Sole proprietor vs private limited company: A tax guide

Sole Proprietorship v/s Private Limited Company:

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):
Income tax slab Income Tax Rate
0-₹2,50,000 NIL
₹2,50,000 - ₹5,00,000 5% of the total income above ₹2,50,000
₹5,00,000 -  ₹10,00,000 ₹12,500 + 20% of the total income above ₹5,00,000
₹10,00,001 and above ₹1,25,000 + 30% of the total income above ₹10,00,000
Tax slab for proprietors above 60 but below 80 years of age (categorised as senior citizens): 
Income tax slab Income Tax Rate
0-₹3,00,000 NIL
₹3,00,000 - ₹5,00,000 5% of the total income above ₹3,00,000
₹5,00,000 - ₹10,00,000 ₹10,000 + 20% of the total income above ₹5,00,000
₹10,00,000 and above ₹1,10,000 + 30% of the total income above ₹10,00,<000>

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%.
  • 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. 
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