Sole Proprietor is popular business model in India. It a business owned and managed by single owner. For Sole Proprietor income tax rate of individual is applicable in India. In Sole Proprietorship all business activities are carried by single person and due to this firm faces higher income tax even though actual net profit is less. Sole Proprietor need to follow below points this is helps in Tax Saving. Sole Proprietor may be earning income form salary , business , housing income , other sources etc. hence its important to have right tax planning.
In this article we discussing Sole Proprietor. By maintaining proper books of accounts , claim depreciation etc. small and medium business tax saving tips.
| S.No | Income Tax | Tax Rate | Financial Year |
| 1 | Up to ₹2,50,000 | NIL | FY 2019-20 |
| 2 | ₹2,50,001 to ₹5,00,000 | 5% | FY 2019-20 |
| 3 | ₹5,00,001 to ₹10,00,000 | 20% | FY 2019-20 |
| 4 | Above ₹10,00,000 | 30% | FY 2019-20 |
Bookkeeping is Key challenge in day todays business by small & medium business owners. In Sole proprietor business owner is looking after all roles such as sales , marketing , administration etc. Due to this proprietor doesn’t get adequate time to timely maintain books of accounts of Firm. For Tax Saving or tax planning of Proprietorship business first need to understand what is business taxable business income. Once you arrive at projected annual taxable income than you can apply below points to save income tax in India.
Proprietor business is run and managed by single person. As most time such business family member of owner also take part in business work. Family member some time help in business as part time or as a full time. However they forger to take a salary from firm for there work. In simple terms family member is supporting in business as an employee of firm and in return he need salary. Paying salary to family member for work done is one of best income tax saving tips. It also helps to save tax filing benefit for family member.
There are two kind of expenses one is capital expenditure and another is revenue expenditure. Capital expenditure , expenses for purchase of fixed assets such as Laptop , Servers, Machine etc. This expenses appear in asset site balance sheet. Even though there is immediate cash outflow however for it not get deducted from Taxable Net profit. Income tax Act gives a section to claim depreciation on fixed assets for Proprietor firm. By claiming income tax Proprietor reduced its taxable income and can save income tax.
As like other business Proprietor also faces problem of debt collection. It’s a sales for which buyer not paid funds and now the amount due become bad debt. Most of Proprietor carries business on accrual basis due to for sales where buyer not paid amount to Proprietor tax get applicable. Hence on regular interval Proprietor of business need to calculate bad debts of firm and claim them in income tax return , by claiming bad debts in timely manner small & medium size business owner can save income tax.
Most of time Proprietor business finalizes there books of accounts after closure of financial year. For example For FY 2019-20 books get finalized in July 2020 and Income tax due was Rs. 200000/.Income tax Act makes it mandatory to pay quarterly installment of advance tax. For non payment of advance tax Late payment interest is applicable. Paying advance tax is important to save late payment interest.
| Due date of installment | Amount payable |
| On or before 15th June | Not less than 15% of the advance tax liability |
| On or before 15th September | Not less than 45% of the advance tax liability |
| On or before 15th December | Not less than 75% of the advance tax liability |
| On or before 15th March | 100% of the advance tax liability |
Small & medium Proprietor business have cash run business. In cash run business they make expense on behalf of firm such as traveling expenses , meeting expenses etc. However due lack of awareness they forget to record cash expenses in firm books of accounts. By recording cash expenses firm and arrive at net taxable income. To arrive at net taxable income its important to record all cash expense in firm. Recording cash expenses is benefits in tax saving.
Tax planning should not be done with an intent to defraud the revenue. Proprietor need to keep him updated about the recent changes in tax law , company law and other allied law to complete the annual filing income tax & other compliances.
In Sole proprietorship business individual uses his personal assets from purpose of firm. Such as for Traveling for meeting , dispatch of goods etc. Proprietor uses his car / motor bike. For which there may be petrol expenses , repair & maintenance expense. Since the expenditure is done for the firm it should get recorded in books this helps to reduce income tax.
Sole proprietor visits coffee shops , restaurant to get new clients for which he may be paying these coffee shop bills. As purpose of these expenses is to get new client , serve existing client etc. hence its important to record such meeting expenses in firms books of account. By doing this its an answer for How to Save tax for Sole Proprietor business.
Chapter VI of Income Tax gives investments options by which an individual can make investment or claim his /her existing expenses. Under chapter VI , proprietor can invest upto Rs.150000/- , This investment/ expense can help in upto Rs.45000/- income tax saving. Under 80 C one can claim for LIC , Tuition fees etc.
Filing Income Tax return within due date is important. We discussed about how to save tax for proprietor business . However its equally important to save on income tax act late filing fees, penalty , late payment interest. Under Section 234 F of Income Tax Act 1961, for non filing of ITR late filing fees upto Rs. 10000/- is applicable. Hence file ITR within due date to save late filing fees.
Donation to charitable organization which are government approved and registered under Section 12 AA of income tax Act is allowable expenditure. Sole proprietor may be giving donation to charitable organization as a social responsibility. If Sole proprietor gives donation to 80 G registered organization it can help to reduce net taxable income and this results in tax saving tips for Sole proprietor.
Medical insurance premium paid offers tax benefits under Section 80D. Sole proprietor shall buy mediclaim policy for self and family members. Premium paid for these expense get deducted from firms net taxable income.
Most of individual have housing loan , this loan have monthly EMI. The EMI goes towards principle amount of loan and interest amount. Income Tax Act 1961 gives relaxation in income tax for individuals paying housing loan EMI. Under 80C upto Rs. 1.50 lac of amount paid toward housing loan principle amount can be claimed.
Many small & medium business payees higher income tax , late filing fees , interest due to improper books of accounts , failed tax planning etc. Many of individual prepares books of accounts near the income tax filing dead line. In India, Chartered Accountants are considered as the best tax planners and as an expert in the field, they ensure that maximum tax can be saved within the bounds of law and simultaneously availing maximum benefits of tax saving schemes.
