FOR a Proprietary firm, income tax is assessed on the combined income of the proprietor, which includes both business income and any other income earned by the proprietor during the financial year. This combined income is subject to taxation under the Income Tax Act, 1961.
Business income is one component of the overall income and is usually derived from the operations of the sole proprietor’s business. Other income may include income from investments, rental income, interest income, capital gains, and any other sources of income not directly related to the proprietor’s business operations.
The Income Tax Act provides for various deductions, exemptions, and tax rates depending on the nature of income and the individual’s or proprietor’s specific circumstances. It’s important for sole proprietors to maintain proper records and accounts to accurately calculate and report their total income, including both business and other income, while filing their income tax returns.
In a proprietary firm (also known as a sole proprietorship) in India, the provision for income tax is computed based on the estimated income tax liability for the current financial year. Here are the general steps involved in computing the provision for income tax in a proprietary firm:

1. Determine Taxable Income: The first step is to calculate the firm’s taxable income. This involves computing the net profit or income generated by the business operations during the financial year. Taxable income may include income from various sources, such as business operations, investments, and other income.
2. Consider Applicable Tax Rates: The next step is to determine the applicable income tax rates based on the income slabs and categories relevant to the firm’s income. Different types of income (e.g., business income, capital gains, interest income) may be taxed at different rates. The current income tax rates and rules should be considered.
3. Apply Deductions and Exemptions: Reduce the taxable income by applying any eligible deductions, exemptions, and tax incentives available under the Income Tax Act, 1961. Common deductions may include deductions for business expenses, depreciation, and exemptions for certain types of income.
4. Calculate Tax Liability: Once the taxable income is determined, calculate the income tax liability by applying the applicable tax rates to the taxable income. This will give you the estimated income tax amount that the firm owes for the financial year.
5. Consider Advance Tax Payments: If the firm has made advance tax payments during the financial year, take these payments into account when computing the provision for income tax. Advance tax payments are typically made in installments throughout the year.
6. Account for MAT (Minimum Alternate Tax): If applicable, consider whether the firm is liable to pay Minimum Alternate Tax (MAT). MAT is applicable to certain businesses, and if the MAT liability is higher than the regular income tax liability, it needs to be accounted for in the provision.
7. Create the Provision: Based on the estimated income tax liability, create a provision for income tax on the firm’s balance sheet. This provision represents the amount set aside to meet the firm’s tax obligations.
8. Financial Statement Presentation: The provision for income tax is included in the firm’s financial statements, typically as a current liability on the balance sheet and as an expense in the income statement.
9. Review and Adjust: Periodically review the provision for income tax and adjust it as necessary to reflect changes in the firm’s financial position, tax laws, or other relevant factors.