Annual Compliance - Proprietorship


Annual Compliance - Proprietorship

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Proprietorship Return Filing:

Proprietorship return filing refers to the process of filing income tax returns for sole proprietorship businesses in India. As per Indian law, the proprietor and the proprietorship firm are considered as a single entity, and therefore, the income tax return filing for the proprietor and the proprietorship firm is the same.

Unlike registered companies, proprietorship firms are not taxed at flat rates. Instead, they are taxed based on the income tax slab rates applicable to individuals. The current income tax slab rates for proprietorship firms are based on the income range and are subject to change from time to time.

It is mandatory for proprietorship firms to file income tax returns every year, unless there is an exemption. The income tax return forms to be filed depend on the nature of the proprietorship. Form ITR-3 should be used for income tax filing if the proprietorship firm is run by a Hindu Undivided Family (HUF) or by any proprietor. On the other hand, Form ITR-4 is used for proprietorship tax filing under a presumptive tax scheme to reduce the compliance burden of small businesses.

It is essential for proprietorship firms to file income tax returns within the stipulated deadline, failing which, they may face penalties and legal consequences. Additionally, if the proprietor files an income tax return before the deadline, any losses incurred by the business can be carried forward, subject to certain conditions. However, deductions under sections 10A, 10B, 80-IA, 80-IAB, 80-IB, and 80-IC cannot be permitted.

Income Tax Slab Rate:

Income Tax SlabTax Rate
Up to Rs. 2,50,000Nil
Rs. 2,50,001 – Rs. 5,00,0005%
Rs. 5,00,001 – Rs. 10,00,00020%
Above Rs. 10,00,00030%

filing Income tax returns:

Filing income tax returns for proprietorship firms in India involves the following steps:

  1. Obtain a PAN: The first step to filing income tax returns for a proprietorship firm is to obtain a Permanent Account Number (PAN) for the business.

  2. Maintain books of accounts: The proprietorship firm needs to maintain proper books of accounts, including records of all financial transactions.

  3. Calculate taxable income: The taxable income of the proprietorship firm needs to be calculated by subtracting all applicable deductions and exemptions from the gross income.

  4. Choose the appropriate ITR form: The next step is to choose the appropriate Income Tax Return (ITR) form for the proprietorship firm. The ITR form to be used depends on the nature of the business and the income earned.

  5. Fill in the ITR form: The ITR form needs to be filled in with all the relevant details, including income earned, deductions claimed, taxes paid, etc.

  6. Verify the ITR: The ITR form needs to be verified using any of the available options, such as digital signature, Aadhaar OTP, etc.

  7. Submit the ITR: The ITR form can be submitted online on the Income Tax Department’s e-filing portal.

  8. Pay any tax due: If any tax is due, it needs to be paid using the available options, such as online payment through net banking or by visiting a bank.

It is important to note that the due date for filing income tax returns for proprietorship firms is generally July 31st of the assessment year. However, this date may be extended by the Income Tax Department from time to time.

Do Proprietorship Firms have a mandatory requirement to file an Income Tax Return?

Yes, it is mandatory for proprietorship firms to file an income tax return in India. As per the Income Tax Act, any individual or entity earning income above the basic exemption limit is required to file an income tax return. This applies to all proprietorship firms, regardless of their size or turnover.

The basic exemption limit for proprietorship firms is currently set at Rs. 2.5 lakhs per annum. If the firm’s income exceeds this limit, it must file an income tax return. It is important to note that even if the firm does not have any taxable income or profit, it is still required to file a return if the income exceeds the basic exemption limit.

Filing income tax returns on time is important for proprietorship firms, as it helps them avoid penalties and interest charges levied by the Income Tax Department. Failing to file returns can also result in legal action and prosecution, which can be detrimental to the firm’s reputation and financial health.

In addition to mandatory compliance requirements, filing income tax returns also helps proprietorship firms establish their financial credibility and maintain a clean track record. It can also help them access credit and other financial services in the future.

Due date of filing of an income tax return:

The due date for filing an income tax return for sole proprietorship firm may vary based on the type of taxpayer and their audit requirements. Below is a table summarizing the due dates for filing income tax returns for sole proprietorship firms for the assessment year 2022-23 (financial year 2021-22).

Type of TaxpayerDue Date of Filing Income Tax Return
Non-audit casesJuly 31, 2022
Audit casesOctober 31, 2022

It is important to note that the due dates may be subject to change based on any updates or notifications from the Income Tax Department. Therefore, it is always advisable to stay updated with the latest information regarding the filing of income tax returns.

Audit of Proprietorship:

Proprietorship firms are required to maintain proper books of accounts and financial records, and depending on their turnover, they may also be subject to an audit. Here are some important things to know about the audit of a proprietorship:

  1. Turnover Limit: Proprietorship firms with a turnover of less than Rs. 2 crore are not required to get their accounts audited. However, if the turnover exceeds Rs. 2 crore, then the accounts need to be audited by a Chartered Accountant (CA).

  2. Tax Audit: A tax audit is conducted to ensure that the income, expenses, deductions, and other financial transactions of the business are in compliance with the Income Tax Act. If the turnover of the proprietorship exceeds Rs. 1 crore, a tax audit is mandatory under Section 44AB of the Income Tax Act.

  3. Compliance Audit: A compliance audit is conducted to ensure that the business is complying with various laws and regulations such as GST, labor laws, etc. However, compliance audit is not mandatory for proprietorship firms.

  4. Auditing Process: The auditing process involves examining the financial records, verifying transactions, reconciling accounts, and ensuring compliance with the relevant laws and regulations. The auditor will issue an audit report, which will provide an opinion on the accuracy and completeness of the financial statements.

  5. Due Date for Audit: The due date for the audit of a proprietorship is September 30th of the assessment year. For example, if the financial year ends on March 31, 2022, the due date for the audit will be September 30, 2022.

Annual Compliance – Proprietorship FAQ’s

Must a sole proprietor file taxes? 

Answer: Yes, a sole proprietor must report all business income and losses on their personal income tax return as the business is not taxed separately.

How can a Proprietorship file income tax returns? 

Answer: Proprietorship firms can file their annual tax returns using either ITR 3 or ITR 4 forms.

When should ITR 3 be filed for a proprietorship return? 

Answer: ITR 3 should be filed if the proprietorship is run by an individual or a Hindu Undivided Family.

When should a Proprietor file ITR 4? 

Answer: A proprietor can file ITR 4 if they come under the presumptive taxation scheme.

Is a Proprietorship subject to double taxation? 

Answer: No, a proprietorship is not subject to double taxation as it is not considered a separate tax entity from its owner.

What are the main tax benefits for a sole proprietor? 

Answer: A sole proprietor can deduct the cost of health insurance for themselves, their spouse, and dependents as a main tax advantage.

What are the annual compliance requirements for a proprietorship firm? 

Answer: Proprietorship firms must file their annual tax returns with the Income Tax Department. However, they are not required to file annual reports or accounts with the Ministry of Corporate Affairs, which is mandatory for LLPs.

Is it necessary to have a Proprietorship audited? 

Answer: A tax audit is not necessary for proprietorships, as it is based on turnover and other criteria.