Understanding Taxation for a Sole Proprietorship Firm
A Sole Proprietorship firm, also known as a sole trader, proprietorship or individual entrepreneurship’. It is a type of business/enterprise/firm that is owned by a single person leaving no distinction between the owner and the business entity.
Sole proprietorship registration takes anything between 5-7 days. Due to its simple structure and fewer compliance features, the sole proprietorship firm is famous amongst small and medium scale enterprises/business.
Under the present article, we would try to understand the sole proprietorship taxation covering sole proprietorship taxes, income tax return filing, tax audit applicability and the due date for filing of the income tax return. Staying compliant is mandatory in sole proprietorship just like any other businesses. It is therefore advisable to follow the compliance calendar 2020 to not miss out on any important deadlines
Sole Proprietorship Taxation
The income tax rate for sole proprietorship firm is the same as that of the income tax rate of individuals. In Budget 2020, a new tax regime has been announced where the individuals shall have the option to pay taxes as per the new slabs subject to certain conditions from FY 2020-21 onwards.
| 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% |
- Another option of income tax rates as applicable to the sole proprietorship firm for the Financial Year 2020-21 (Assessment Year 2021-22) is detailed hereunder
- Tax slab for sole proprietorship firm, wherein, the age of the proprietor is above 60 years but less than 80 years 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 income above ₹ 10,00,000. |
- Tax slab for sole proprietorship firm, wherein, the age of the proprietor is above 80 years (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 the total income above ₹ 10,00,000 |
- Tax slab for sole proprietorship firm, wherein, the proprietor is an non-resident individual (below 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 the total income above ₹ 5,00,000. |
| Above ₹ 10,00,000 | ₹ 1,12,500 + 30% of the total income above ₹ 10,00,000. |
Surcharge
The surcharge is payable over and above the income tax calculated as per the income tax rate provided above. The applicable surcharge for Financial Year 2020-21 is detailed below –
| Particulars | Surcharge Rates |
| Total income above ₹ 50 Lakhs but less than ₹ 1 Crore | 10% of the income tax |
| Total income above ₹ 1 Crore | 15% of the income tax |
Health and Education Cess
Health and education cess has to be calculated on the sum total of income tax and surcharge. Health and education cess is payable @4% on income tax plus a surcharge.
Rebate (under section 87A)
Recently, the tax rebate, under section 87A of the Income Tax Act, 1961, has been increased/revised. For the Financial Year 2020-21, maximum tax rebate available under section 87A is ₹ 12,500.
Tax rebate is available only to the resident individual / proprietor earning net taxable income up to ₹ 5 Lakhs. Tax rebate is applied to the total tax before adding ‘Surcharge’ and ‘Health and Education Cess’.
Income Tax return filing
ITR filing forms, as applicable to the sole proprietorship firm, is detailed hereunder:
| Income Tax Form | Description |
| ITR 3 | Applicable to the individuals and HUFs having income from a proprietary business or profession. |
| ITR 4 | Applicable to individual/proprietor carrying out business or profession under presumptive income. |
Tax audit applicability for sole proprietorship firm
Tax audit is applicable in case of sole proprietorship firm under the following circumstances:
- In case the total sales/turnover or gross receipts of the sole proprietorship firm carrying on business exceed ₹ 1 Crore; or
- In case the total gross receipts of the sole proprietorship firm carrying on profession exceed ₹ 50 Lakhs.
Due date of filing of an income tax return for sole proprietorship firm:
| Particulars | Due date |
| Income tax return filing wherein the audit is not | 31st July |
| Income tax return filing wherein the audit is necessary | 30th September |
CA Poonam Gandhi
Chartered Accountant, based at Ahmedabad having vast practice experience of more than 9 years in the field of Indirect Taxation. Currently, working as a 'freelance content writer' and associated with the top most leading sites. Also acting as an educator for the taxation course, 'Certificate on taxation law and GST', for the site https://www.intolegalworld.com/.
