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ITR Filing for Proprietorship and Small Businesses: A Complete Guide

Updated: Dec 12, 2023

A proprietorship gets regarded as an extension of the proprietor, and when it comes to income tax filing, the procedures mirror that of filing personal returns for the proprietor. Consequently, the laws that govern the payment of income tax for the proprietor also extend to cover the proprietorship. This means that the proprietorship and its associated tax obligations are subject to the same regulations as the proprietor, establishing a close connection between the two.

By following these steps and ensuring the accuracy of your information, you can successfully file an income tax return for your proprietorship using the eFiling system.

Unfolding the steps for E filing ITR for small proprietorship business:

1) To initiate the process of filing an income tax return for a proprietorship using the e-Filing system, it is essential to first obtain a PAN card as it is a requirement for filing the ITR. Once you have your PAN card, you can proceed to register it in the e-filing system of the Income Tax Department. If you have already completed the registration process, you can simply enter your password to proceed further.

2) Next, navigate to the 'E-File' tab and select the 'File Income Tax Return' option. A crucial step here is to choose the appropriate assessment year, which corresponds to the relevant financial year. For instance, if you are filing for the financial year 2022-2023, the assessment year would be 2023-2024.

3) After selecting the assessment year, you need to choose the mode of filing. If you prefer online filing, select the 'Online' mode and click on 'Continue'. From the subsequent window, click on 'Start New Filing' to initiate the process.

4) As an individual filing for a proprietorship, select the 'Individual' status and proceed by clicking on 'Continue'. The next step involves selecting the appropriate form type based on your business. You can choose either ITR 3 or ITR 4, depending on your specific requirements. Once you have made the selection, click on 'Let's get started' to proceed further.

5) At this stage, the ITR form will be displayed on your screen. It is crucial to accurately fill in all the requested details. Once you have completed filling in the required information, click on 'Proceed' to move forward.

6) To ensure accuracy, it is advisable to review your ITR before submission. Click on 'Preview Return', and a window will appear. Here, you need to provide a declaration affirming the correctness and completeness of the details provided in the form. Upon having entered the declaration, you will need to click on 'Proceed to Validation'.

7) Take a moment to carefully review the preview of your ITR. If all the details appear to be correct, proceed with the validation process. There are two methods available for ITR validation: Aadhar OTP or EVC (electronic verification code).

8) Additionally, you have the option to either 'E-verify later' within a 120-day timeframe or send a copy of the I-TVR (Income Tax Verification Report) to the Income Tax Department.

Why is ITR mandatory and beneficial in the light of E filing ITR for small proprietorship business:

  1. Facilitates Easy Loan Approval: Banks often require tax returns as proof of income when applying for loans, such as vehicle loans or house loans. Filing your income tax return (ITR) is essential to provide this mandatory document for loan approval.

  2. Enables Tax Refund Claims: In cases where tax has been deducted (TDS) from your income despite having a total taxable income below the basic exemption limit and no tax liability, filing an ITR is necessary to claim a refund of the TDS amount.

  3. Serves as Income and Address Proof: Your ITR can be used as valid proof of your income and address in various situations.

  4. Accelerates Visa Processing: Embassies and consultants often require copies of past tax returns during visa applications. Timely filing of your ITR ensures you have the necessary documents for quick and smooth visa processing.

  5. Allows Carry Forward of Losses: Filing your ITR within the original due date enables you to carry forward losses to subsequent years. This benefit allows you to offset those losses against future income, thereby reducing your tax liability.

  6. Helps Avoid Penalties: Failure to file tax returns as required by the income tax act may result in penalties imposed by tax officers, with penalties of up to Rs. 5,000.

  7. Supports Term Insurance Applications: Insurance providers offering term insurance policies often request ITR records as evidence of annual income. These records help determine the coverage amount based on the individual's income level.

  8. Enables Refund Claims for Excess Tax Payments: Even if your income falls below the taxable threshold, taxes may still be deducted from certain sources, such as salary or fixed deposits. Filing an ITR allows you to claim a refund for any excess tax deducted at the source.

Dissecting audit requirements under the spectrum of E filing ITR for small proprietorship business:

  1. Turnover Criteria: An audit of a proprietorship may be required based on the annual turnover. If the proprietorship firm's turnover exceeds Rs 1 crore during the assessment year, or if it is a professional proprietorship with total receipts surpassing Rs 50 lakh, an audit becomes necessary.

  2. Presumptive Tax Scheme: Regardless of the annual turnover, if a proprietorship falls under a presumptive tax scheme, it is mandatory to conduct an audit. This ensures compliance and thorough examination of the financial records.

  3. Compliance with the Income Tax Act: The audit process for a proprietorship firm follows the guidelines specified in the Income Tax Act of 1961. According to this Act, the audit of a proprietorship firm must be performed by a certified Chartered Accountant (CA). The CA's role is to ensure proper maintenance of the books of accounts and compliance with all required regulations.

In compliance with the law, proprietorships are required to file tax returns annually, unless exempted. As previously mentioned, the income tax liability of a proprietorship falls on the proprietor. To file the tax return, there are two options available: physical filing or utilizing an e-filing portal with the proprietor's electronic signature. Additionally, the choice of the appropriate form depends on the nature of the proprietorship.

Which ITR form to pick as part of E-filing ITR for small proprietorship business:

When selecting the appropriate ITR form, individuals who run a business have two options: ITR-3 or ITR-4. ITR-3 is suitable for individuals operating a proprietorship business, although it is a more intricate form. Small businesses with a total income below Rs 50 lakhs and who utilize the presumptive taxation scheme under Sections 44AD, 44ADA, or 44AE can file ITR-4. The presumptive taxation scheme provides convenience for small businesses and professionals as it eliminates the need for maintaining detailed accounting records and undergoing tax audits.


Q1) How do the deadlines for filing income tax returns for proprietorships vary based on the need for an audit and involvement in international transactions, as outlined in the Income Tax Act of 1961?

  1. Proprietorships that do not require an audit are required to file their income tax returns by the 31st of July.

  2. Proprietorships that are subject to audit must file their income tax returns by the 30th of September.

  3. Proprietorships that have engaged in international transactions or are categorized as specified domestic entities are required to file their income tax returns by the 30th of November.

It is essential for proprietors to be aware of these deadlines and ensure timely filing based on their specific circumstances to avoid penalties and comply with tax regulations.

Q2) Which ITR form is recommended for proprietors when filing their taxes?

For proprietors filing taxes, it is advisable to choose the ITR-3 form, specifically designed for individuals operating a proprietorship business.

Q3) What advantages are associated with utilizing the presumptive taxation scheme under Section 44AD for tax filing?

Opting for the presumptive taxation scheme under Section 44AD offers several benefits, including simplified accounting requirements, exemption from tax audits, and the convenience of declaring a fixed percentage (8% or 6% for digital transactions) of turnover as profits. This makes the tax filing process more streamlined and less burdensome for small businesses.

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