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Proprietorship - Taxation

Sole Proprietorship does not have any legal status in the eyes of the law and income earned by it, is taxed in the hand of individual owing it. The income earned by an individual from various sources is clubbed and taxed accordingly.

Tax Computation

The tax liability of the Individual on its taxable income is computed in the following manner:

• Ascertain the 'total income' of the individual by aggregating incomes falling under following four heads:-
  • Income from House Property, whether residential or commercial, let-out or self-occupied. However, house property used for purpose of individual's business does not fall under this head.
  • Profits and Gains of Business or Profession.
  • Capital Gains.
  • Income from other sources including interest on securities, winnings from lotteries ,races ,puzzles ,etc.
• To the total income so obtained, 'current and brought forward losses' should be adjusted for set off in subsequent assessment years to arrive at the gross total Income. The total income so computed is the 'gross total income'.


• From the gross total income, prescribed 'deductions' of the Income Tax Act 1961 shall be made to get the 'net income'.

Generally, all expenses incurred for business purposes are deductible from taxable income, given that the expenses must be wholly and exclusively incurred for business purposes and also that the expenses must be incurred/paid during the previous year and supported by relevant papers and records. But expenses of personal or of capital nature are not deductible. Capital expenditure are deductible only through depreciation or as the basis of property in determining capital gains/losses.

But no deduction shall be allowed in respect of any expenditure incurred in relation to income which does not form part of total income.

• Tax liability is computed on the 'net income' that is chargeable to tax. It is done either on accrual basis or on receipt basis (whichever is earlier). However if an income is taxed on accrual basis, it shall not be taxed on receipt basis.


• From the tax so computed, tax rebates or tax credit are deducted

Tax Rates

A. Individuals

I. In case of individual (other than II and III below) -

II. In case of individual being a woman resident in India and below the age of 65 years at any time during the previous year:-

III. In case of an individual resident who is of the age of 65 years or more at any time during the previous year:-

Further, the amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge at the rate of 10% of such income tax, provided that the total income exceeds Rs. 10 lacs. Thus, in case of individuals/HUFs no surcharge shall be payable if the total income is below Rs.10 lacs.

The tax and surcharge, if any, are to be further enhanced by education cess levied @ 3% from Assessment Year. 2008-09 onwards.

Source: www.business.gov.in

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