ITR Filing for Proprietorship and Small Businesses for FY 2023-24
Updated: Jul 11
The complexity of filing taxes is one of the prime yet highly challenging tasks for any proprietor or small business owner. Every financial year brings with itself a new set of updates and guidelines. Keeping a business updated and compliant with the same becomes very important. In FY 2023-24, it's all about understanding the basics of ITR filing not for compliance purposes but for tax benefits and creating a strong base for financial health in the years to come. With this article, we will simplify the ITR filing process for small businesses and individual proprietors.
Table of Content
Overview of ITR Filing for Proprietorship and Small Businesses
Definitions of Small Business and Proprietorship in the Context of ITR:
With respect to the filing of ITR, small businesses refer to independently owned and operated companies whose size and revenue are limited by nature. Small businesses can represent sole proprietorships, partnerships, and private limited companies that normally turn over relatively lower revenues for taxation purposes in India. These limits differ by regulations and industries.
Proprietorships, also known as sole proprietorships, are individually owned and operated businesses, with one person holding all responsibilities for assets and liabilities. The business proprietorship is not a legal entity separate from its owner, unlike a corporation or limited liability company. Hence, this becomes very important for tax purposes. In that regard, the income of the business is only regarded as personal income of the individual, taxable in the hands of that proprietor and, therefore, forming part of the personal income tax returns using specific ITR forms for such entities.
Why is ITR Filing Important?
Income tax return filing is a statutory requirement for small businesses and proprietorships, but beyond regulatory compliance, it serves several vital business functions.
Legal Requirement: The most important thing in filing the ITR is that it is a legal duty. Any non-compliance results in penalties and legal problems, thus hampering the credibility and operational standing of the business.
Financial Documentation: The annual filing of ITRs provides documented proof of income, which is of essence in validating financial performances of the business over time. This may always come in handy during times of loan or credit facility requirements, where many financial institutions require past tax returns as prerequisites in gauging creditworthiness.
Tax Planning: Filing of ITR is a prerequisite to effective tax management by planning and using its various deductions, exemptions, and incentives under the law. Through this, small businesses can avail of these benefits, thereby decreasing the total tax payable.
Government Tenders: Commonly, to be eligible for most government tenders, businesses need to present their tax return documents as an assurance of their financial and tax-compliant status.
Carry Forward of Losses: Every business goes through its highs and lows. By filing returns, any business can carry forward losses to the succeeding year, which can be set off against future profits, resulting in substantial tax relief.
Builds a Financial Track Record: Consistent filing of ITRs builds a strong, sound financial record of the business, thereby enhancing the reputation of the business in the market. This attracts investors, partners, and other stakeholders who hold an instrumental position for the growth of a business.
Determining the Right ITR Form
The proper selection of ITR forms is very crucial for small businesses and proprietorships so that proper compliance with the tax laws can be made and, to get optimum tax benefits. The type of ITR form to be selected is influenced by the nature of the business structure and sources of earnings. Here is a detailed outline of different ITR forms applicable to small businesses and proprietorships and guidance relating to the choice of appropriate form.
Different ITR Forms Applicable to Small Businesses and Proprietorships:
ITR-3:
Applicability: This form applies to an individual and a Hindu Undivided Family deriving income from a proprietary business or carrying on a profession. The form accommodates all types of income such as salary, house property, lottery winnings, capital gains, business/profession, and other sources.
Key Features: The forms have exhaustive profit and loss statements and generate balance sheet information as on the last day of the previous year.
ITR-4 (Sugam):
Applicability: This is suitable when the income is of the nature of small business and freelance professions of shopkeepers, and so on, opting for the presumptive scheme under Sec 44AD, 44ADA, or 44AE of the IT Act. In this scheme, income is assessable on a presumptive basis at a certain percentage of the total turnover or gross receipts.
Key Features: It has less complexity compared to ITR-3 as it requires no detailed accounting and is best suited for businesses whose turnover is up to the prescribed limit, which currently is INR 2 Crores for businesses and INR 50 Lakhs for professionals.
How to Choose the Right Form Depending on Business Structure and Sources of Income?
Nature of Business: ITR-3 is more suitable if the business has various complicated transactions, huge turnover, or particular professional services that require detailed financial statements. ITR-4 will be more appropriate for smaller businesses or those who want tax compliance and reporting that are simplified in nature, particularly in respect of which presumptive taxation is eligible.
Income Sources: If the sources of income include several items, like salary, rental income, capital gains, or even winnings from lotteries along with business income, ITR-3 could handle each of these diversified sources effectively. ITR-4 is restricted to presumptive business income, together with salary/pension, one house property, and other source income excluding capital gains.
Compliance and Recordkeeping: Firms who are comfortable maintaining detailed records, or those requiring to claim certain deductions or losses should choose ITR-3. Small businesses that need easier compliance and less record-keeping may be better off with ITR-4, especially if the income is easily predictable or stable.
ITR Filing for Proprietorship and Small Businesses: Step-by-Step Guide to Filing ITR
Filing of ITR online, also known as e-filing, is structured in a way that requires steps that are convenient and problem-free, even for those who do not have any knowledge regarding tax laws. Here is how small businesses and proprietors can help themselves file ITR online quickly, along with details and documents required from one's side while going through the process.
Step-by-Step Details about How to File ITR Online
Step 1: Preparation through the Collection of Required Documents
Scrape through all the financial documents, like bank statements, past records of income tax returns, TDS certificates, profit and loss statements, balance sheets, and documents of investments that are eligible for deductions or exemptions from tax.
Step 2: Registration or Login to e-Filing Portal
Log on to the official Income Tax e-Filing portal by visiting incometaxindiaefiling.gov.in.
In case you are a new user, register yourself by using the 'Register Yourself' button. In case of existing users, log in with User ID (PAN), password, and captcha code.
Step 3: Download the Applicable ITR Utility
On the dashboard of the portal, click on the 'Downloads' section. Click on the Assessment Year to download the applicable ITR utility depending on your business type, viz. ITR-3 or ITR-4 as discussed above.
Step 4: Submission of ITR Form with Downloaded Utility
The downloaded utility, either Excel-based or Java-based, has to be opened, and fill in the personal information, income details, deductions, taxes paid, etc herein. The form automatically calculates the tax liability.
Step 5: Validate and Generate the XML File
After filling in the details, the 'Validate' button can be used to check for any errors. If the information is correct, generate an XML file. This is used for upload on the e-Filing portal.
Step 6: Upload the XML File
Log in to the e-Filing portal. Under the 'e-File' menu, select 'Income Tax Return'. Choose the relevant Assessment Year, ITR Form Number, and Submission Mode as 'Upload XML'. Browse and select the XML file you generated and then upload it.
Step 7: Verify the Return
Now, after uploading the XML file, you have to validate your return. It can be validated via Aadhaar OTP or EVC through bank account, Demat account, or with the help of a digital signature certificate. If you are unable to e-verify immediately, print ITR-V form, sign and send it to CPC, Bangalore within 120 days of filing a return.
Step 8: Acknowledgment Received
On successful uploading and verification of the ITR, you will get the acknowledgment from the Income Tax Department. The acknowledgment is also forwarded to your registered e-mail.
Essential Documents and Information Required for Filing
Aadhaar Card
Details of Bank account
TDS certificates
Other sources of income details
Balance sheet and profit & loss account statements
Receipts of eligible investments and expenditure under Sections 80C to 80U
Previous year's tax return
Common Deductions and Benefits for Small Businesses
Below is an inclusive list of common tax deductions and benefits, accompanied by some strategic tips on how to maximize these opportunities.
List of Deductions and Tax Benefits Available for Small Businesses
Business Expense Deductions: All ordinary and necessary expenses paid in carrying out business activities are deductible. This includes rent, utilities, office supplies, repairs, and maintenance.
Depreciation: Depreciation can be claimed on capital assets like machinery, buildings, vehicles, and furniture that are used in the business by spreading the cost over the useful life of such assets.
Benefits to Employees: All the expenses incurred to allow employees to make use of certain benefits or advantages which could pertain to a health plan, insurance, retirement plan, and so on are totally deductible.
Professional Fees: It would include fees paid for services availed from a lawyer, accountant, auditor, or any other professional advice, consultancy, and services.
Advertising and Marketing: Advertising and marketing expenses are fully deductible and this includes costs associated with developing and maintaining a website.
Education and Training: The fees paid to train or educate yourself or your employees to improve any skills that will benefit your business are deductible.
Home Office Expenses: You can deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that part of your home, which is used regularly and exclusively for business purposes.
Travel Expenses: Business trips are deductible, including lodging, transportation, meals (subject to limitations), and incidental expenses.
Interest: The interest on business loans, credit used solely for business purposes, is tax-deductible.
Bad Debts: Being a businessperson, if you have accounts receivable that turned out to be bad debts, you can write them off and claim a deduction.
How to Maximize These Benefits to Reduce Taxable Income
Keep Detailed Records: Maintain meticulous records of all expenses, including receipts, bills, invoices, and bank statements, to substantiate deductions.
Plan for Capital Purchases: Plan capital asset purchases to maximize depreciation deductions. Consider the timing of these purchases to take advantage of tax benefits.
Employ Family Members: Hiring family members legally allows you to distribute income and utilize lower tax brackets.
Leverage Retirement Plans: Setting up retirement plans for employees (and yourself) not only benefits your team but also offers significant tax advantages.
Stay Informed on Tax Changes: Tax laws frequently change. Staying updated through seminars, tax advisors, or professional associations can help you take advantage of new deductions and credits.
Maximize Home Office Deductions: Ensure you meet the strict IRS criteria for home office deductions to claim this benefit without risk.
Consider the Structure of Your Business: Sometimes, changing your business structure (from sole proprietorship to an LLC or corporation) can provide significant tax benefits. Consult with a tax professional to choose the best structure for your business.
Monitor Travel and Entertainment Expenses: Keep detailed logs of business travel and entertainment expenses to differentiate personal from business expenses accurately.
Avoiding Common Mistakes in ITR Filing
Listed below are the common mistakes, and steps to avoid them for a smoother processing of tax return:
Incorrect or Incomplete Disclosure of Income: There has to be a report of all sources of income, including secondary incomes or transient gains; it is overlooked in the majority of times, which may invite penalties or audits.
Misconceptions about Tax Deductions: Many small business owners either claim deductions that do not relate to them at all or miss out on eligible deductions due to ignorance.
Errors in Basic Information: Simple errors like incorrect PAN details, bank account numbers, or contact information can delay the processing of returns or issuing refunds.
Computational Errors: The mistakes in computation of taxable income, deductions, or tax credit may portray incorrect tax liabilities.
Not Maintaining Proper Documentation: Another common lapse is the non-maintenance of proper receipts, bills, and other necessary supporting documents for proving claims made in the tax returns.
Missing Deadlines: Delay in filing returns may be costly not only due to the penalty levied but also because this may lose the opportunity for carry-forward losses.
Inappropriate ITR Form: Choosing the correct ITR form depending on the nature and type of business carried on and the types of income earned may be a characteristic that results in rejection or failure of the tax return.
How to avoid these errors?
Keeping Record of all Income: Maintain a complete record of all sources of income during the calendar year. Ensure all your income is accounted for and noted properly for reporting in ITR.
Know Available Deductions: Consult regularly with a tax advisor to keep updated on the current tax environment and about various deductions one can use concerning one's situation.
Double Check Information: Before you submit your ITR, check all personal and business information. Ensure that all the financial information therein is in agreement with your supporting documentation.
Avail Reliable Tax Preparation Service: Use credible tax preparation services that will help you reduce computational errors and support you with the best strategies for tax savings.
Keep Proper Records: Build up a system for keeping receipts and any other documents related to taxes throughout the year. This will render filing hassle-free and make it easy to respond in case the tax department ever questions you.
Set Reminders for Deadlines: Track all deadlines and set reminders well ahead in advance so there is sufficiently intelligent time to prepare and review your tax returns prior to submission.
Select Correct ITR Form: Understand the criteria laid down for every category of ITR form and select the one most eligible regarding business structure and nature of income in your case. Seek professional advice if there is doubt.
Regular Consultations with Tax Experts: Engage with tax experts throughout the year, not just in tax season. This proactive approach can help ensure you are compliant and optimize your tax returns throughout the year.
FAQ
Q1. Who needs to file ITR for proprietorship?
Any proprietorship, whether there are profits or losses, is required to file an Income Tax Return if their income is more than the basic exemption limit.
Q2. What is the last date of filing ITR for proprietorship businesses?
The due date is generally 31st July of the assessment year. However, it may vary if the business is covered under audit.
Q3. Which form should proprietors use for filing ITR?
ITR-3 shall be used if a proprietor declared income from business or profession; otherwise, ITR-4 would be applicable in the case of the presumptive taxation scheme.
Q4. What is a presumptive taxation scheme?
In the case of presumptive taxation, Section 44AD specifies that small businesses can simply declare 8% of their turnover as income. If the receipt is digital, 6% would be considered as income.
Q5. Do proprietors need to maintain books of accounts?
Yes, books of accounts have to be maintained by proprietors only when their income exceeds INR 2.5 lakh or if total sales/turnover exceeds INR 25 lakh in any of the 3 preceding previous years.
Q6. Whether audit is necessary in the proprietorship business?
Audit is compulsive, if the turnover exceeds INR 1 crore; in the case of presumptive taxation under Section 44AD, INR 2 crore.
Q7. How to file ITR for small businesses online?
You can upload your ITR online through the e-filing portal of the Income Tax Department. Keep all necessary documents handy, including financial statements, TDS certificates, and bank statements.
Q8. What are the penalties for late filing of ITR for proprietors?
After the due date but before December 31st, there could be a penalty of INR 5,000 for late filing, and INR 10,000 thereafter. In cases where the income is below INR 5 lakh, the fine will not exceed INR 1,000.
Q9. Am I entitled to claim expenses on account of the home office in my ITR?
Yes, you will be entitled to claim a proportionate amount on account of home office expenses like rent, electricity, and internet charges, which is based on the area used for business purposes.
Q10. Can proprietors claim deductions under Section 80 of the Income Tax Act?
Yes. Proprietors can claim deductions for business expenses, depreciation, and other eligible deductions under Sections 80C to 80U of the Income Tax Act.
Related Posts
See AllIndian startups with DPIIT (Department for Promotion of Industry and Internal Trade) recognition can potentially save thousands or even more in taxes. The Income Tax Act's Section 80-IAC is the provis
Every Indian wants to possess their own house, either by construction or purchase. Purchasing a home not only reflects a prosperous existence but also gives you access to an asset whose value increase
