The sole proprietorship model is the most common form of business in India, with crores of taxpayers running their businesses in it. When the total income of a sole proprietor (individual) exceeds the threshold limit prescribed by the Income Tax Act, 1961, the sole proprietor is required to file an income tax return. When filing an ITR online, there is no distinction between a sole proprietorship business and an individual. As far as income tax is concerned, an individual’s business and the individual are considered to be a single entity. This article discusses the question, “How do I prepare my Income Tax Return for a sole proprietorship?”.
Sole proprietorship ITR form
How does a sole proprietorship file its ITR?
As a sole proprietor, you are required to submit two forms of income tax returns. Here are these forms:
- A business or profession taxpayer is required to fill out ITR-3, an ITR form that includes information about the balance sheet and profit and loss account of the business or profession.
- For taxpayers who choose the presumptive income scheme under sections 44AD, 44ADA, and 44AE, the ITR-4 form is required. Small traders are saved from the cost & time involved in maintaining books of accounts by the Presumptive Income Scheme, a simple tax scheme prescribed by the IT department.
When do sole proprietorships have to file their ITRs?
The Income Tax Act, 1961 specifies the due dates for filing an ITR for a sole proprietorship, as follows:
- ITRs for sole proprietorships are due by 31st July, even if audits are not required.
- Every year, tax audit reports and ITRs must be filed by 30th September.
For sole proprietorships, when is the audit required?
According to the Income Tax Act, audit criteria are determined by the turnover of any business or profession. Income Tax Act audits are called “Tax Audits” and must be conducted by Chartered Accountants based on section 44AB. Under section 44AB of the IT Act, the following thresholds apply:
- Tax audits are compulsory for business entities with gross turnover, receipts, or sales exceeding Rs. 1 crore.
- Instead of Rs. 1 crore, the limit for the profession is Rs. 50 lakhs.
- When a proprietorship declares a profit below the rate prescribed in the presumptive taxation scheme for businesses or professions covered by sections 44AE, 44BB, 44BBB or 44ADA (irrespective of turnover), an audit is mandatory (irrespective of turnover).
- Even if the proprietor’s turnover exceeds Rs. 1 crore but falls below Rs. 2 crores, he or she may elect to use the presumptive taxation scheme. However, he or she must declare a profit of at least 8% or 6% (sales through banking routes) of the turnover to be eligible.
- Moreover, the Government has relaxed the requirement for audits in cases where the turnover is less than Rs. 10 crores and over 95% of transactions are through banking channels.
In India, how do I file an ITR for a sole proprietorship?
The following steps are required to file a proprietorship’s income tax return using the Income Tax Portal:
- If you do not have a PAN card, first apply for one through NSDL or UTITSL. Once you have received it, you may file your ITR.
- If you have already registered, you will need to use your PAN details and password to log into the e-filing portal of the Income Tax Department.
- Click on ‘Filing Income Tax Return’ on the ‘E-File’ tab
- You can choose the assessment year, such as FY 2021-22 for ITR of FY 2022-23.
- Once you select ‘Online’ as the mode of filing and click on ‘Continue’, a new window will open where you can click on ‘Start New Filing’.
- The status should be selected as ‘Individual’ and the ‘Continue’ button should be selected
- Then, click ‘Let’s get started’ in the new window that opens once you have selected the appropriate ITR Form from the dropdown menu.
- You must fill out the online ITR Form with the relevant details and click on the ‘Proceed’ button
- In a new window, click on ‘View Return’, and a declaration of correctness and completeness of the data will appear. Click on ‘Proceed to Preview’.
- Click on “Proceed to Validation” once you have reviewed the preview of your ITR.
- Validating ITRs through the Aadhar OTP or Electronic Verification Code (EVC) is an option. However, it is better to verify returns in order to receive a refund faster.
If a proprietor does not file an ITR, what are the consequences?
As per section 234F of the Income Tax Act, non-filing of an ITR by a proprietor may result in a penalty or late fee. The minimum penalty is Rs. 1000 but may be extended up to Rs. 5,000.
Despite the simplicity of conducting any business or profession as a sole proprietor, sole proprietors must comply with income tax requirements and submit income tax returns by the prescribed deadline. There are many benefits of filing an ITR for any Indian citizen. Therefore, you should not avoid filing an ITR intentionally as it may result in fines and notices.