Annual Compliance – Proprietorship


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Proprietorship Return Filing

Proprietorship firms file the Proprietor income tax return just like the LLPs and the Companies registered in India. In the legal sense, the proprietorship and the proprietor are considered to be one. Hence, the income tax return filing of the proprietor and the proprietorship are the same.

As a sole proprietorship is not taxed as a different legal entity, the business owners file their business taxes like their individual returns. Like any other individual taxpayer, a proprietorship firm is also entitled to a proprietorship tax deduction as per the prevailing Income tax rules and depending on the slab rates applicable to his income.

Whereas the income tax rates for the registered companies are assessed on flat rates.

As the proprietorship firms are small and independent businesses owned by a single person. These unregistered businesses are one of the easiest to manage.

Income Tax Slab Rate

A new tax regime has been announced where the individuals can pay taxes as per the new slabs subject to certain conditions from FY2020-2021 onwards.

Income range Rate of tax
0-2,50,000 NIL
2,50,001-5,00,000 5%
5,00,001-7,50,000 10%
7,50,001- 10,00,000 15%
10,00,00-12,50,000 20%
12,50,000- 15,00,000 25%
Above 15,00,000 30%

Tax slab rates for sole proprietorship income tax return filing wherein the proprietor’s age is above 60 years but less than 80 years at any time during the previous year.

Income Slab Income Tax Rate
Up to Rs. 3,00,000 NIL
Rs.3,00,000 to 5,00,000 5% of the total income above Rs.3,00,000
Rs.5,00,000 to 10,00,000 Rs. 10,000+20 % of the total income above Rs.5,00,000
Above Rs. 10,00,000 Rs. 1,10,000+30% of the total income above Rs. 10,00,0000

Tax slabs for proprietorship firms where the age of the proprietor is above 80 years

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

Tax slab for sole proprietorship firms where the proprietor is a non-resident individual ( Irrespective of the proprietor’s age).

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

A surcharge is payable over and above the income tax calculated as per the income tax rate provided above.

Income slab Surcharge Rates
Total Income above Rs. 50 Lakh but then Rs. 1 crore 10% of the income tax
Total Income above Rs. 1 crore 15% of the income tax

How to file Income tax returns for proprietorship firms?

Proprietorship tax returns are to be filed every year unless there is an exemption. As mentioned before, the proprietor and the proprietorship firms are considered as one single person. Two forms are to be filed depending on the nature of the proprietorship.

Form ITR-3

This form should be used to file Income tax if the proprietorship firm is run by a Hindu Undivided Family (HUF) or by any proprietor.

Form ITR-4

The proprietorship firm uses this form for proprietorship tax filing under a presumptive tax scheme. This is done to reduce the burden of compliance of small businesses.

The business income of the person has been added to the payment of the proprietor himself. This way, the business taxes become the personal taxes of the proprietor. The proprietor is still entitled to all tax deductions offered to individuals or Hindu Undivided Family.

Is it necessary for Proprietorship Firms to File Income Tax Return?

Under the Income Tax Act, all proprietors below the age of 60 are required to file an Income tax return if the total income is more than Rs. 3 Lakhs.

In the case of proprietors over the age of 60 years are required to file income, but below 80 years, then income tax filing is mandatory if the total income exceeds Rs. Three lakhs.

Proprietors over the age of 80 years and above must file the proprietorship tax returns if the income exceeds Rs. 5 lakhs.

If the proprietor files an income tax return before the deadline, losses, if any, in the business would be allowed to be carried forward. The deduction under sections 10A, 10B, 80-IA, 80-IAB, 80-IB, and 80-IC cannot be permitted unless the proprietorship income tax return has been filed on or before the due date.

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 necessary 31st July
Income tax return filing wherein the audit is necessary 31st October

Presumptive Taxation scheme

A presumptive taxation scheme is a provision within the Income Tax At that provides relief to the small taxpayers. The Government of India aimed at allowing the small businesses to carry on the trade without being burdened by the excessive compliance-related requirements.

Entities enrolled under the presumptive taxation scheme can compute income on an estimated basis under Section 44AD. The presumptive taxation scheme allows the taxpayers to pay tax at a minimum rate. Also, the entities enrolled under the scheme need not maintain books of accounts. A presumptive taxation scheme is an effective medium that taxpayers can use to reduce the compliance-related burden.

Audit of Proprietorship

Depending upon the annual turnover of the proprietorship, an audit is necessary to be carried. Under these three conditions, an audit would be required:

  • If the turnover of the proprietorship firm carrying business is exceeding Rs.1 crore during the financial year.
  • In a professional case, an audit is required if total gross receipts are exceeding Rs—50 lakh.
  • If the proprietorship is under any presumptive tax scheme regardless of the annual turnover, an audit is required.

For the audit to be carried on, the rules are set out under the Income Tax Act, 1961. The audit is to be done by a certified Chartered Accountant. The CA has to ensure that all the books of accounts are correctly maintained and complied with all the compliances.

Annual Compliance – Proprietorship FAQ’s

1. Is it necessary for the sole proprietor to file taxes?

08 December 2021

A sole proprietor is required to report all the business income, losses on the personal income tax returns, the business is not taxed separately under this.

2. How to file income tax returns for a Proprietorship?

17 November 2021

Proprietorship annual return filing is done ITR 3 and ITR 4.

3. When to file ITR 3 for proprietorship return filing?

17 November 2021

ITR 3 is furnished in case if the proprietorship firm is run by a Hindu Undivided Family or by an individual.

4. When is ITR 4 Furnished by a Proprietor?

17 November 2021

ITR 4 is furnished by the proprietor under the presumptive taxation scheme.

5. Is a Proprietorship taxed twice or double?

17 November 2021

As the sole proprietorships are not considered tax entities, they are not separate from their owners so the proprietor does not have to face double taxation.

6. What are the major tax benefits for a sole proprietor?

08 December 2021

The main tax advantage of a proprietorship is that it can deduct the cost of health insurance for self, spouse, and dependents.

7. What are the annual compliances for a proprietorship firm?

08 December 2021

The proprietorships are required to file the annual tax returns with the Income Tax Department. However, the annual reports or the accounts are not necessary to be filed with the Ministry of Corporate affairs which is necessary in the case of the LLPs

8. Is it necessary to get a Proprietorship audited?

08 December 2021

In the case of proprietorships tax audit is not necessary, it is completely based on the turnover and other criteria.

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