Why salary paid to proprietor is not allowed in Income Tax?
Many time this question arises that why salary paid to proprietor is not allowed as deduction to business for Income Tax Calculation?
The reason of this is:
- One can not pay salary to himself
- Even if salary is paid the income tax will be same
- Though certain part of salary are exempted say HRA etc. but still the rule 1. applies here
- proprietorship does not have a seperate status, proprietor and business are considered one and same.
- Employee and employer both are required, the proprietor cannot give salary to himself
- In proprietorship business, although the business entity concept applies yet the separate legal entity is not applied.
And also even if any amount paid to owner for managing the business can not be said salary since one can not pay salary to himself. The amount paid for managing the business can be classified as professional income.
But again if we consider it as professional income, the tax payable will be same.