How Are Sole Proprietorships Taxed in India

How Are Sole Proprietorships Taxed in India

Sole proprietorships are the most common form of business entity in India. 

They are easily formed and have little formalities associated with them. There is no need for a separate bank account, filing of balance sheets or appointment of auditors. 

A sole proprietorship can be started by any person who owns an unincorporated business and is not required to register with the Registrar of Companies (RoC). 

There are three ways in which income earned from a sole proprietary firm may be taxed.

Sole proprietorship

A sole proprietorship is a business that is owned and operated by one individual. 

The income or loss of the individual owner is reported on his or her personal tax return, and he or she is taxed at regular rates.

A sole proprietorship also has significant disadvantages:

  • The owner must pay self-employment taxes on net earnings from services performed as an independent contractor (such as those provided by home-based businesses).
  • The owner may not deduct business expenses incurred concerning any personal use of a property (for example, real estate used for personal and business purposes) unless those expenses qualify for an exception under Section 274 of the Internal Revenue Code.

The Internal Revenue Service often considers an individual who runs several businesses simultaneously in different capacities—an employee in one company and an independent contractor selling services to another company—to be operating two businesses simultaneously within his/her sole proprietorship. 

In this case, the authorities will treat both companies as separate entities even though one person owns them; therefore, all income generated from each company will be considered separate sources of income when calculating taxes owed at year-end.

Sole proprietorship income tax calculation

If you're a sole proprietor and you want to know how much income tax you need to pay, here is the formula for doing so:

  • Gross income (the total amount of money that came into your hands) minus expenses and deductions equals net profit.
  • Net profit multiplied by the applicable tax rate will give your income tax liability.

Sole proprietorship tax rates

In India, sole proprietorships are taxed at a flat rate of 30%. The corporation tax rates for companies with no profits and less than Rs 1 crore in turnover are also 30%.

The tax payable by a sole proprietorship can be calculated using the formula: Taxable income x Applicable rate = Total taxes due. 

For example, if your taxable income is Rs 1 lakh and you're paying the applicable rate of 20%, your total taxes due would be Rs 20,000 (1 lakh x 20%).

For sole proprietors below the age of 60 years

If you are a sole proprietor below the age of 60 years, your tax liability is calculated as follows:

  • Taxable income = Gross receipts - Allowable deductions
  • Tax rate = Taxable income/Taxable income*100%
  • Tax payable = Tax due on taxable income * Excise duty + surcharge + education cess

For sole proprietors above 60 years but below 80 years

You'll be taxed on the net profit of your business after deducting all expenses and investments. 

The applicable tax rate depends on the years you've been running your business, ranging from 5% to 20%.

The tax amount payable is calculated as follows:

Taxable income (after all deductions) * Tax rate = Tax amount payable

You must also pay a surcharge, health, and education cess levied at 3% each. There's no rebate on this for people below 80 years of age.

For sole proprietors above 80 years

If you are a sole proprietor above 80 years of age and have a business income from the same, your maximum tax deduction is Rs 1.5 lakhs. 

This is because only 70% of the interest paid on a home loan will be deductible (Rs 1 lakh), and other investments will also be eligible for deduction under section 80C or 80CCF or 80G.

In case you are above 80 years of age and only a resident Indian non-corporate taxpayer who has an income from business or profession or vocation, then your total deductions can go up to Rs 2 lakhs if you are single and between 60-80 years of age; 

it goes up to Rs 2.5 lakhs if you are married, but both husband & wife don't exceed 60 years; it goes up further to Rs 3 lakhs if both husband & wife do not exceed 60 years.

Surcharge

Surcharge is levied on individuals who earn more than Rs 1 crore in a financial year. 

This was introduced in the year 2015 and is currently at 10% of the income tax payable. It is calculated on the total income that exceeds Rs 1 crore.

Health and Education Cess

Health and education cess is a tax that the government imposes on any taxable income to fund the public health system and educational institutions. 

The health and education cess is calculated at 2% of your net taxable income. It’s typically levied along with other taxes, including income tax and corporate tax (if applicable).

The health and education cess was first introduced in 1993 to increase funding for public healthcare, research, development and related projects. In 2018 alone, 

this tax raised over Rs 90 billion from more than 3 million taxpayers across India—and it provides vital support for those who need it most.

What Is Health & Education Cess?

Health & Education Cess = Education Cess + Secondary Higher Education Cess + Higher Secondary Edn. Charges + Post-Matric Scholarship Charges

Rebate (under section 87A)

The rebate under section 87A will be available to those assessees who have filed their annual income tax returns in the previous year. 

The rebate is also applicable for a subsequent year if the taxpayer dies during the assessment year and his estate has paid any sum as income tax. 

In such cases, the rebate can be claimed by either spouse or heir of the deceased.

The following conditions must be met to claim this deduction:

  • It should not exceed Rs 10 lakhs per annum
  • The profit from business or profession must not exceed Rs 1 crore during FY 2017-18 (after accounting for depreciation)

How can a sole proprietor file his IT return?

There are multiple ways in which a sole proprietor can file his return. He can choose any one of the following:

  • Online: He can use the official website of the Income Tax Department (http://www.incometaxindiaefiling.gov.in/) to submit his documents and pay taxes online. If he cannot register with this site, he needs to visit an authorized tax agent or CA who will help him file his IT return by paying them a fee.
  • Post office: The other way is submitting your documents through post offices that the government has set up for this purpose across all major cities and towns in India, especially during tax filing season (usually from July 1st each year until September 30th).
  • Banks: You can also submit your IT return at any of these banks, which will ensure the safe delivery of your income tax forms along with instructions on how they should be filled out before sending them back again via courier services such as DHL or FedEx so that no time is lost when submitting these forms after making changes or corrections on them later down the line if needed too!

Due date of filing an income tax return for a sole proprietorship firm:

The return has to be filed by the 15th day of the next month. For example, if a company ends its financial year on March 31st,

its ITR must be filed by April 15th. Similarly, if it ends on June 30th, then its ITR will have to be filed by July 15th.

  • Monthly: 15th of next month
  • Quarterly: 15th day of 3rd month after the end of the quarter

When does a sole proprietor pay taxes?

In India, sole proprietors are responsible for paying their own taxes. They do this by deducting tax from their income at source—i.e., before paying them out to you as business owners—and submitting it to the government on your behalf. 

At the end of each year, you must file your taxes and submit them to the government.

Are sole proprietors taxed twice?

No. Sole proprietorships are taxed only once. The net profit from your business is taxed in one of two ways: either at a flat rate or with progressive tax brackets.

  • Flat rate: Rather than apply different rates to different levels of income, the Indian government has decided that all sole proprietors will be subject to the same flat rate of tax on their net profit. That means if you have only one type of income (like an online shop), then you'll pay a low percentage of your profits. But if you receive multiple types of income and/or have high profits, then this "flat rate" may end up being higher than what other businesses pay under more complex rules that take into account their various expenses and deductions as well as where they're based (state or national).
  • Progressive rates: While some countries use progressive rates for corporate taxes, India uses them for personal income taxes as well—so if you're an individual who owns a business but doesn't make enough money from it to consider yourself self-employed, then you are taxable income will be taxed according to these guidelines instead!

Expenses that a sole proprietor Cannot deduct

A sole proprietor is not allowed to deduct any of the following expenses:

  • The business pays for business expenses.
  • Travel costs that were not required to maintain or improve your trade or profession.
  • Entertainment expenses that have no direct relationship with your business.
  • Office supplies and equipment.
  • Car and truck expenses, except those that are used more than 50% for business purposes (this will be discussed later in this article).

Read more,

One Person Company Registration

GST Registration Online

Service Tax Registration

Online Company Registration

Conclusion

The sole proprietorship is a very common business model in India. A sole proprietorship has certain advantages, such as flexibility and low business cost. 

In addition to these advantages, the tax treatment of a sole proprietorship is also very simple. 

The income tax rules for sole proprietorships are designed to ensure that their profits are taxed at the same rate as other businesses or individuals.

FAQ's Related to how are sole proprietorships taxed in india

1. What is a sole proprietorship? 

A sole proprietorship is an unincorporated business owned and run by one person. The business makes money, pays taxes, and has no separation between the owner's personal finances and business finances. This means that any losses or profits from the business are taxed on their own tax return as part of their personal income.

2. Who can be a sole proprietor?

Any individual who owns their own business can be considered a sole proprietor. The only exception would be when two people own equal portions of the company. In this case, filing as partners may be necessary instead of using the more generalized term "sole proprietor."

3. What is the difference between a partnership and sole proprietorship? 

Partnerships are businesses that are owned by two or more people who share ownership equally; there must also be some form of the ongoing financial arrangement between these partners (i.e., financial contributions). Partnerships are not taxed separately from their owners; instead, they report profits/losses on Schedule C alongside other self-employment income sources like freelance work.

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