Taxation for Sole Proprietorship in India

A sole proprietorship is one of the most popular and simplest forms of business in India these days. It is owned, managed, and controlled by a single individual, which makes it easy to set up and operate. A sole proprietorship offers minimal regulatory compliance and complete control to the owner, and taxation for sole proprietorships takes a different approach than that of companies or LLPs. Sole Proprietors are eligible for deductions and exemptions under the Income Tax Act of 1961 for business expenses, investments, medical insurance, etc. Furthermore, if the annual turnover of the business crosses a threshold, the sole proprietorship becomes eligible for GST registration in India. It is essential to understand the tax implications of sole proprietorship under different tax laws as it can help entrepreneurs make better decisions and judgements about establishing a business entity.

In this blog, we will cover everything about taxation for sole proprietorships in India, including applicable taxes and deductions to help you optimize your tax liabilities.

What is a Sole Proprietorship?

A sole proprietorship is a kind of business owned and managed by a single individual. It does not have a separate legal identity from its owner, who is personally liable for all profits, losses, and liabilities of the business.

Advantages of a Sole Proprietorship

Sole Proprietorship in India has the following advantages:

• Easy to Start and Operate.
• Minimal Compliance
• Complete Control over the business
• Direct Taxation Benefits
• Less Regulatory Filing Burden

Sole Proprietorship Taxation in India

A sole proprietorship is not a separate legal entity from its owner. The business income is treated as the proprietor’s personal income and is taxed accordingly under individual income tax laws.

Since sole proprietorships are not required to pay corporate tax, their tax obligations are relatively straight. However, they must comply with various tax laws, such as the Income Tax Act of 1961 and the Goods and Services Tax (GST) Act of 2017 (if applicable).

Applicable Taxes for Sole Proprietorships in India

A sole proprietorship is subject to different types of taxes on the basis of the nature and scale of the business:

1. Income Tax for Sole Proprietors

The income of a sole proprietorship is taxed as the individual’s/proprietor’s personal income. The applicable tax rates for the financial year 2023-24 (assessment year 2024-25) are as follows:

Old Tax Regime (With Exemptions & Deductions)

New Tax Regime for Individuals below 60 years

New Tax Regime for Individuals between 60 years and 80 years

New Tax Regime for Individuals above 80 years

2. Goods and Services Tax (GST)

GST is mandatory for businesses exceeding the turnover threshold of:

• ₹40 lakhs for businesses dealing in goods
• ₹20 lakhs for service providers

If registered under GST, the proprietor must file periodic GST returns such as GSTR-1, GSTR-3B, and GSTR-9 (annual return). Small businesses with a turnover of up to ₹1.5 crore can opt for the Composition Scheme, which allows them to pay GST at a lower rate with minimal compliance.

3. Tax Deducted at Source (TDS)

A sole proprietor must deduct TDS on certain payments, such as:

• Salaries exceeding the taxable limit
• Rent payments above ₹2.4 lakh annually
• Professional fees exceeding ₹30,000 per transaction
• TDS must be deposited with the government, and TDS returns Form 26Q and 24Q must be filed quarterly.

4. Professional Tax

Some states in India levy professional tax on individuals engaged in business or professions. The tax varies from ₹200 to ₹2,500 annually, depending on the state.

5. Advance Tax Payments

If the total tax liability exceeds ₹10,000 in a financial year, the sole proprietor must pay advance tax in four instalments:

• 15% by June 15
• 45% by September 15
• 75% by December 15
• 100% by March 15

Income Tax Return (ITR) Filing for Sole Proprietorships

Sole proprietors must file Income Tax Returns (ITR-3 or ITR-4) based on their income type:

• ITR-3 – For proprietors maintaining books of accounts
• ITR-4 – For those opting for presumptive taxation under Section 44AD & 44ADA of the Income Tax Act, 1961

ITR Filing Due Dates:

• Non-audited proprietors: July 31 of the assessment year
• Audited proprietors: October 31 of the assessment year

How to Reduce Tax Liability as a Sole Proprietor

There are several ways to legally reduce the tax liability of a sole proprietorship in India, and some of them are mentioned below:

• Opt for Presumptive Taxation: If the turnover is below ₹2 crore (for businesses) or ₹50 lakh (for professionals), opting for presumptive taxation under Section 44AD or 44ADA of the Income Tax Act, 1961 can help reduce tax liability by allowing a fixed percentage of income as profit without maintaining detailed books of accounts.
• Invest in Tax-Saving Instruments: Contributions to schemes like PPF, LIC, ELSS, and NPS qualify for deductions under Section 80C of the Income Tax Act, 1961.
• Claim Business Expenses: Businesses must deduct all eligible business expenses such as rent, salaries, travel, office supplies, and internet bills to lower taxable income.
• Depreciation on Business Assets: Sole Proprietorship must claim depreciation on machinery, vehicles, and computers used for business purposes.
• Split Income Legally: Employ family members in the business and pay reasonable salaries to reduce overall taxable income.
• Keep Proper Financial Records: Maintain organised records of income and expenses to avoid penalties or audits and maintain compliance with the regulations.

Conclusion

In India, the obligation to pay tax is different on the basis of the entity established and the type of the business entity established. Handling taxes as a sole owner is simple but requires deep understanding and preparation. Maintaining compliance and avoiding fines involves a deep understanding of existing rates under the Income Tax Act, 1961 GST, and TDS duties. Proprietors can reduce their tax burden by submitting their tax returns on time, claiming allowable deductions for business costs and expenditures, and investing in tax-saving schemes like EPF, NPS, etc. Furthermore, it is pertinent to maintain accurate financial records and using presumptive taxation can make tax compliance even more manageable. Even though tax regulations can seem complicated, consulting a tax professional can help minimise tax obligations and guarantee seamless operations, freeing up business owners to concentrate on expansion while maintaining legal compliance.

Frequently Answered Questions

1. Is a sole proprietorship taxed separately in India?

No, the business income is considered the proprietor’s income and taxed under personal income tax slabs.

2. Do I need a separate PAN for my sole proprietorship?

No, the proprietor’s PAN is used for all tax-related concerns

3. Is GST registration mandatory for all sole proprietorships?

Only if the turnover exceeds Rs. 40 lakhs for goods or Rs. 20 lakhs for services.

4. What is the due date for ITR filing?

July 31 for non-audited and October 31 for audited businesses.

5. What happens if I don’t pay advance tax?

Interest under Sections 234B and 234C of the Income Tax Act, 1961, will be charged for late payments.

6. Can I file my tax return online?

Yes, through the Income Tax Department’s e-filing portal.