Sole Proprietorship

How To Calculate Taxable Income For Sole Proprietorship In India

In this article, we will discuss how one can calculate taxable income for sole proprietorship. Read on to know!

A sole proprietorship firm is also referred to as a sole trader, proprietorship, or individual business. There is no separation between the owner and the business entity in this kind of business, enterprise, or firm.

A sole proprietorship business is one of the easiest to maintain. Because of how simple they are to operate, sole proprietorships are very popular in the unorganized business sector, especially among small merchants and traders.

In this blog, we will cover all aspects of a sole proprietorship, including how to calulate taxable income.

Sole Proprietorship Income Tax Calculation

A sole proprietorship business is not taxed in India as a separate legal entity. Instead, the business owners include their business taxes in their individual tax returns.

 However, a sole proprietor’s business income is added to his individual income after business expenses, tax deductions, and other relevant income, if any, are deducted from his gross receipts.

According to current IT laws and in accordance with the slab rates relevant to his taxable income, such a business is eligible to get the sole proprietorship tax deduction just like any other individual. Contrast this with registered businesses, for whom income taxes are calculated at set rates.

Sole Proprietorship Taxation 

The rate of income tax for sole proprietorship businesses is the same as the individual business rate.

Income range (in ₹)  Rate of tax (New regime) Rate of tax (Old regime)
0- 2,50,000                       NIL                   NIL
2,50,001- 5,00,000 5%   5%
5,00,001- 7,50,000   10% 20%
7,50,001- 10,00,000 15% 20%
10,00,001- 12,50,000 20% 30%
12,50,001- 15,00,000 25% 30%
Above 15,00,000   30% 30%

The tax rate for sole proprietorship businesses if the owner was older than 60 but younger than 80 at any time during the previous year (i.e. senior citizen).

Income tax slab  Income Tax Rate
Up to ₹ 3,00,000 NIL
₹ 3,00,000 to ₹ 5,00,000 5% of the total income above ₹ 3,00,000.
₹ 5,00,000 to ₹ 10,00,000 ₹ 10,000 + 20% of the total income above ₹ 5,00,000.
Above ₹ 10,00,000 ₹ 1,10,000 + 30% of the total pay above ₹ 10,00,000.

Tax rate for a business that is a sole proprietorship and whose owner is over 80 years old(i.e. super senior citizen).

Income tax slab Income Tax Rate 
Up to ₹ 5,00,000 NIL
₹ 5,00,000 to ₹ 10,00,000 20% of the total income above ₹ 5,00,000.
Above ₹ 10,00,000  ₹ 1,00,000 + 30% of total income above ₹ 10,00,000 

The tax rate for a sole proprietorship where the owner is a non-resident individual (this slab applies irrespective of the age of the proprietor).

Income tax slab  Income Tax Rate
Up to ₹ 2,50,000 NIL
₹ 2,50,000 to ₹ 5,00,000 5% of the total income above ₹ 2, 50,000.
₹ 5,00,000 to ₹ 10,00,000  ₹ 12,500 + 20% of total income above 5,00,000.  
Above ₹ 10,00,000 ₹ 1,12,500 + 30% of the total income above ₹ 10,00,000.  

In addition to the income tax imposed according to the aforementioned tax slabs, sole proprietors must also pay the surcharge listed below.-

  • 10% of the income tax amount, if the total income is between Rs. 50 lakh to Rs. 1 crore.
  • If the total income exceeds Rs 1 crore, 15% of the income tax amount will be due.

Another important factor of the sole proprietorship income tax calculation is that, if the IT return is submitted on time or before the deadline, any losses incurred by the business may be carried forward. 

Also, if one misses the deadline for filing his proprietorship IT return, the tax deductions permitted under Sections 10A and B and Sections 80-IA, IB, and IC will not be taken into account.

In addition, regardless of turnover, an audit would be necessary for every proprietorship firm subject to the presumptive taxation scheme if the income claimed is less than the considered profits and gains under the scheme. A practicing Chartered Accountant must conduct the audit for proprietorship for income tax purposes.

To get more information, get in touch with Vakilsearch. They will help you file your taxes and will take care of all your needs.

Health and Education Cess

The sum of the income tax and surcharge must be used to calculate the health and education cess. The health and education are payable 4% on income tax plus a surcharge.

Rebate (Under Section 87A)

In accordance with section 87A of the Income Tax Act of 1961, the tax rebate has recently been increased/revised. The highest tax rebate allowed under section 87A is 12,500 for the Financial Year 2020–21.

Only resident individuals and proprietors with net taxable income up to 5 Lakhs are eligible for a tax relief. Before ‘Surcharge’ and ‘Health and Education Cess’ are added, a tax rebate is applied to the total tax.

Which ITR Form should a Proprietorship Firm use?

Form ITR-3

He cannot file an ITR-3 if the Individual/HUF receives income from a partnership entity that is engaged in business or profession. He is obligated to submit an ITR-2 in this situation.

The proprietor’s digital signature can be used to digitally or physically submit Form ITR-3, the income tax return for proprietorship businesses.

Due Date for Filing Proprietorship Firm Tax 

A proprietorship that is not subject to an audit must file its income tax return by July 31.

The proprietorship’s income tax return is due on September 30th if an audit is required by the Income Tax Act.

If the proprietorship is engaged in a specific domestic transaction or an overseas transaction with linked firms, Form No.3CEB must be provided. The income tax return is due on November 30th for sole proprietorship businesses that must file Form No. 3 CEB.

Conclusion

We hope that after reading the information above, one has a better understanding of how to calulate taxable income for a sole proprietorship in India and what the applicable rates are.

If you have trouble calculating your income tax returns, you can get assistance from Vakilsearch to file your taxes. This will make the procedure easier for you. Their team will assist you with everything from answering your queries to filing income tax returns on your behalf.

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