How sole proprietorship businesses are taxed in India

There is no magic rule that says corporate form of business will save you more tax in comparison to proprietorship. Tax can be saved through proper tax planning. Sole proprietorship are small and independent service providers or resellers who work for themselves in their own business. It’s a business owned by a single individual. In this article, we will discuss how a sole proprietorship business is taxed in India and applicability of tax audit, TDS provisions and presumptive taxation scheme to a proprietor. Proprietorship means the business is owned by a single owner. One person company should not be considered as a proprietorship business as its registered as a separate legal entity. Doctors, advocates, Chartered accountants, company secretary, small retail shop owners, contractors and other traders are generally doing business as a proprietor. As per tax laws, business Income from a sole proprietorship is taxed in the hands of the proprietor. In addition to the sole trader’s other Income, business Income gets added to calculate tax on the total income. Such business carry very low liability risk and therefore these owners are not required liability protection like in the case of private limited or public limited companies.

Permanent Account Number (PAN)

Before filling IT returns for your business income, you need to obtain a Permanent Account Number (PAN). Permanent Account Number or PAN is required for all income tax related matters of your dole proprietorship business. As proprietorship business has no separate legal identity they cannot be issued a separate PAN for their businesses. So PAN as allotted to the owner is to be used for all income tax purposes related to the proprietorship business i.e. PAN of the proprietor/owner is the PAN for the proprietorship business.

Basic exemption limit for an individual or proprietor

An individual or proprietor is taxable only when his or her income increases the Basic Exemption Limit. Basic exemption limit for the financial year 2018-19 for an individual who is below 60 years of age is Rs.2, 50,000. Similarly, an individual who is 60 years of age or more but below the age of 80 years, has a basic exemption limit of Rs. 3,00,000. Above 80 years of age, proprietors are classified as super senior citizens. For super senior citizens, basic exemption limit is Rs. 5,00,000.

Basic Exemption Limit For Financial Year 2019-20 (AY 2020-21)

Age limit of a proprietor being a resident in India	Basic Exemption Limit in INR
who is less than 60 years of age	2,50,000
who is of the age of 60 years or more but less than 80 years	3,00,000
Who is of the age of 80 years or more	5,00,000

If your income is above this basic exemption limit, then your total income will be taxable in India based on the rates applicable to you. To calculate your tax liability, you need to calculate tax at the rate of zero on the basic exemption limit and then start at the rate of 5%, 20% and 30% on balance left out as the case may be.

Tax Rates Applicable to an individual or proprietor

Tax rates are defined based on the income slabs. A proprietor who is below 60 years of age, is taxable at the rate of 5% up to his total income of Rs.5,00,000 after taking out basic exemption of Rs. 2,50,000 I.e. on balance Rs. 2,50,000 he is taxable at the rate of 5%. From 5,00,000 to 10,00,000 he is taxable at the rate of 20% and any thing above Rs. 10,00,000 is taxed at the rate of 30%. This means, if an individual who is below 60 years of age has total income of Rs. 12,00,000, then out of it Rs. 2,50,000 is not taxable, Rs. 2,50,001 to Rs. 5,00,000 is taxed at the rate of 5%. From Rs. 5,00,001 to Rs. 10,00,000, its taxed at the rate of 20% and balance Rs. 2,00,000 is taxed at the rate of 30%. Total tax payable in this case is calculated at the end of the article. Similarly, a senior citizen who is between 60 to 80 years of age, is exempted up to Rs. 3,00,000. Rs. 3,00,001 to 5,00,000 is taxed at the rate of 5%. From 5,00,001 to 10,00,000, income is taxed at the rate of 20% and beyond Rs. 10,00,000 income is taxed at the rate of 30%. A super senior citizen has only two rates of tax as in his case, income is not taxable up to Rs. 5,00,000. For income between 5,00,001 to 10,00,000, tax rate is 20%. Beyond Rs. 10,00,000, the entire income is taxable at the rate of 30%.

Tax Rate of a proprietor being a resident in India

Total Income Slabs in INR	When the proprietor is less than 60 years of age	When the proprietor is of the age of 60 years or more but less than 80 years	When the proprietor is of the age of 80 years or more
Up to 2,50,000	Nil	Nil	Nil
2,50,001 to 3,00,000	5%	Nil	Nil
3,00,001 to 5,00,000	5%	5%	Nil
5,00,001 to 10,00,000	20%	20%	20%
Above 10,00,000	30%	30%	30%

Tax rebate

As a proprietor, you are also eligible for tax rebate under section 87A of IT act 1961. As per this section, if your total income is less than equal to Rs. 3,50,000, then you can claim up to Rs. 2,500 as tax rebate. This means Rs. 2,500 or income tax liability whichever is less is eligible for tax rebate U/s 87A. You will be deducting tax rebate from your tax liability calculated on total taxable income.

Health and Education Cess

For financial year 2018-19, total Health and Education cess to be paid on income tax is 4%. Cess is an additional levy charged on tax liability by the central government to raise fund for specific purpose. Cess is calculated on your income tax liability before adding interest under section 234A, 234B and 234C of IT Act 1961 and after considering surcharge if any. For instance if your tax liability is Rs. 10,000 then cess @4% has to be calculated on Rs. 10,000.

Surcharge

The income tax as calculated before charging cess, has to be charged surcharge at the rate of 10% in case total income exceeds Rs. 50,00,000. If total income exceeds Rs. 1 Crore, then surcharge on Income Tax should be 15%. Surcharge is charged on tax liability calculated on your total income. In case of confusion, you can check the calculation given at the end of the article. Please note that surcharge is not applicable if your total income does not exceed Rs. 50,00,000.

Applicability of tax deductions

Most of the deductions in chapter VI-A are provided for an individual or proprietor. Below we have listed all the sections and type of investments or expenditure which can be claimed as tax deductions from a individual or proprietor’s gross total income;

• Section 80C – in respect of life insurance premia, contributions to PPF, Tution fees etc
• 80ccc – in respect of pension fund
• 80ccd – in respect of contribution to national pension system
• 80ccg – in respect of investment made under any equity saving scheme
• 80d – in respect of medical insurance premia
• 80dd – in respect of maintenance including medical treatment of a dependent being a person with disability
• 80ddb – in respect of medical treatment
• 80e – in respect of payment of interest on loan taken for higher studies
• 80ee – in respect of interest on loan taken for residential house property
• 80g – in respect of donation to certain funds, charitable institutions etc.
• 80gg – Deduction in respect of rent paid
• 80gga – In respect of certain donations for scientific research or rural development
• 80ggc – in respect of contribution given to political parties
• 80ia – in respect of products and gains from industrial undertaking or enterprises engaged in infrastructure development.
• 80iab – in respect of profits and gains by an undertaking or enterprise engaged in development of special economic zone.
• 80ib – in respect of profits and gains from certain industrial undertaking other than infrastructure development undertaking.
• 80iba – in respect of profits from housing project
• 80ic –  in respect of profits and gains of certain undertaking in certain special category of states
• 80id – in the case of hotels and convention center in NCR
• 80ie – in respect of undertaking in north-eastern states
• 80jja – in respect of profits and gains from the business of collecting and processing of biodegradable waste.
• 80jjaa – in respect of employment of new employees
• 80qqb – in respect of royalty income of authors
• 80rrb – in respect of royalty of patents
• 80tta – in respect of interest on deposits in saving accounts
• 80u – in case of a person with disability

After deducting above applicable tax deductions, from your gross total income, you arrived at total income. Tax is calculated on your total income. Even section 87A rebate eligibility is also determined based on your total income. If total income does not exceed Rs. 3,50,000, then you are eligible for rebate of Rs. 2,500 or tax liability whichever is less.

Presumptive taxation Scheme

A proprietor can take benefits of presumptive taxation scheme under section 44AE, 44AD and 44ADA of the IT Act 1961 based on the type of business or profession. By using these presumptive taxation scheme, you can calculate your income chargeable under the head “income from business or profession”. Along with other incomes, you can arrive at your tax liability based on above discussed provisions. If you are running a goods transport agency, then you can calculate your income under the head “profits and gains from business or profession” based on the provisions of presumptive taxation scheme under section 44AE. Similarly, a businessman and professional can avail presumptive taxation scheme benefits under section 44AD and 44ADA respectively. If you have opted for presumptive taxation scheme, then income under the head “profits and gains from business or profession” for tax calculation will be calculated based on these sections instead of on your actual profit. While filing return of income with government, you are required to choose the ITR form applicable to presumptive Scheme.

Applicability of Tax audit U/s 44AB

Applicability of tax audit depends on the total revenue or gross receipts of the business. If you are running a business, then your books of account is required to be audited by a chartered accountant in practice under section 44AB if total turnover during the financial year is more than Rs. 1 Crore. In case of a professional, if gross receipts is more than Rs. 50,00,000, then tax audit is applicable.

Applicability of TDS

TDS stands for Tax Deducted At Source. If as a proprietor, your business is required to be audited under section 44AB (1)(a) and 44AB (1)(b) then TDS amount has to be deducted under various sections of IT Act 1961. After deduction, you are required to deposit the TDS amount with the government, file quarterly return with the government and issue TDS certificate to deductee. All these has to be done on or before the due date as specified in tax laws.

Example on how to calculate tax liability of a proprietor

Mr. XYZ, aged 52 years running a small retail business as a proprietor, the particulars of income year ended 31.03.2019 is as under;

• Net profit of Rs. 4,20,000 from the business of retail shop
• Income from house property is Rs. 18,000

During the year, he has deposited insurance premium  on the self of Rs. 10,000 and son of Rs. 28,000. He has also contributed to public provident fund of Rs. 50,000 on January 2019. Computation of total income and tax liability of Mr. XYZ is as under;

Previous Year	2017-18
Assessment Year	2018-19
Particulars	Amount in Rs.
Income From House Property	18,000
Profits and Gains from Business or Profession	4,20,000
Gross Total Income	4,38,000
Less: Deductions under chapter VI-A	.
Life Insurance premium paid	38,000
Contribution to Public Provident Fund	50,000
Total Income	3,50,000
Tax On Total Income [(350000-250000)*5%]	5,000
Less: Rebate U/s 87A	2,500
Total Tax Payable	2,500
Add: Surcharge @ 15% (Surcharge Not Applicable)	–
Tax Including Surcharge	2,500
Add: Health and Education Cess @ 4%	100
Net Tax Payable	2,600

Income tax return form (ITR)

ITR 4S is specifically prescribed for those sole proprietorship business whose main business is playing, hiring or leasing goods carriage and who owns not more than 10 goods carriage at any time during the year. Those persons who want to avail section 44AD benefit for their income tax calculation can also use ITR 4S for filing their IT return. ITR 4 has been prescribed for all other sole proprietorship business. Details such as PAN number, date of birth, Name, current address are required to be provided along with all other details that are required as per IT act.

Books of accounts

If such proprietorship businesses gross receipts or incomes have exceeded Rs 10,00,000 or Rs 1,20,000 respectively in any of the 3 preceding previous years to the previous year for which you are filling your IT return, then you have to maintain books of accounts as specified under the IT act. If the sole proprietorship business is newly set up and such business’s gross receipts or incomes are likely to exceed Rs 10,00,000 or Rs 1,20,000 respectively during the previous year, then such sole proprietorship business has to maintain books of accounts as prescribed in IT act. Proprietorship business can also get covered under section 44AD of IT act if their turnover or gross receipts are up to Rs. 2 crore and they have disclosed their taxable income as greater than equal to 8% of the gross receipts or turnover. In such cases, proprietorship business are not required to maintain books of accounts as required under section 44AA of IT act. Recommended read:

• Section 44AA – Compulsory maintenance of books of accounts
• Section 44AD – Presumptive Basis of calculating business profits
• Income tax audit under section 44AB of IT act