exceeds Rs 5,000 per financial year. The firm/LLP claims the TDS as advance tax credit.

Pass-through to partners

Share of profit from the firm/LLP (including from mutual fund investments) paid to partners is exempt from tax in partners’ hands under Section 10(2A) of the Income Tax Act to avoid double taxation, since the firm has already paid tax on it.

Practical considerations

• Most partnership firms use mutual fund investments for short-term treasury (liquid and overnight funds) rather than long-term equity investment.
• The flat 30 per cent tax rate for firms and LLPs makes arbitrage funds (equity-oriented, taxed at 20 per cent STCG) an efficient option compared to overnight funds (debt, 30 per cent) for surplus deployment over one to three months.
• Firms are not subject to MAT (Minimum Alternate Tax) or AMT in the same manner as companies; LLPs are subject to AMT at 18.5 per cent under Section 115JC.
• SIP mandates are rarely used by partnerships due to the discretionary nature of surplus fund availability.

Dissolution and winding up

When a partnership dissolves or an LLP is wound up, the mutual fund units held by the entity must be redeemed or distributed to the partners. Redemption is treated as a normal capital gains transaction at the firm/LLP level before distribution of proceeds. There is no tax exemption on dissolution (unlike Section 47(i) for HUF partition); the firm/LLP recognises capital gains at the time of redemption.

If units are distributed in specie to partners (transferred to individual demat accounts without redemption), the Income Tax Department may treat this as a transfer under Section 2(47) and tax the deemed consideration (market value on date of distribution) as capital gains of the firm. Legal advice should be obtained before distributing units in specie to avoid unintended tax consequences.

Comparison with individual investing

A key difference between investing as a partnership/LLP and investing as an individual is the tax rate: individuals benefit from the basic exemption limit and progressive slabs for debt fund gains, whereas a partnership/LLP is taxed at a flat 30 per cent. For an individual in the 30 per cent slab, there is no difference on debt fund returns; for lower-slab individuals, the partnership structure is tax-inefficient for debt funds.

For equity funds, the 20 per cent STCG and 12.5 per cent LTCG rates apply equally to individuals and firms. The arbitrage between the equity fund LTCG rate (12.5 per cent) and the firm’s flat income tax rate (30 per cent) on debt fund gains makes equity funds and arbitrage funds proportionally more efficient for partnership/LLP investors.

Foreign partnership and LLP investors

A foreign limited partnership or LLP incorporated outside India cannot invest directly in Indian mutual funds. Such entities must either register as a Foreign Portfolio Investor with SEBI or invest through an Indian subsidiary. A foreign LLP’s Indian partners cannot invest through the LLP entity; they must invest in their individual NRI/OCI capacity.

Reporting obligations

Firms and LLPs investing in mutual funds must report capital gains and IDCW in their income tax returns:

• Firms, file ITR-5.
• LLPs, file ITR-5; additionally, LLPs with turnover above Rs 40 lakh or total assets above Rs 25 lakh must have their accounts audited under the LLP Act.

Mutual fund transactions are also reported in the AIS under the firm’s/LLP’s PAN; the firm must reconcile AIS data before filing ITR-5.

Regulatory framework

• Indian Partnership Act, 1932
• Limited Liability Partnership Act, 2008
• SEBI (Mutual Funds) Regulations, 1996, eligible investors
• Income Tax Act, 1961, Sections 10(2A), 50AA, 111A, 112A, 115JC
• PMLA (Maintenance of Records) Rules, 2005, beneficial ownership

See also

• Corporate body MF investor
• Sole proprietorship MF investor
• Trust as MF investor
• Mutual fund
• SEBI
• Capital gains tax in India

References

1. SEBI (Mutual Funds) Regulations, 1996, Third Schedule, eligible investors.
2. Indian Partnership Act, 1932, partnership firm registration and authority.
3. Limited Liability Partnership Act, 2008, LLP incorporation and governance.
4. Income Tax Act, 1961, Section 10(2A), partner’s share in firm profit.
5. Income Tax Act, 1961, Section 115JC, AMT for LLPs.
6. PMLA Rules, 2005, Rule 9, beneficial ownership for non-individual entities.
7. AMFI guidelines on KYC for non-individual investors.