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Save Taxes as a Proprietor

A sole proprietorship is entitled to tax exemption under certain conditions as is an individual.
Save Taxes as a Proprietor

Sole proprietorship business is taxable as is an individual under the Income Tax Act. If a person is sole proprietor of more than one business, he is liable to pay tax on income from all firms together as a single assessee.

To compute the total income of an individual, let’s understand the procedure. Total income is equal to the net profit of all businesses and sole proprietorship firms of the individual. Net profit of the firm, in turn, means gross receipts/turnover less all expenditure made related to the business.

To make it more clear, total income of an individual is calculated by adding net profits of all proprietorship firms of the individual. For income tax purposes, a sole proprietorship firm can maintain its accounts either on cash basis or on accrual basis. Method of accounting is also very useful for tax calculation.

To minimize the tax liability, you should first recognize the expenditure related to the business. Normally, sole proprietorship business runs from home or without having proper office, especially in case of services, and many assets are used simultaneously for business and personal purposes. To claim expenditure, you should segregate expenditure for business and personal purposes. Apart from direct expenses, below are common expenditures made for business purpose:

Rent of the business place. You can pay rent to the owner of the property even if the business is run from home. A proprietor cannot take rent for the property he owns.
Running, maintenance, finance cost and depreciation of vehicle.
Computer, furniture and equipment maintenance, interest cost and depreciation.
Telephone, internet and communication expenses.
Electricity, power and generator running and maintenance expenses.
Staff salary and welfare expenses.
 Stationery, computer consumables, books and periodical expenses.
Advertising, promotion and website expenses.
 Travelling and conveyance expenses.

For claiming the expenditure against a business income, following requirements need to be met:
 You must have an evidence to support the expenditure made.
 Make no cash expenditure beyond specified limit.
 Deduct and deposit TDS if applicable.

Certain deductions are applicable to all individual assesses. The same is true for sole proprietor also. Following deductions can be claimed to save tax:
 Deduction u/s 80C of the Income Tax Act for investments in LIC, PPF, mutual funds, tuition fee, principal payment of housing loan, etc up to Rs.1,00,000.
 Deduction u/s 80CCF up to Rs.20,000 for investment in infrastructure bonds.
 Deduction u/s 80D against payment of Mediclaim policy premium up to Rs.15,000.
 Deduction u/s 8GG if a person is paying rent for his residence.
 Deduction u/s 80G for donation to any registered charitable organization.

Special provision for small business providers
A new provision has been made in the Income Tax Act with effect from 2010-11 that if an assessee has a turnover of less than Rs.60 lakh a year, he can declare income at eight percent or more on the total turnover and shall not be liable to maintain any books of accounts. So, even if you have a maximum turnover of Rs.60 lakh, your income will be assumed as Rs.4.80 lakh only and total tax liability will be Rs.30,900 (for male individuals below 60 years). This provision is applicable to all businesses having turnover of up to Rs.60 Lakh, irrespective of the nature of business.

Adjustment of losses
Under the Income Tax Act, if an assessee incurs loss in one business, he can set off this with profit from another business. If the loss still persists, the assessee can carry forward this to next year and set off with the profit next year, and so on up to eight years from the year of loss. To carry forward business loss to next year, assessee must file the return on or before due date.

Location advantage
If sole proprietorship business has a turnover from export, one can avail up to 100 percent tax exemption by setting up a unit in a special economic zone. No tax is levied on income for the first five years. As much as 50 percent income is taxable in the next five years under section 10AA of the Income Tax Act.

Mukesh Goel is a chartered accountant and partner at Mukesh Raj & Company.

©Entrepreneur October 2011

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4 comments

1 Nilesh On 12 October 2012 at 8:32 am

does Individuals saving accounts and business current account also come under the return. and what type of tax liability will be for the person. should he calculate his solely own business and half transaction taken in to saving account and it is more than 60 lacs. i mean what type of return we need to file. and what it will contain. please answer me I am very confuse. thanks in Advance.

2 neelraaj varsani On 19 March 2013 at 9:04 am

hi i wanted to know how much cash transaction can be shown in the bank accounts if the firm is sole proprietorship.

Waiting for your reply soon.

3 A. Dayal On 23 August 2013 at 11:16 am

Thank you for the article. Very precise information. Just what I was looking for!

4 Rajneesh Verma On 25 December 2013 at 7:17 am

Hi, Thanks for the information. Please help me with following queries:-
- Can cash transactions without bill be considered for expenditure and is there any limit for same? Example vehicle maintenance, Petrol, Paying to maid for cleaning etc?
- can loss in shares be also adjusted against income?
- electricity bills are on house owner- Paid to him in cash- how can that be adjusted?
- For a scenario “Annual income from Proprietor business is less then 100,000 with expenses separate- total annual Income from salary is 13,00,000 then
– books need to be maintained?
- any other special needs on audit and requirement for filling tax?

- which Income form to be used and is there any XLs tax calculator for individuals with income fro salary and proprietorship firm both? Pls share

Thanks

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