Business Entity Taxation in India
The same ₹50 lakh of business profit can attract ~₹8L, ~₹11L, ~₹12.5L or 24L+ of tax depending on the entity it is earned through - proprietorship, partnership, Private Limited or HUF. This note walks through how each entity is taxed and which one minimises tax. Source: Labour Law Advisor (Rishabh Jain) video - figures below are per the video, under the new tax regime.
Applicable: FY 2025-26 (AY 2026-27) onwards · Income Tax Act 2025 (Section 58 replaces 44AD/44ADA)
Key Points
- Business = anything related to commerce, trading or manufacturing. Profession = vocation - earning from skill, education or craft. Some professions are specified professions (doctors, lawyers, interior designers, IT consultants, etc.) - this matters for presumptive taxation.
- Business income is taxed on profit, not revenue:
Revenue (receipts) − eligible expenses − depreciation = Profit Before Tax (PBT); PBT − tax = PAT. - Eligible expenses are those related to the business (stock purchased, shop rent, electricity/water, staff, warehousing). A Vegas casino trip is not.
- Depreciation - capital assets (mini truck, furniture, AC) are expensed over their useful life, e.g. a ₹15L truck over 5 years → 20% per year.
- Two ways to compute profit: actual books or presumptive (declare a fixed % of receipts as profit, no books/vouchers needed).
- A proprietorship has no separate identity - it uses the proprietor's PAN, and all businesses (restaurant, shop, YouTube, clinic) are clubbed into one individual's income. Partnership, LLP, OPC, Pvt Ltd and HUF each have a separate PAN and are separate taxable entities.
- Presumptive taxation is available to Individual, HUF and Partnership firm only - not to LLP or Pvt Ltd/OPC (they must maintain books and get audited).
- Old sections 44AD / 44ADA are now Section 58 under the Income Tax Act, 2025.
Entity Comparison
| Entity | Separate PAN | Tax rate on profit | Presumptive (Sec 58 / 44AD / 44ADA) | Profit withdrawal | Best for |
|---|---|---|---|---|---|
| Proprietorship | No (owner's PAN) | Individual slab rates + surcharge (>₹50L) + 4% cess; 87A rebate up to ₹60,000 (income ≤ ₹12L) | Yes | No extra tax - it is already the owner's income | Small businesses / professionals |
| Partnership Firm | Yes | Flat 30% + 12% surcharge if profit >₹1 Cr + 4% cess (max ~34.94%) | Yes | Partner salary/remuneration taxed at partner's slab; share of profit after tax is exempt | Profitable businesses that distribute profits |
| LLP | Yes | Same as partnership - 30% flat | No - books + audit required | Same as partnership | Partnership with limited liability |
| Private Limited / OPC | Yes | 22% (Sec 115BAA) + surcharge + cess = 25.168% effective | No - books + audit required | Dividend taxed at shareholder's slab (surcharge capped at 15%); salary taxed at slab | Funded / loss-making startups, or long-term reinvest-and-exit |
| HUF | Yes | Individual slab rates | Yes | - | Ancestral property rent, family business |
Presumptive Taxation (Section 58, earlier 44AD / 44ADA)
| Business (44AD) | Specified Profession (44ADA) | |
|---|---|---|
| Turnover / receipts limit | ₹2 Cr (₹3 Cr if cash receipts ≤ 5%) | ₹50L (₹75L if cash receipts ≤ 5%) |
| Minimum profit to declare | 6% of digital receipts + 8% of cash receipts | 50% of gross receipts |
| Books of accounts | Not required | Not required |
These are minimums - you can declare more.
Examples:
- ₹2 Cr revenue (₹1 Cr online + ₹1 Cr cash) → min profit ₹6L + ₹8L = ₹14L
- ₹3 Cr revenue (₹2.9 Cr online + ₹10L cash, cash
<5%) → min profit ₹18.2L - A doctor / designer / IT consultant with ₹50L receipts cannot declare 6% - must declare at least 50%.
Proprietorship - Tax on Profit
Taxed exactly like an individual (new or old regime slabs). Up to ₹12L income gets 87A rebate up to ₹60,000; surcharge applies above ₹50L (10% for ₹50L-₹1 Cr); 4% cess on the total.
| Profit | Tax |
|---|---|
| ₹10L | Slab tax ₹40,000 - fully rebated under 87A → ₹0 |
| ₹50L | No rebate, no surcharge → ~₹11.23L |
| ₹1 Cr | Slab tax + 10% surcharge + 4% cess → ~₹29.5L |
Partnership Firm
Flat 30% on taxable profit. Partners can be paid salary/remuneration/commission (deductible for the firm), but within limits on book profit:
| Book profit slab | Max partner remuneration |
|---|---|
| First ₹6L (or loss) | Higher of ₹3L or 90% of book profit |
| Balance above ₹6L | 60% |
- Book profit ₹3L → 90% = ₹2.7L, but ₹3L is higher → all ₹3L can be paid → taxable profit ₹0
- Book profit ₹10L → ₹5.4L (90% of 6L) + ₹2.4L (60% of 4L) = ₹7.8L remuneration; ₹2.2L taxed at 30%
- Most beautiful benefit: remuneration is taxed in partners' hands at slab rates, but the firm's profit after tax distributed to partners is exempt in their hands.
₹1 Cr book profit, 2 partners at 50:50:
| Item | Amount |
|---|---|
| Max remuneration | ₹61.8L (₹30.9L each) |
| Firm taxable profit | ₹38.2L → tax ~₹12L |
| Firm PAT distributed | ~₹26L (₹13L each) - exempt |
| Tax on each partner's ₹30.9L salary | ~₹5.27L |
| Total tax on ₹1 Cr | ~₹22.5L |
If firm profit exceeds ₹1 Cr: 30% + 12% surcharge (= 33.6%) + 4% cess → ~34.94% max.
LLP
Tax maths and 30% rate are exactly the same as a partnership firm. The only catch: no presumptive taxation - LLP and Pvt Ltd have heavy compliance anyway, so the government requires actual books, actual profit and audit (if in range).
Private Limited / OPC
Base rate 22% + 10% surcharge + 4% cess = 25.168% effective - ₹10L profit → ~₹2.5L tax. Looks cheaper than 30%, but the money is still inside the company.
Extreme example - OPC with ₹100 Cr profit:
| Route | Company tax | Tax in director's hands | Total tax | Director keeps |
|---|---|---|---|---|
| Keep in company, pay out as dividend | ~₹25.17 Cr | ~₹26.8 Cr (30% slab + surcharge capped at 15% for dividends + cess) | ~₹52 Cr | ~₹48 Cr |
| Take all as salary (needs board/MCA approval) | ₹0 | ~₹39 Cr (₹75K std deduction, 30% slab, 25% surcharge, 4% cess) | ~₹39 Cr | ~₹61 Cr |
| Same profit in a partnership firm | 30% + 12% + 4% ≈ 34.94% | PAT exempt | < ₹39 Cr | more |
So why do people choose Pvt Ltd?
- Loss-making startups that need funding / equity investment - no choice.
- Long-term vision: founder doesn't withdraw (has other income), reinvests the profit (only ~25% tax each year leaves more to reinvest), and eventually exits by selling shares / listing - paying only capital gains tax (video says ~20% on unlisted shares; post Budget 2024 LTCG on unlisted shares is 12.5%; lower still for listed).
- But if you run a profitable business and withdraw profits, partnership or even proprietorship is far more tax-efficient than Pvt Ltd.
HUF
- Limited business types: managing ancestral property (rental income) or a family business / shop / cottage industry.
- Taxed like an individual (same slabs), but no 87A rebate - ₹10L income → ₹40,000 tax for HUF vs ₹0 for an individual.
- More: HUF / Private Trust
Disclaimer
For educational purposes only. Figures are approximate, reconstructed from the video. Consult a Chartered Accountant for specific advice.