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.
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.
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 2017-18 (AY 2018-19)
| 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 |
