Every business in India deals with income tax in two ways. It pays tax on its own profit, and it often deducts or collects tax on other people’s income on the government’s behalf. The first comes down to your entity type and how you compute profit. The second (TDS and TCS) comes down to whom you pay and for what. This guide takes each in turn, then covers returns, audit and records, the parts that tie them together.
All of this is happening during a change of law. The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026. The department’s FAQ on the new Act sets out the split. Income earned up to 31 March 2026 is assessed under the old Act, with old forms and old section numbers. Income earned from 1 April 2026 falls under the new Act, which replaces “previous year” and “assessment year” with a single “tax year”. In late 2026 most businesses are doing both at once: filing 2025-26 returns under the old law, and paying advance tax and filing TDS statements for 2026-27 under the new one.
If you want the return itself handled, Complianto’s income tax return service prepares it from your accounts and files it.
1. How each type of business is taxed
Sole proprietorship
The proprietor and the business are one taxpayer. Business profit is added to the owner’s other income (salary, rent, interest) and taxed at the individual slab rates for the year. There is no separate business return. The owner files ITR-3, or ITR-4 where a presumptive scheme is used and the form’s conditions are met, as the department’s guidance for individuals with business income explains.
Partnership firm and LLP
A firm or LLP is taxed as a separate entity at a flat rate. For 2025-26 (AY 2026-27), the firm and LLP page gives the rate as 30%. A surcharge applies where income exceeds ₹1 crore, plus health and education cess. Alternative minimum tax applies where normal tax falls below the minimum. Interest and remuneration paid to partners are deductible to the firm within limits and taxable in the partners’ hands. A partner’s share of the firm’s remaining profit is not taxed again.
Company
A company is taxed separately at corporate rates. For AY 2026-27, the department’s domestic company page lists a concessional 22% for companies opting for the section 115BAA regime and 15% on business income of eligible new manufacturing companies under section 115BAB. Both are exempt from minimum alternate tax. Surcharge and 4% cess are added on top. Other domestic companies pay the rate set for the year, and minimum alternate tax can apply where book profit is high relative to taxable income. Dividends paid to shareholders are taxed in the shareholders’ hands.
Presumptive taxation
Small proprietors and firms (not LLPs or companies) can declare profit as a fixed percentage of turnover instead of keeping full accounts. For 2025-26 the ITR-4 FAQ describes three schemes:
- Profit at 8% of turnover for businesses (6% of the digitally received part), up to ₹2 crore, or ₹3 crore if cash receipts are within 5%.
- Profit at 50% of gross receipts for specified professionals, up to ₹50 lakh, or ₹75 lakh with the same cash condition.
- A fixed amount per vehicle for goods carriage operators.
From tax year 2026-27 the three schemes are merged into section 58 of the 2025 Act. Presumptive income saves bookkeeping effort, but it is not always the lower tax. It also carries a trap: declaring less than the deemed profit can bring in books and audit.
Rates at a glance (AY 2026-27)
| Entity | How profit is taxed | Return |
|---|---|---|
| Proprietor / HUF | Individual slab rates on total income | ITR-3 or ITR-4 |
| Partnership firm | 30% plus surcharge (above ₹1 crore) and cess | ITR-5 or ITR-4 |
| LLP | 30% plus surcharge (above ₹1 crore) and cess | ITR-5 |
| Company | 22% (115BAA option), 15% (115BAB) or the rate set for the year, plus surcharge and cess | ITR-6 |
2. Advance tax: paying during the year
Income tax is not left to the end of the year. A business whose tax for the year will cross the advance tax threshold pays it in instalments as the year goes on. Under the 1961 Act, the threshold was ₹10,000 of tax after TDS. Instalments were due on 15 June, 15 September, 15 December and 15 March, reaching 15%, 45%, 75% and 100% of the estimated tax. Presumptive-scheme taxpayers paid the whole amount in a single instalment by 15 March.
The new Act took over from tax year 2026-27. The department’s FAQ confirms that advance tax for that year, starting with the June 2026 instalment, follows the 2025 Act. Shortfalls carry interest, so estimate profit honestly at each instalment date rather than catching up in March. A business that pays salaries or has its receipts subject to TDS can reduce each instalment by the TDS it expects to be credited.
3. TDS and TCS: tax you handle for others
TDS means the payer deducts tax from a payment and deposits it against the payee’s PAN. TCS means the seller collects tax on top of certain sales. Either way, the business acts as the government’s collection point and is liable if it fails.
What usually attracts TDS in a business
- Salaries above the taxable limit. This is section 392 of the 2025 Act, which replaced old section 192.
- Payments to contractors and sub-contractors.
- Professional and technical fees.
- Rent for land, buildings, plant or machinery.
- Commission and brokerage.
- Interest other than on securities.
- Payments of any kind to non-residents.
The 2025 Act groups most non-salary deductions into a single section, 393, laid out as a table of payment types, rates and thresholds instead of the old run of 194-series sections. The rate and threshold depend on the type of payment, so build them into your vendor master instead of deciding invoice by invoice.
The TDS cycle
- Get a TAN before the first deduction. Existing TANs continue under the new Act.
- Deduct at the time of credit or payment, whichever is earlier, at the correct rate. Use the higher no-PAN rate where the payee has not given a valid PAN.
- Deposit the tax by the monthly due date using the challan.
- File the quarterly statement: Form 138 for salary, Form 140 for other resident payments, Form 144 for non-residents and Form 143 for TCS. These replace 24Q, 26Q, 27Q and 27EQ, according to the official form mapping guide.
- Issue certificates to payees from the statements processed on TRACES.
Quarterly TDS statements are due on 31 July, 31 October, 31 January and 31 May, as the Form 140 manual lists. A late statement attracts a fee for each day of delay, capped at the tax amount. Statements with wrong PANs or untagged challans deny the payee their credit. Those errors are fixed by filing a correction statement.
TDS you suffer
Customers deduct TDS from what they pay you too. That tax is credited against your own liability, but only if it appears against your PAN in your annual tax statement. Reconcile it every quarter. A customer who deducted but did not file leaves a gap you cannot claim until they correct it.
4. Returns and due dates
Every company and firm files a return every year, profit or loss. Proprietors file when their income crosses the exemption limit or when they want to carry losses forward. For returns of 2025-26 income now being filed:
| Case | Due date |
|---|---|
| Business or profession, accounts not audited | 31 August 2026 (passed) |
| Accounts audited (companies, audited firms and proprietors) | 31 October 2026, extended to 21 November 2026 by CBDT Circular 7/2026 |
| Tax audit report | 30 September 2026, extended to 21 October 2026 |
Missing the due date has consequences beyond a late fee. Under the old Act, a business loss could be carried forward only if the return was filed on time. Returns for tax year 2026-27, the first under the new Act, will be filed in 2027 on forms to be notified under the Income-tax Rules, 2026.
5. Tax audit
Separately from any company law audit, the income tax audit applies in three cases. It applies when business turnover exceeds ₹1 crore, or ₹10 crore if cash receipts and payments are each within 5%. It applies when professional receipts exceed ₹50 lakh. And it applies to presumptive cases that declare lower profit or exit the scheme early. These thresholds are in section 63 of the 2025 Act, which corresponds to old section 44AB, as the forms FAQ states. For 2025-26 the report is Form 3CA or 3CB with 3CD. From tax year 2026-27 it is the new consolidated Form 26, due by 30 September 2027. Circular 7/2026 extended this year’s audit report date to 21 October 2026.
6. Records: what to keep and why
Income tax law requires books of account from businesses and professionals above certain income or turnover levels. It requires a prescribed set of books from specified professionals. The 1961 Act set this out in section 44AA; check the current rule under the 2025 Act with your adviser. Companies must also keep books under the Companies Act, on accrual basis and double entry, for eight years. In practice, every business should keep:
- a cash book and bank book reconciled to statements each month;
- a sales and purchase register that matches GST returns;
- a fixed asset register, for depreciation;
- a TDS register showing each deduction, challan and quarterly statement;
- a payroll register, if you have employees;
- invoices, bills and vouchers for every entry.
Good records do more than satisfy the law. They are what lets you estimate advance tax properly, claim every TDS credit and answer a notice without panic. Complianto’s bookkeeping and accounting service maintains these records monthly, if you would rather not run them in-house.
7. A working calendar
| When | What |
|---|---|
| Every month | Deposit TDS/TCS deducted in the previous month; reconcile bank and GST records |
| 15 June, 15 September, 15 December, 15 March | Advance tax instalments as set under the 1961 Act; check the current schedule with your adviser |
| 31 July, 31 October, 31 January, 31 May | Quarterly TDS statements |
| 30 September (21 October in 2026) | Tax audit report, if applicable |
| 31 August / 31 October (21 November in 2026) | Return of income: non-audit / audit cases |
Dates move when CBDT extends them, as it did in 2026. Check the e-filing portal before relying on a date.
Frequently asked questions
We converted from a proprietorship to a private limited company mid-year. How many returns?
Two taxpayers, two returns. The proprietor reports business income up to the conversion date in their own return. The company files ITR-6 from incorporation onwards.
Does a company pay advance tax in its first year?
Yes, if its estimated tax for the year crosses the threshold. The first year is not exempt.
Is TDS a cost to the business?
Not if it is deducted and deposited correctly. It comes out of the payee’s money. It becomes a cost only when you fail to deduct. Then the tax, interest and, in some cases, disallowance of the expense fall on you.
Complianto (complianto.in), operated by Mentorcorp Private Limited, is a private consultancy and is not affiliated with any government body. We do not issue official documents. We charge a professional fee for application assistance and advisory services. Applicants can apply directly to the government without our fees via the official portals: MCA (mca.gov.in), Income Tax (incometax.gov.in), GST (gst.gov.in), MSME (udyamregistration.gov.in), FSSAI (foscos.fssai.gov.in), Startup India (startupindia.gov.in), and IP India (ipindia.gov.in).
This article is general information, not legal or tax advice.
