Last updated: March 27th, 2024 10:16 AM

Proprietorship Tax Return Filing & Its Compliances

Filing tax returns is a fundamental obligation for all businesses operating as sole proprietorships in India. Business owners must clearly understand the tax return filing process to ensure compliance with Indian tax laws and maximize tax benefits. This comprehensive guide provides a step-by-step approach to proprietorship tax return filing in India, covering key aspects such as tax obligations, documentation requirements, allowable deductions, and essential deadlines.

Proprietorship

As the simplest business structure in India, a sole proprietorship refers to a business owned and managed by a single individual. [shortcode_9]

Proprietorship Taxes in India 

Proprietorships in India are subject to the same obligations as their owners regarding taxation. A proprietorship is treated as an extension of the proprietor, resulting in a tax filing process similar to an individual's. Income tax laws governing proprietors also apply to proprietorships.

Proprietorships and Taxation:

• Proprietorships, like partnerships and companies, are liable to pay taxes on their revenue.
• The income tax filing procedure for proprietorships aligns with the proprietor's tax returns.
• Proprietors and businesses are considered single entities for taxation purposes.
• Tax liabilities and obligations are borne by the proprietor, who is personally responsible for fulfilling the tax requirements of the business.

Interconnected Tax Obligations:

• Sole proprietors must understand that their proprietorship's tax obligations are intertwined with their tax obligations.
• Adherence to income tax regulations and guidelines outlined by the government is crucial.

Income Reporting for Proprietorships:

• The proprietor must report the income earned by the proprietorship on their tax return.
• This includes the business's profits and other income sources associated with the proprietorship.
• The proprietor's tax return encompasses personal income and income from the proprietorship.

Tax Identification Number:

Since the proprietorship is not considered a separate legal entity, it has no distinct tax identification number. Instead, the proprietor's Permanent Account Number (PAN) is utilized for tax-related transactions and filing returns on behalf of the proprietorship.

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

• Under the Income Tax Act, all proprietors below 60 must file an Income tax return if the total income exceeds Rs. 3 Lakhs.
• For proprietors over 60 years who must file income below 80, income tax filing is mandatory if the total income exceeds Rs. Three lakhs.
• Proprietors over 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 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.

Significance of Filing Income Tax Returns for Proprietorship Firms

The Profound Impact of Filing Income Tax Returns for Proprietorship Firms: A Journey of Responsibility and Triumph

• Embracing Financial Responsibility: Filing tax returns reflects a deep commitment to financial responsibility, evoking a sense of duty and dedication to compliance.
• Unlocking Opportunities: It empowers and fulfills, opening doors to exciting possibilities for a prosperous future.
• Triumph through Compliance: By filing returns, we celebrate the triumph of ethical practices, establishing a solid foundation for growth and prosperity.

Tax Audit for Proprietorship

The audit of a proprietorship is contingent upon its annual turnover and certain other circumstances. Three specific scenarios warrant the need for an audit:

• Turnover exceeding Rs 1 crore: An audit is mandatory if the proprietorship firm's annual turnover exceeds Rs 1 crore during the assessment year. This criterion applies to businesses engaged in trade or commerce.
• Professional proprietorship with receipts over Rs 50 lakh: In the case of a professional proprietorship, such as a consultancy or service-based business, an audit is required if the total receipts of the proprietorship exceed Rs 50 lakh.
• Proprietorship under presumptive tax scheme: Regardless of the annual turnover, an audit is necessary if a proprietorship falls under any presumptive tax scheme.

The rules governing the audit process for a proprietorship are defined under the Income Tax Act of 1961. According to the Act, the audit of a proprietorship firm must be conducted by a certified Chartered Accountant (CA). The audit assures the authorities and stakeholders that the proprietorship's financial information is reliable and compliant. Proprietors must engage a certified Chartered Accountant for the audit to ensure adherence to the prescribed standards and guidelines. By conducting an audit, the proprietorship demonstrates transparency, accountability, and compliance with the applicable tax laws.

Presumptive Taxation Scheme for Proprietorship

A presumptive taxation scheme is a provision within the Income Tax Act that provides relief to small taxpayers. The Government of India aimed to allow small businesses to carry on the trade without being burdened by 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 taxpayers to pay taxes 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 for taxpayers to reduce the compliance-related burden.

Income Tax Return for Proprietorship Firms -  Union Budget 2023-2024 

• New income tax slab rates have been substantially revamped in the 2023-2024 budgets.
• The new income tax regime has raised a tax rebate limit of Rs.3 lakh for salaried and individual taxpayers.
• Tax rebates for individual and salaried taxpayers have increased from Rs.5 lakh to Rs.7 lakh under the new income tax regime.

Proprietorship Tax Rate AY 2024-25| FY 2023-24 under Normal Tax Regime

 Proprietorship Tax Rate AY 2024-25| FY 2023-24– Proprietor's age is less than 60 years

Net Income Range	Rate of income-tax (%)
Up to Rs.2,50,000	–
Rs.2,50,001 to Rs. 5,00,000	5
Rs. 5,00,001 to Rs. 10,00,000	20
Above Rs. 10,00,000	30

Proprietorship Tax Rate AY 2024-25| FY 2023-24–Proprietor’s age is between 60 and 80 years

The following tax rate applies to a Proprietor who turns 60 during the previous year but is younger than 80 on the last day of the previous year:

Net Income Range	Rate of income-tax (%)
Up to Rs. 3,00,000	–
Rs. 3,00,001 to Rs. 5,00,000	5
Rs. 5,00,001 to Rs. 10,00,000	20
Above Rs. 10,00,000	30

Proprietorship Tax Rate AY 2024-25| FY 2023-24–Proprietor’s age is above 80 years

 This applies to Proprietors aged  80 or older at any time during the previous year.

Net Income Range	Rate of income-tax
Up to Rs. 5,00,000	–
Rs. 5,00,001 to Rs. 10,00,000	20
Above Rs. 10,00,000	30

Tax rates for Proprietors opting for an Alternate Tax Regime under Section 115BAC

An alternative tax regime for proprietors was introduced by the Finance Act 2020 as Section 115BAC. Assesses must give up specified exemptions and deductions to take advantage of this tax regime.  The Income tax rate for a Proprietor who opts for the alternate tax regime:

Net Income Range	Rate of income-tax (%) (FY 2022-23)	Rate of income-tax (%) (FY 2023-24)
Up to Rs. 2,50,000	–	–
Rs. 2,50,001 to Rs. 3,00,000	5	–
Rs. 3,00,001 to Rs. 5,00,000	5	5
Rs. 5,00,001 to Rs. 6,00,000	10	5
Rs. 6,00,001 to Rs. 7,50,000	10	10
Rs. 7,50,001 to Rs. 9,00,000	15	10
Rs. 9,00,001 to Rs. 10,00,000	15	15
Rs. 10,00,001 to Rs. 12,00,000	20	15
Rs. 12,00,001 to Rs. 12,50,000	20	20
Rs. 12,50,001 to Rs. 15,00,000	25	20
Above Rs. 15,00,000	30	30

Rates of surcharge – For Assessment Year 2024-25 under the Normal Tax Regime

In addition to the Income Tax amount calculated, individuals must pay Surcharge and Cess based on the above-mentioned tax slabs. In respect of a  Proprietor, the rate of surcharge for the Assessment Year 2024-25 is tabulated here:

Nature of Income	Range of Total Income
	Up to Rs. 50 lakhs (%)	Rs. 50 lakhs  to Rs. 1 crore (%)	Rs. 1 crore   to Rs. 2 crores (%)	Rs. 2 crores to Rs. 5 crores ((%)	More than Rs. 5 crores
Short-term capital gain as per under Section 111A or Section 115AD	Nil	10	15	15	15
Long-term capital gain is covered under Section 112A or Section 115AD, or Section 112	Nil	10	15	15	15
Dividend income not being dividend income chargeable to tax at the special rate under sections 115A, section 115AB, section 115AC, section 115ACA	Nil	10	15	15	15
Unexplained income chargeable to tax under Section 115BBE	25	25	25	25	25
Any other income	Nil	10	15	25	37

Rates of surcharge – For Assessment Year 2024-25 under alternate tax regime

The rate of surcharge in case of the Proprietor opting for an alternate tax regime as per section 115BAC will be 25% instead of 37% for AY 2024-25

Deadline Proprietorship Tax Return Filing

The deadline for filing an income tax return for a proprietorship depends on whether it requires an audit per the Income Tax Act 1961 and whether it has engaged in international transactions.

• If your proprietorship does not require an audit, you must file your income tax return by July 31st.
• If your proprietorship needs to be audited, the deadline for filing the income tax return is September 30th.
• In the case of proprietorships involved in international transactions or specific domestic entities, the deadline to file the income tax return is November 30th.

It's important to remember these dates and comply with the respective deadlines based on the nature of your proprietorship. Meeting these deadlines ensures you fulfil your legal obligations and maintain financial compliance. [shortcode_52]

Documents Required for Proprietorship Income Tax Return Filing

As a sole proprietor, the following documents are required for ITR filing for Proprietorship Firm:

• PAN card
• Aadhar card
• Bank account details
• Form 16, 16A and 26AS
•  Advance tax payment challan

Filing an Income Tax Return for a Proprietorship

Proprietorships are required to file tax returns annually unless exempted. The income tax of a proprietorship is treated as that of the proprietor. The tax return can be filed physically or electronically through an e-filing portal using the proprietor's electronic signature. Depending on the nature of the proprietorship, two different forms need to be filed:

Form ITR-3:

This form ITR-3 is used to file income tax for proprietorships run by a Hindu Undivided Family or any other proprietor.

Form ITR-4 Sugam:

This form, ITR-4, is designed explicitly for proprietorships that fall under presumptive tax schemes. It aims to reduce the compliance burden on small businesses. As mentioned earlier, the income tax of a proprietorship is treated the same as that of the proprietor. This means that the business income of the proprietorship is added to the proprietor's income, making the business taxes equivalent to the proprietor's. The proprietor is still eligible for all the tax deductions offered to individuals or Hindu Undivided Family (HUF), as applicable.

Procedure for e-Filing an Income Tax Return for a Proprietorship

Steps to follow for e-filing an Income Tax Return for a Proprietorship are explained in detail below:

• Step 1: Get Your PAN Card Ready: Your PAN card is your ticket to fulfilling your tax obligations. Ensure you have this essential document issued by the Income Tax Department. It grants you a unique Permanent Account Number (PAN) necessary for paying taxes.
• Step 2: Utilize Your PAN for Filing: Remember, since a proprietorship doesn't have a separate legal entity, you'll use your PAN to pay income tax and file returns. It's a seamless process that ensures your tax compliance.
• Step 3: Register on the e-filing Portal: If you haven't already registered on the e-filing portal using your PAN. If you've already registered, log in and get ready to dive into the tax filing adventure.
• Step 4: Navigate to "Income Tax Return." On the e-filing portal, locate the "Income Tax Return" option from the menu. Click on it to embark on the next phase of your tax filing journey.
• Step 5: Select the Appropriate Details. Here, you'll need to select the relevant details carefully:
  • Assessment year: Choose the relevant year for filing your return.
  • ITR form: Select the appropriate form based on the nature of your proprietorship.
  • Filing Type: Decide whether it's an original or revised return.
  • Submission mode: Opt for "prepare and submit" to move forward.
• Step 6: Fill in the Required Details: This is where your attention to detail matters. Fill in all the requested information diligently. Some fields are mandatory, while others depend on your specific circumstances. Take your time and ensure accuracy.
• Step 7: Choose Your Verification Method: Next, select your preferred verification method. You have three options:
  • E-verify immediately: Get instant verification for a hassle-free experience.
  • E-verify within 120 days: Please update any necessary information within the given timeframe.
  • Manual verification: If you prefer a more hands-on approach, select "I don't want to e-verify" and proceed with manual verification.
• Step 8: Preview and Submit: Review your return before submission. The "Preview and Submit" option allows you to double-check for errors or omissions. Take this opportunity to ensure everything is accurate and in order.
• Step 9: Final Verification:  After submitting, it's time for the final verification. Choose either OTP or EVC verification. Remember, timing is crucial here. Enter the OTP/EVC within 60 seconds to complete the verification process.

Latest Update on the Pay Later Option for Income Tax Filing

The Income Tax e-filing portal has recently rolled out a 'Pay Later' option, allowing you to complete your tax filing process before making any tax payments. You can pay taxes after you are done filing. For additional information, please refer to our guide – Pay later option for the Income tax return filing. IndiaFilings can help you to complete the Proprietorship Return Filing efficiently. [shortcode_52]