Sole proprietor vs private limited company: A tax guide

Sole Proprietorship is the purest business form under which one can operate a business. It is not a legal entity; instead is a person who personally owns the company and is responsible for handling debts.

A private limited company, on the other hand, is a form of a company incorporated under the laws of Companies Act and is a popular form of business entity. Multiple stakeholders control it.

Taxation Rate: Sole Proprietorship

Tax Slab for Proprietors Below 60 Years (Last Day of Previous Year)

Tax Slab for Proprietors Above 60 but Below 80 years of Age (Categorized as Senior Citizens)

Taxation Rate: Private Limited Company

If a Private Limited company makes under ₹400 crores in the previous year, a 25% tax is levied. If their turnover is over ₹400 crores, 30% tax is levied. In addition to this, a slew of new corporate tax cuts was introduced in Budget 2019. Companies can now also opt for the new rates of 22% (for existing companies) and 15% (for new companies). However, doing so will make ineligible for certain deductions and exemptions.

Surcharge: Sole Proprietorship

A surcharge at 10% of tax is applicable if your income lies between ₹50 lakh to ₹1 crore. Upon exceeding ₹1 crore the surcharge will be payable at 15%.

Surcharge: Private Limited Company

For Private Limited Companies that have opted for the new tax rate of 22%/15%, a flat 10% surcharge will be levied. If companies choose to pay taxes at 30/25 per cent (the old system), they’ll have to pay 7% surcharge if their net taxable income falls in the 1 crore to 10 crore category, and 12% if it falls in the over 10 crore category.