A sole proprietorship in India is taxed as an individual — not as a separate legal entity. For AY 2026-27, the default New Tax Regime applies, with slabs ranging from 0% (up to ₹4 lakh) to 30% (above ₹24 lakh). Proprietors under 60 years of age can opt for the Old Regime to claim deductions like 80C and 80D. The key trade-off: New Regime offers lower slab rates but fewer deductions; Old Regime allows deductions but has higher base rates.

• Zero tax for income up to ₹4 lakh under the New Regime (AY 2026-27)
• Rebate under Section 87A makes income up to ₹12 lakh effectively tax-free under New Regime
• Business expenses (rent, salaries, depreciation) are deductible before computing taxable income under both regimes

How Is a Sole Proprietorship Taxed in India?

A sole proprietorship has no separate tax identity. The business income is added to the proprietor's personal income and taxed at individual slab rates under the Income Tax Return for Sole Proprietorship framework. This is both an advantage and a limitation — you enjoy the simplicity of individual filing, but there's no separate corporate tax rate available to you.

The applicable tax regime and slab rates depend on the proprietor's age and choice of regime. As of AY 2026-27, the government's Direct Tax Code 2025 governs the provisions, replacing the earlier Income Tax Act 1961 framework. The New Tax Regime is now the default unless you specifically opt out.

New Tax Regime Slab Rates (AY 2026-27)

Under the New Tax Regime (default), sole proprietors are taxed at the following rates for AY 2026-27. The rebate under Section 87A effectively makes total income up to ₹12 lakh tax-free for resident individuals.

Income Slab	Tax Rate (New Regime)
Up to ₹4,00,000	Nil
₹4,00,001 – ₹8,00,000	5%
₹8,00,001 – ₹12,00,000	10%
₹12,00,001 – ₹16,00,000	15%
₹16,00,001 – ₹20,00,000	20%
₹20,00,001 – ₹24,00,000	25%
Above ₹24,00,000	30%

Note: A standard deduction of ₹75,000 is available for salaried individuals under the New Regime. For sole proprietors with only business income, this standard deduction does not apply — however, actual business expenses remain deductible.

Old Tax Regime Slab Rates (AY 2026-27)

The Old Tax Regime allows proprietors to claim deductions like 80C (up to ₹1.5 lakh), 80D (health insurance), HRA, home loan interest, and business-related allowances. Slab rates differ by age category.

For Individuals Below 60 Years

Income Slab	Tax Rate (Old Regime)
Up to ₹2,50,000	Nil
₹2,50,001 – ₹5,00,000	5%
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

For Senior Citizens (60 to 79 Years)

Income Slab	Tax Rate (Old Regime)
Up to ₹3,00,000	Nil
₹3,00,001 – ₹5,00,000	5%
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

For Super Senior Citizens (80 Years and Above)

Income Slab	Tax Rate (Old Regime)
Up to ₹5,00,000	Nil
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

Which Regime Is Better for Sole Proprietorship?

The right regime depends on how many deductions your business can legitimately claim. As a thumb rule, if your total deductions (80C, 80D, home loan, business expenses) exceed approximately ₹3.75 lakh, the Old Regime can be more beneficial. If your deductions are lower, the New Regime's lower slab rates work in your favour.

Factor	New Tax Regime	Old Tax Regime
Default Regime	Yes (from AY 2024-25 onwards)	Opt-in required
Deductions (80C, 80D)	Not available	Available
Business Expenses	Deductible	Deductible
HRA / LTA	Not available	Available
Tax-free threshold	Up to ₹12 lakh (with 87A rebate)	Up to ₹5 lakh (with 87A rebate)
Surcharge (above ₹50 lakh)	Applicable (capped at 25% for >₹5 cr)	Applicable

For sole proprietors with significant business deductions and investment-linked deductions, running a tax computation under both regimes before filing is strongly advisable. Talk to a Tax Expert at Taxocity to determine the optimal regime for your business income.

Surcharge and Health & Education Cess

Beyond the slab tax, a Health and Education Cess of 4% is levied on the total tax payable (including surcharge). Surcharge is applicable when total income exceeds certain thresholds:

Total Income	Surcharge Rate
Up to ₹50 lakh	Nil
₹50 lakh – ₹1 crore	10%
₹1 crore – ₹2 crore	15%
₹2 crore – ₹5 crore	25%
Above ₹5 crore	25% (under New Regime, capped)

What Expenses Can a Sole Proprietor Deduct?

One of the most important aspects of sole proprietorship taxation is that genuine business expenditures can be deducted from gross revenue before arriving at taxable income — this applies under both Old and New Regimes. Common deductible expenses include:

• Office rent and utility bills
• Salaries and wages paid to employees
• Depreciation on business assets (machinery, computers, furniture)
• Interest on business loans
• Professional fees and consulting charges
• Advertising and marketing expenses
• Travel expenses incurred for business purposes

Maintaining proper books of account and invoices is essential to substantiate these deductions during scrutiny. Proprietors with turnover above ₹1 crore (or ₹50 lakh for professionals) are required to get a tax audit done under the Direct Tax Code 2025.

Advance Tax Due Dates for Sole Proprietors

If a sole proprietor's estimated tax liability for the year exceeds ₹10,000, advance tax must be paid in instalments. Missing advance tax deadlines attracts interest under Sections 234B and 234C.

Instalment	Due Date	% of Tax to Be Paid
1st Instalment	15th June	15%
2nd Instalment	15th September	45% (cumulative)
3rd Instalment	15th December	75% (cumulative)
4th Instalment	15th March	100%

ITR Filing Due Dates (AY 2026-27):

• For individuals (no audit required): 31st July 2026
• For proprietors requiring tax audit: 31st October 2026

TDS Obligations for Sole Proprietors

A sole proprietor whose accounts are subject to audit is required to deduct TDS on payments made to third parties. Key TDS rates applicable as of AY 2026-27:

Payment Type	TDS Rate (Individual)	TDS Rate (Other than Individual)
Contractor payments (194C)	1%	2%
Professional fees (194J)	10%	10%
Rent on plant/machinery (194I)	2%	2%
Rent on land/building (194I)	10%	10%
Commission/brokerage (194H)	5%	5%

TDS must be deposited with the government by the 7th of the following month (30th April for March deductions) and quarterly TDS returns must be filed.

Presumptive Taxation: A Simpler Option

Small sole proprietors can opt for the Presumptive Taxation Scheme under the Direct Tax Code 2025, which simplifies compliance significantly.

• Section 44AD (Business): Eligible for proprietors with turnover up to ₹3 crore (if digital receipts exceed 95%). Taxable income is presumed at 8% of turnover (6% for digital receipts). No books of account or audit required.
• Section 44ADA (Professionals): For specified professionals (doctors, lawyers, architects, etc.) with gross receipts up to ₹75 lakh. Taxable income presumed at 50% of receipts.

If you opt for presumptive taxation, you must pay the entire advance tax in a single instalment by 15th March of the relevant financial year.

GST Obligations for Sole Proprietors

Income tax and GST are separate compliances. A sole proprietor must register for GST if annual turnover exceeds ₹40 lakh (₹20 lakh for service providers, ₹10 lakh in special category states). Once registered, quarterly or monthly GST filing is mandatory irrespective of business activity.

You can also read our detailed guide on GST Registration for Sole Proprietorship and GST Filing for Sole Proprietorship for a complete compliance walkthrough.

Key Takeaways

1. Sole proprietorship income is taxed at individual slab rates — not at a flat corporate rate.
2. New Tax Regime is the default for AY 2026-27; income up to ₹12 lakh is effectively tax-free via Section 87A rebate.
3. Old Tax Regime is beneficial if total deductions (80C, 80D, home loan, etc.) exceed approximately ₹3.75 lakh.
4. Business expenses (rent, salaries, depreciation) are deductible under both regimes before computing taxable income.
5. Advance tax is payable in 4 instalments if annual tax liability exceeds ₹10,000.
6. Presumptive taxation under Section 44AD (turnover up to ₹3 crore) or 44ADA (receipts up to ₹75 lakh) removes the need for maintaining books of account.
7. ITR filing due date: 31st July 2026 (non-audit cases); 31st October 2026 (audit cases).

How Taxocity Helps Sole Proprietors

Taxocity has been helping Indian entrepreneurs and small business owners with end-to-end tax and compliance support for over three decades. Whether you're just starting out or scaling an established proprietorship, our real human tax experts ensure 100% compliance — from regime selection and advance tax planning to ITR filing and TDS returns.

Rated 4.8/5 from 5,000+ verified reviews, Taxocity provides personalised guidance tailored to your business income, helping you choose the right tax regime, claim every legitimate deduction, and file on time without penalties.

If you haven't yet formalised your business, you can also explore Sole Proprietorship Registration with Taxocity to get your business recognised and compliant from day one.

Frequently Asked Questions

Is sole proprietorship taxed differently from a salaried person?

The slab rates are the same, but the income head differs. Proprietorship income is classified as "Profits and Gains from Business or Profession," while salaried income falls under "Income from Salaries." Business owners can deduct actual business expenses; salaried persons get a standard deduction of ₹75,000 under the New Regime.

Can a sole proprietor switch between tax regimes every year?

No. A sole proprietor with business income can switch from the New Regime to the Old Regime only once in a lifetime. Once you opt back for the Old Regime, switching is restricted. Salaried individuals without business income can switch every year.

Which ITR form applies to a sole proprietorship?

Sole proprietors with business or professional income file ITR-3 (for those maintaining books of account) or ITR-4 (Sugam) if opting for the Presumptive Taxation Scheme under Section 44AD or 44ADA.

Is audit mandatory for all sole proprietors?

A tax audit is mandatory if turnover exceeds ₹1 crore for business (₹10 crore if 95%+ transactions are digital) or ₹50 lakh for professionals. Proprietors opting out of presumptive taxation despite meeting turnover thresholds may also attract audit requirements.

---

Disclaimer: This article is for general informational purposes only and does not constitute tax advice. Tax laws are subject to amendments; provisions mentioned are based on the Direct Tax Code 2025 applicable for AY 2026-27. Please consult a qualified tax advisor or Taxocity's experts before making any tax-related decisions specific to your business situation.