Operating a Sole Proprietorship in India entails significant financial and legal obligations. To ensure the seamless functioning and expansion of your business, it is imperative to adhere to diverse tax and regulatory obligations. These responsibilities include submitting Income Tax Returns, TDS Returns, GST Returns, EPF Returns, maintaining precise financial records, and, on occasion, undergoing a Tax Audit.
What is Proprietorship Compliance?
Meeting the compliance obligations for a sole proprietorship is vital for the effective functioning of the business. As the sole owner and operator, you bear personal responsibility for all business activities. Adhering to legal requirements guarantees that your business operates lawfully and ethically.
Cost-Effective: Setting up a sole proprietorship is budget-friendly as it typically requires no formal registration. However, specific business registrations may be needed if operating from a separate space, along with income tax and service tax registrations in some cases.
Quick Decision-Making: With absolute control, a sole proprietor can make swift and flexible business decisions.
Financial Control: The owner retains full control over the company's finances, providing a strong incentive for their involvement and commitment.
Personal Business Relations: Sole proprietorships often thrive in businesses where personal relationships matter. The owner can maintain one-on-one connections with employees and customers.
Confidentiality: Protecting business secrets is easier in this structure compared to others.
Tax & Process
Tax Savings for Sole Proprietors:
Investment Deductions: Qualifying investments in instruments like PPF, national savings certificates, life insurance, and pension plans covered under Sections 80C, 80CC, and 80CCD can earn income tax deductions.
Health Insurance Benefits: Tax deductions under Sections 80D, 80DD, and 80DDB are available if you've paid for health insurance, whether for yourself or relatives.
Home Loan Advantages: If you have a home loan, you can claim deductions on both the principal and interest payments, under Sections 24 and 80C, respectively.
Educational Loan Savings: Educational loans, whether for your education or a family member's, can qualify for deductions under Section 80E, specifically for the interest portion.
Equity Savings Scheme: If your annual income is below Rs 12 lakh, you can invest in approved companies and mutual funds through the Rajiv Gandhi Equity Savings Scheme under Section 80CCG.
Capital Gains Exemptions: Gains from long-term capital assets, like real estate, can be exempt from Capital Gains Tax if reinvested in approved vehicles.
Charitable Contributions: Donations to charities, social causes, or the National Relief Fund can earn deductions under Section 80G.
Non-Taxable Income Sources: Income from non-taxable sources such as Hindu Undivided Families, partnership firm shares, international service allowances, gratuities, and more can help save on taxes.
GST Number (if relevant)
Sales and Purchase Records
MSME Registration (if applicable)
Credit Card Statements (if applicable)
Compliance Requirements for Sole Proprietorship Firm
Income Tax Filing
Sole proprietorships must file an annual income tax return each financial year, following the same tax rates as individual proprietors. Returns can be filed physically or online through the Income Tax e-filing portal, using Form ITR-3 for businesses and Form ITR-4 (SUGAM) for businesses with income up to ₹50 lakh, computed on a presumptive basis.
TDS Return Submission
If the proprietor holds a valid TAN (Tax Deduction and Collection Account Number), TDS returns must be filed. The type of return depends on the nature of the deduction, with options like Form 24Q for salary, Form 27Q for non-residents, Form 26QB for property transfers, and Form 26Q for other deductions.
GST Return Filing
Registration for GST is necessary if the proprietor's business turnover surpasses Rs. 20 lakhs. Once registered, GST returns like GSTR-1 and GSTR-3B must be filed, outlining taxable goods and services transactions, and tax payments, and adhering to monthly or quarterly filing schedules.
EPF Return Submission
If the sole proprietor employs more than 20 individuals, EPF registration is mandatory, and accordingly, EPF returns must be filed.
Accounting and Bookkeeping
Maintaining books of accounts becomes necessary if the business's sales/turnover/gross receipts exceed Rs. 25 lakhs, or if the income from the business surpasses Rs. 2.5 lakhs in any of the preceding 3 years.
A tax audit is obligatory if the business's sales, turnover, or gross receipts exceed Rs. 1 crore in a financial year, or specific other circumstances. The threshold limit for a tax audit is proposed to increase to Rs. 5 crore from the assessment year 2020-2021, subject to certain conditions. The Finance Bill, 2021, also proposes further raising this limit to Rs. 10 crore for taxpayers engaged in digital transactions.
What is the penalty for late or non-filing of the Income Tax Return of a Sole Proprietorship firm?
Late or non-filing of the Income Tax Return after the due date incurs a penalty of Rs. 200 per day.
Who can conduct audits for proprietorship firms?
Audits for proprietorship firms can only be conducted by a practicing chartered accountant.
Is it necessary for a sole proprietor to file taxes?
Yes, a sole proprietor is required to report all business income and losses on their personal income tax returns because the business is not taxed separately.
How can a proprietorship file income tax returns?
Proprietorship annual return filing is carried out using ITR 3 and ITR 4 forms.
When is ITR 3 used for proprietorship return filing?
ITR 3 is used when the proprietorship firm is operated by a Hindu Undivided Family or an individual.