A businessman is taxed on business profits under the head Profits & Gains of Business or Profession (PGBP). A proprietor pays at individual slab rates; a partnership firm or LLP pays a flat 30%; a company pays 22% (Section 115BAA) or 25%. Small businesses can use the Section 44AD presumptive scheme — declare 6-8% of turnover (up to Rs3 crore) as profit, with no books and no audit.
How a Business Is Taxed — Rate Table
The tax treatment depends entirely on the legal form of the business. Choosing the right structure changes both the rate and what you can deduct.
| Business Structure | Tax Rate | Key Notes |
|---|---|---|
| Proprietorship (individual) | Slab | Same slabs as an individual; new regime nil up to Rs12L taxable |
| Partnership firm | 30% | Flat, + 12% surcharge above Rs1cr; partner salary & interest deductible |
| LLP | 30% | Flat, like a firm; distributions to partners not taxed again |
| Company — Section 115BAA | 22% | No exemptions/deductions; + 10% surcharge + 4% cess |
| Company — turnover ≤ Rs400cr | 25% | With exemptions; else general 30% |
| New manufacturing co (115BAB) | 15% | Conditions apply; incorporated & set up in time |
| Startup (Section 80-IAC) | Tax holiday | 100% profit deduction for any 3 of first 10 years |
Rates for AY 2026-27 under the Income-tax Act, 2025. Surcharge & 4% health-and-education cess apply on top. Verify on the official portal before filing.
Not sure which structure or regime is cheapest for your business?
Get Expert Advice →Presumptive Taxation — Section 44AD & 44ADA
Presumptive taxation lets eligible small businesses declare a fixed percentage of turnover as profit — no books of account, no tax audit. It is available to resident individuals, HUFs and partnership firms (not companies or LLPs).
| Scheme | Who | Turnover / Receipts Limit | Deemed Profit |
|---|---|---|---|
| Section 44AD | Small businesses (traders, retailers, etc.) | Up to Rs3 crore (if cash receipts ≤ 5%) | 6% digital / 8% cash |
| Section 44ADA | Professionals (CA, doctor, lawyer, architect, etc.) | Gross receipts up to Rs75 lakh | 50% |
| Section 44AE | Goods-transport operators | Up to 10 goods vehicles | Per-vehicle deemed income |
The Rs3cr 44AD / Rs75L 44ADA limits apply where cash receipts do not exceed 5% of turnover. File ITR-4.
- Declare 6% of turnover received digitally / by bank and 8% of the cash portion as income.
- You can declare a higher profit than the presumptive rate, but not lower without books + audit.
- Once you opt in, you must stay in for 5 years; opting out early triggers audit & book-keeping.
- Advance tax is payable in a single instalment by 15 March under the presumptive scheme.
If you opt out of Section 44AD within five years of opting in, you lose presumptive eligibility for the next five years and must maintain books and get a tax audit whenever your income exceeds the basic exemption limit. Plan the switch deliberately.
Want us to check if 44AD saves you tax and file your ITR-4?
File with a CA →Which Business Expenses Are Deductible?
Under Section 37, any expenditure incurred wholly and exclusively for the business is deductible from profit. Personal expenses are not — and mixed expenses are apportioned to the business share.
Deductible
- Staff salaries, wages & PF
- Rent for office, shop or factory
- Electricity, internet & phone (business use)
- Advertising & marketing
- Professional fees (CA, lawyer, consultant)
- Depreciation on assets (Section 32, WDV)
- Interest on business loans
- Raw material & inventory purchases
Not deductible
- Personal / household expenses
- Income tax itself
- Cash payment above Rs10,000 to one person/day (Section 40A(3))
- Expenses where TDS not deducted (30% disallowed)
- Capital expenditure (only depreciation allowed)
- Penalties & fines for law breaches
Deduct TDS on rent, contractor and professional payments before you pay them. If you miss TDS, 30% of that expense is disallowed and added back to your profit — a costlier hit than the tax you saved by paying in cash.
When Is a Tax Audit Mandatory?
A tax audit under Section 44AB is required once turnover or receipts cross the prescribed limits, or when you declare less profit than the presumptive rate.
| Situation | Audit? | Threshold |
|---|---|---|
| Business — normal | Yes | Turnover above Rs1 crore |
| Business — cash receipts & payments ≤ 5% | Yes | Turnover above Rs10 crore |
| Profession | Yes | Gross receipts above Rs50 lakh |
| Opted out of 44AD / declared < deemed profit | Yes | If total income exceeds basic exemption |
| Presumptive 44AD / 44ADA (within limits) | No | No books, no audit — file ITR-4 |
Tax-audit report (Form 3CA/3CB + 3CD) is filed by a Chartered Accountant. Penalty for default: 0.5% of turnover, capped at Rs1.5 lakh.
Old vs New Regime for a Proprietor
A proprietor is taxed at individual slab rates, so the regime choice matters. The new regime is the default for AY 2026-27 and is nil up to Rs12 lakh taxable income (Section 87A rebate), but it removes most deductions.
New regime (default)
- Nil tax up to Rs12L taxable (87A rebate)
- Rs75,000 standard deduction (if salary)
- Lower slab rates, simpler
- Most Chapter VI-A deductions gone (no 80C, HRA)
- Best when few deductions
Old regime (optional)
- 87A rebate up to Rs5L taxable
- 80C, 80D, HRA, home-loan interest allowed
- Rs50,000 standard deduction
- Higher slab rates above Rs10L
- Best when deductions are large
A taxpayer with business or professional income who moves from the new regime to the old regime can switch back only once — after that the choice is generally locked. Salaried individuals can switch every year; businessmen cannot. Decide with a CA before you file Form 10-IEA.
Compare both regimes on your actual numbers.
Old vs New Calculator →Frequently Asked Questions
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