A sole proprietorship is the simplest type of business in India that is owned and controlled by an individual. It is not a distinct legal entity, and the profits earned by the business and the income of the proprietor are both considered to be the same for tax purposes. Sole proprietorships are taxable under the Income Tax Act 1961, where profits would be taxed as the individual income of the proprietor. The income from a business, profession, or other sources is determined after deducting allowable business expenses, depreciation, etc. Furthermore, single proprietors must abide by the Tax Deducted at Source (TDS) provisions while paying amounts like wages, rent, contractor charges, or professional charges. Besides, if their turnover exceeds the audit limit, firms should preserve proper books of accounts and file tax audit reports. Abiding by the compliance secures genuine operations, prevents penalties, and prevents them from claiming deductions, thus making taxation an imperative part of successfully running a sole proprietorship.
Applicability of TDS on Sole Proprietary Firms
TDS applies to a sole proprietorship only if it crossed the tax audit limit as specified under Section 44AB in the last fiscal year. Where applicable, the proprietor must follow all TDS rules to the letter, just like any other company—this implies deducting, paying, reporting, and issuing TDS certificates within time to avoid attracting penalties.
1. TDS Application to Proprietorships
A proprietorship that is categorised as an individual or HUF is not considered a separate legal entity. Hence, the application of TDS depends upon the turnover or professional receipts of the proprietor.
TDS is applicable to sole proprietors whose sales are more than ₹1 crore (for business) or ₹50 lakh (for profession) in the last fiscal year, under Section 44AB of the Income Tax Act.
2. TDS Deduction Responsibilities
When the proprietor is liable, he is required to deduct TDS on some payments, such as:
- Salary (Section 192)
- Payments to contractors (Section 194C)
- Rent (Section 194I)
- Fees for professional or technical services (Section 194J)
- Commission or brokerage (Section 194H)
- Interest (Section 194A)
- Purchase of commodities over ₹50 lakh (Section 194Q)
Deposit TDS to the government within the given time limits. File TDS returns every quarter (Forms 24Q, 26Q, etc.). Supply TDS certificates (Form 16/16A) to payees.
3. Situations When TDS is Not Required
- In case of turnover of the sole proprietor being less than the audit limit (₹1 crore business / ₹50 lakh profession).
- In case of payment made for personal purposes (for example, paying personal house rent or for personal services).
- In case of a payment made that is less than the prescribed TDS limit of that section.
4. TDS Rates
| Type of payment | Relevant Section | Threshold Limit | TDS Rate |
| Salary | 192 | based on the income slab | As per applicable tax rate |
| Contractor | 194C | ₹30,000 per contract / ₹1 lakh per year | 1% (individual) / 2% (company) |
| Rent | 194I | ₹2,40,000 per year | 10% (land/building) |
| Professional Fees | 194J | ₹30,000 per year | 10% |
| Purchase of Goods | 194Q | ₹50 lakh per year | 0.1% |
Key TDS Sections Applicable to Sole Proprietorships
Every time a sole proprietorship is to make a TDS deduction, that is, when its turnover or gross receipts cross the threshold set under Section 44AB of the Income Tax Act of 1961, the owner would have to deduct the tax under specific TDS clauses depending on the nature of the payment made. The following is the long list of the essential TDS clauses relevant to a sole proprietorship.
1. Section 192 – TDS on Salary
- Applicability: When an entrepreneur is compensating workers.
- Rate: Calculated on income tax slab rates in effect after allowing exemptions and deductions under the Income Tax Act.
- Threshold: Applies when the salary income surpasses the fundamental exemption restriction (₹2,50,000 for fewer than 60 years).
- Note: The Employer (owner) should collect the employee’s PAN information and yearly submit Form 16.
2. Section 194C – TDS on Contractor or Sub-contractor Payments
- Applicability: Payments made for the completion of contracts, including manufacture, provision of labour, or advertising, should be applied here.
Thresholds:
- ₹30,000 per single contract or
- ₹1,00,000 overall annually.
Assessment:
- 1% when the payee is an individual or HUF
- 2% when the recipient is a corporation, company, or other person.
3. TDS on Professional or Technical Fees – Section 194J
- Applicability: payments for legal, technical, professional services, accounting, or advertising.
- Threshold: For each payee, ₹30,000 yearly.
- Rate: 10% for professional services.
4. Section 194I – TDS on Rent
- Applicability: On rent received for land, building, office space, machinery, or equipment on rent for business use.
- Threshold: ₹2,40,000 annually.
- Rate: 10% on rent of building, land, or furniture, 2% on rent of plant, machinery, or equipment.
5. Section 194H: TDS on Brokerage or Commission
- Applicability: Brokerage or commission (excluding insurance commissions) remitted to agents or intermediaries.
- Threshold: ₹15,000 in a financial year.
- Rate: 5% TDS.
6. Section 194A – TDS on Interest (Except for Interest on Securities)
- Applicability: Interest paid to non-banks by a proprietorship firm (e.g., borrowed from individuals or financing companies).
- In the case of individuals, ₹5,000 and ₹40,000 (₹50,000 in case of senior citizens) if paid through co-operative societies, banks, or post offices.
- Rate – 10%
- Payment of ₹70,000 as a yearly interest to a borrower is equivalent to 10% TDS.
7. Section 194Q: TDS on Purchase of Goods
- Applicability: Acquisition of products (raw material) from a single supplier amounting to more than ₹50 lakh during a financial year.
- The condition is to be used only if the buyer (owner) had a turnover of more than ₹10 crore during the last year.
- TDS rate: 0.1% on the amount exceeding ₹50 lakh.
8. Section 194IB – TDS on rent payable by individuals (not covered under 194I)
- Covers individuals or HUFs receiving monthly rent of over ₹50,000 and not liable for tax audit.
- Rate: 5% TDS of rent for a year.
- Non-audit owners receiving ₹55,000 monthly rent need to deduct 5% TDS annually.
9. Section 195 – TDS on Payment to Non-Residents
- Applicability: On any payment (interest, royalty, technical services charges, etc.) to a non-resident or foreign company.
- Rate: As per prevailing rates under Double Taxation Avoidance Agreement (DTAA) or Income Tax Act, as may be beneficial.
10. Section 194IA – TDS on Purchase of Immovable Property
- Applicability: On purchase consideration of property other than residential property in excess of ₹50 lakh.
- Rate: 1% TDS on the entire sale consideration.
- Note: Proprietor (buyer) shall deduct TDS on payment to the seller.
TDS Deduction Process for Sole Proprietorships
- Check if your business crosses the audit threshold as defined in Section 44AB.
- Find payments: Determine if any payments (like salary, rent, or fees to contractors) are subject to TDS under applicable sections.
- Get TAN: Apply for a Tax Deduction and Collection Account Number.
- At the time of making a payment, deduct the required tax rate (TDS).
- Pay TDS to the government on or before the 7th of the subsequent month.
- File quarterly TDS returns in Form 24Q/26Q.
- Furnish Form 16/16A to payees as proof of deduction.
TDS Return Filing By Sole Proprietorships
- Identify and file TDS returns if your proprietorship deducted TDS in the quarter.
- Use the correct forms, e.g., Form 24Q for salary payments. Use Form 26Q for non-salary payments (contracts, rent, etc.).
- Make the return containing TAN, deductor and deductee details, challan details, and payment figures.
- File quarterly. Due dates: July 31st, October 31st, January 31st, and May 31st.
- E-file through the TRACES or NSDL portals.
- TDS certificate (Form 16/16A) with confirmation and issue after filing.
Consequences of Non-Compliance
Noncompliance of a single proprietorship with TDS rules under the Income Tax Act of 1961 will have several legal and financial repercussions. Under Section 201, the owner turns an assessee-in-default if TDS is not withheld. For non-deduction of TDS, interest would be 1% monthly; for non-deposit of TDS, it would be 1.5%. Under Section 271C, a fine equivalent to the TDS level can also be taxed. Apart from this, Section 40(a)(ia) could disallow 30% of the expenses for which TDS was neither deducted nor deposited as a business expense. Thus increasing taxable income. According to Section 234E, missing TDS returns on schedule results in a late filing penalty of ₹200 per day as well as possible fines. Repeated non-compliance might result in criminal action and harm the company’s reputation among tax officials and customers under Section 271H up to ₹1 lakh.
Conclusion
Under the Income Tax Act 1961, TDS on proprietary businesses is controlled; it depends on the kind of payments being made. and the business’s turnover. Subject to the specified threshold limits being exceeded, a single proprietorship has to withhold TDS while making salaries, professional fees, rent, interest, or contractor charges. Compliance calls for obtaining a Tax Deduction and Collection Account Number (TAN), timely deduction, TDS payment to the government, quarterly return filing, and certificate distribution to payees. Non-compliance underlines the need to keep exact records and adhere to legal deadlines because it can result in interest, penalties, expense disallowance, and even legal ramifications. Even though the proprietorship is simple in form, provisions in TDS guarantee the collection of tax at the source and maintain business transactions transparently. Observing these stipulations will allow proprietary companies to function smoothly, avoid conflicts with tax departments, and maintain a good financial and legal standing in India.
Related Service
