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Preface: This post was originally published in 2019 and has been updated on March 18, 2025, to provide you with the most current and accurate information.
If there’s one thing that bothers almost every entrepreneur out there, it’s the taxes. Many entrepreneurs choose different business structures based on their operational needs, limited liability, and access to funding. However, tax liabilities are often overlooked when making this key decision.
Once the company is finally registered, the reality of taxes sets in, and you may regret not choosing a different structure. That’s why, in this article, we’ll guide our readers through the tax models associated with various business structures and help them choose the right one with tax implications in mind and avoid unexpected financial burdens down the line.
Take a look at key business structures in India and tax implications associated with them. Doing so will allow you to decide the best business structure for RoC registration:
Both types of partnerships, whether an LLP or a simple partnership firm, are taxable as separate entities. They are taxed based on certain restrictions, including salaries, bonuses, commissions, and remuneration paid to the partners, which can be deducted.
Upon paying interest to the partner, the firm can claim a deduction of that interest. The partner can receive a maximum interest rate of 12%.
For the AY 2025-26, LLP and Partnership firms are taxed at a flat rate of 30% plus additional surcharge:
If the income is less than INR 1 Crore: No surcharge
If the income is more than INR 1 Crore: 12% surcharge
Health and education cess are calculated at 4% of the income tax and surcharge.
Minimum tax to be paid.
Please note that a partnership firm or LLP is liable to pay Alternative Minimum Tax at 18.5% of book Profit (plus Surcharge and Health and Education cess as applicable) if the normal tax liability is less than 18.5% of book profit.
A company is a separate legal entity from its director and members from the start. It’s the most popular business entity in India and is often the first choice for those who want greater access to funding options and limited liability protection.
The tax model divides pvt ltd companies into two types: Foreign and Domestic. The tax rates differ for them.
For the domestic companies, the tax rates are as follows
If the annual turnover is not more than INR 400 Crore: 25%.
If the annual turnover is over INR 400 Crore: 30%
For foreign companies, the tax rate is as follows:
Corporate Income Tax Rate: As of April 1, 2024, the corporate income tax rate for foreign companies has been reduced from 40% to 35%.
A surcharge is applicable at the following rates:
Domestic companies
Income not more than INR 1 Crore: No surcharge
Income more than INR 1 Crore, but less than INR 10 Crore: 7%
Income more than INR 1 Crore: 12%
Foreign companies
Income not more than INR 1 Crore: No surcharge
Income more than INR 1 Crore, but less than INR 10 Crore: 2%
Income more than INR 10 Crore: 5%
Health and education cess are calculated at 4% of the income tax and surcharge.
Domestic companies that opt for taxation under Section 115BAB are subject to a tax rate of 15%, i.e., the lowest available rate.
A One Person Company encapsulates nearly all the perks of the company with only a single owner. It’s meant for solo entrepreneurs who want to create a good business infrastructure on their own. It’s a separate legal entity from its members and therefore is taxed as such.
Like a private limited company, a one person company (OPC) is incorporated under Companies Act. The Income Tax Department recognizes OPC as equivalent to a private limited company. Therefore, the income tax rates for an OPC are the same as a private limited company.
A single individual owns a sole proprietorship, which the law does not recognize as a separate legal entity. Sole proprietorship business is an informal structure and therefore, the tax model is the same as for an individual.
The government taxes a sole proprietorship firm the same as an individual. The tax slabs for AY 2025-2026 for sole proprietors under the old regime are as follows:
Up to Rs. 2,50,000: No tax
Rs. 2,50,001 to Rs. 5,00,000: 5%
Rs. 5,00,001 to Rs. 10,00,000: 20%
Above Rs. 10,00,000: 30%
The surcharge is as follows:
Income less than INR 50 lakhs: No surcharge
Income between INR 50 lakhs and INR 1 Crore: 10%
Income more than INR 1 Crore: 15%
Health and education cess are calculated at 4% of the income tax and surcharge.
Failure to comply with tax regulations can result in penalties. The Income Tax Act prescribes various penalties for different kinds of non-compliance. For example, if a company fails to file income tax returns by the due date, a penalty of up to Rs. 5,000 will be imposed. In the event of underreporting income, a penalty of 50% of the tax payable on underreported income may be imposed. If the underreporting results from misreporting income, the penalty can increase to 200%.
Businesses may attract Rs. 25,000 fine for failing to maintain or keep books of accounts as required by the Act. A company may be fined Rs. 1,50,000 or 0.5% of its entire revenue, whichever is less, if it does not have its accounts audited or fails to provide the necessary audit report.
To prevent these penalties and guarantee smooth compliance, businesses should stay updated regarding the latest tax regulations, maintain accurate records, and file returns accurately and on time.
Depending on the business structure you choose to register your company under, your tax liability will differ. Before deciding on the right structure, make sure you fully understand the tax implications. For assistance with company registration or ensuring post-registration business and tax compliance, connect with Registrationwala’s consultants.
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