Business Tax Returns: Applicability & Types

What is a business tax return?

A business tax return is just an income tax return with a statement of income and expenditure details. Also, you need to declare in this return any tax to be paid on the profits made. It also contains details of the assets and liabilities held by the business. Items like fixed assets, debtors and creditors of the business, loans taken & given are declared here.

Income Tax Audit

Every taxpayer whose turnover is above Rs. 1 Crore in case of businesses and Rs. 50 Lakh in the case of professionals is required to get a tax audit done. The taxpayer has to appoint a Chartered Accountant to audit their accounts.

Tax audits are required if there has been a loss of your business and you want to carry forward the loss. A tax audit is necessary even when the profits you declare is less than 8% (6% on Digital transactions) of the turnover of business and 50% of receipts in the case of professionals.

Presumptive Taxation

Individuals, HUF, and Firms running businesses or providing services can offer their income to tax on a presumptive basis. Turnover up to which presumptive taxation is allowed for businesses is Rs. 2 Crore and for professionals is Rs. 50 Lakh. A minimum of 8% of the turnover has to be offered as income under a presumptive basis for businesses. For professionals, 50% of professional receipts have to be declared on the business tax return.

Who has to file a business tax return?

The filing of Income Tax returns depends on your business type. For example:

Proprietorship: Your business income, personal income like salary, house property income, interest income, etc., all have to be declared on the same return you will be filing.

If the total income before adjusting any deductions is higher than the taxable limit, then you must file your ITR irrespective of your business profit or loss.

The basic taxable limit is Rs. 5 lakh(with exemption u/s 87A). So, if your net income before deductions is above Rs 5 lakh, you must file your Income-tax return as a Business.

Pvt Ltd Companies, firms and Limited Liability Partnership (LLP), you must file a business tax return irrespective of profit or loss. Even if you are not operating the business, a return has to be filed.

Companies, firms, and LLPs are taxed at a rate of 30%.

What are the due dates for filing of returns?

For the Individuals not liable to a tax audit, the last date for the filing of the return is 31st August after the end of the financial year (You can file Late returns with a penalty up to 31 March). The due date is 30 September if you’re an Individuals (Tax auditable), Company, LLP or partnership firm. For the FY 2017-18, this due date has been extended from 30 September 2018 to 31 October 2018.

The penalty for non-filing of returns: You can not carry forward losses if the return is filed after the due date of filing an income tax return. Also, a fine of Rs.5,000/- under section 271F can be levied on the assessee.

How do we save Corporate Tax in India?

Corporate taxes are levied on the profits earned by companies and firms operating within the country. The rate of taxation applicable to a company depends on the scale of the company’s profits/taxable income and factors such as capital depreciation, Cost of goods sold(COGS), and selling, general and administrative expenses. Careful management of some of these expenses can aid to save some corporate tax and minimize the loss of income through taxation.

Types of Corporation:

A corporation is referred to as a legal entity independent from its shareholders entitled to specific rights and duties of its own. Here in India, corporations are of two categories:

Domestic Corporations: A Company whose management and control is in India and is registered under the MCA, as per Indian Companies Acts of 1956 or 2013 is a domestic corporation. Now, if the Indian arm of a foreign company such as Hindustan Unilever Limited, is wholly controlled and managed within India, it may also be deemed a domestic corporation.

Foreign Corporations: A company based outside India or has a portion of its operations controlled and managed outside the nation’s borders like Infosys & TCS, is a foreign corporation.

Corporate Tax Structures:

Corporate tax is levied upon a company’s net profit gained through avenues such as capital gains, rent, dividends, interest, or from the business itself. Once the taxable income is determined after deductions, taxation occurs in the following manner: capital gains, rent, dividends, interest or from the business itself. Once the taxable income is determined after deductions, taxation occurs in the following manner :

 Domestic Corporation:

25% of gross turnover is below or equal to Rs 400 crore.

30% if the gross turnover exceeds Rs. 400 crore

Additionally, a surcharge of 7% is levied if the income is between Rs 1 and 10 crores, and this value rises to 10% if the income exceeds Rs. 10 crores.

Health & Education Cess is also charged @4% on the Income-tax and surcharge.

Foreign Corporations :

Royalties or fees for technical services from the government or any Indian concern are taxed at a rate of 10%

Additionally, any other type of income is taxed at 40%

The surcharges are 2% for corporations with incomes between Rs.1 crore – Rs.10 crore and 5% for those exceeding this range. 

Health & Education Cess is also charged @4% on the Income-tax and surcharge.

Alternately, companies can pay an Alternate Minimum Tax of 15% if the amounts calculated per the above rates are less than 15% of book profits. There is an additional health and education cess of 4% thereon along with surcharge as per applicable rate.

Corporate Tax Planning:

From the above, it is fairly straightforward that it is no simple task to navigate and save corporate tax in the current landscape effectively. This is where the concept of corporate tax planning comes in. The term should not be associated with tax evasion, which is an illegal practice. Instead, it involves carefully managing a company’s assets and operations to maximize gains and prevent the loss of large portions of the corporation’s income to taxation. Tax planning comes in. The term should not be associated with tax evasion, which is an illegal practice. Instead, it involves carefully managing a company’s assets and operations to maximize gains and prevent the loss of large portions of the corporation’s income to taxation.

Available Deductions:

Emphasize deductions, exemptions and rebates, and the appropriate management and reporting of the organization’s expenses, and it can Minimize payable taxes. These deductions may include :

Capital Gains can either be taxed at a flat rate of 15% or 20% or tax-exempt under Sections 54D, 54G, 54GA 54EC etc. 

Donations to charitable organizations may be 50 -100% tax-exempt under Section 80G, subject to terms and conditions.

Dividends may be eligible for rebates in some instances.

15% Deductions for depreciation under Section 32 for old assets like machinery. 20% additional deduction on the purchase of new assets for manufacturer or production process of any establishment, transmission or distribution of power.

Deduction in respect of employment of new employee u/s 80JJAA

Measures for Appropriate Planning:

In addition to the above deductions, there are specific other measures to save corporate tax. This saving relies on how the company’s management devises its tax-saving strategy. 

Effective Expense Management: Many businesses within the country operate with unorganized labour, hindering proper bookkeeping. Hence it is necessary to maintain detailed reports of overhead costs and wages to claim deductions on various expenses like labour and production.

Equity Valuation: While stock prices are valued at cost, there are cases involving shorter shelf lives where it can also be valued at its Net Realizable Value or NRV. This valuation prevents it from being overvalued and limits the taxable income from capital gains. It’s only applicable in some instances where this value remains relatively steady, as large fluctuations may be grounds for fraud.

Making Use Of Deductions: It is the most effective method of regulating taxable income. Their proper management could prove vital for companies looking to save corporate tax.

Conclusion: It is essential to balance the various available methods to save corporate tax, such as deductions and rebates, and the effective management of expenses. It fully understands the situations that these measures are best suited to also goes a long way in maximizing the gains of your corporation.

 Securities Traders

Tax Filing for Securities Traders

The trader package is designed to ensure maximum Tax Savings for people having a trading income. Along with this, it also includes hassle-free filing by an expert CA who knows the nuances of Intraday and F&O trading. Mis-filing or non-filing can lead to the unnecessary hassle of having to answer IT notices.

You can classify yourself as an Investor if you hold equity investments for more than 1 year and show income as long term capital gain (LTCG). You can also consider yourself an investor and gains as short term capital gains (STCG) if your holding period is more than 1 day and less than 1 year. We also discussed how it is best to show your capital gains as a business income if the frequency of trades is higher or if investing/trading is your primary source of income.

In this chapter we will discuss all aspects of taxation when trading is declared as a business income, which can be categorized either as:

• Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.
• Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contracts. Even though currently almost all equity, currency, & commodity contracts in India are cash-settled, but by definition, they give rise to giving/taking delivery (there are a few commodity futures contracts like gold and almost all agri-commodity contracts with the delivery option to it).Income from shorter-term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if the frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

About This Plan

Get your account summary prepared and tax returns filed by Witcorp Experts

Timeline

It usually takes 1 to 2 working days.

Services Covered

• Income tax return for individual trading in derivatives
• Income tax return for individual in intraday trading
• Consolidation of Trading statements across multiple platforms
• Prepare Account Summary – P&L and Balance Sheet (up to 100 entries per year)
• Tax Return preparation & Filing by Experts
• Business Hours CA Support – Email and Phone
• Excludes the Tax audit Fees

Who Should Buy

• Salaried Individual having income or loss from F&O Trading or intraday equity trading
• Self Employed traders who have income or loss from F&O Trading or intraday equity trading

How It’s Done

• Purchase of Plan
• Upload documents
• Review computation sheet
• Return filed & acknowledgement generated

Documents Required

• Form 16 from your company
• Form 26AS Tax Credit Statement
• Trading account statement from your broker
• Bank statement if interest received is above Rs. 10,000/-

Unlike capital gains, there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in. You can refer to chapter 1 for tax slabs as applicable for FY 2020-21.

Let me explain this with an example:

• My salary – Rs.1,000,000/-
• Short term capital gains from delivery based equity – Rs.100,000/-
• Profits from F&O trading – Rs.100,000/-
• Intraday equity trading – Rs.100,000/-

Gives these incomes for the year, what is my tax liability?

In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains are not added is that capital gains have fixed taxation rates unlike a salary, or business income.

Total income (salary + business) = Rs.1,000,000 (salary income) + Rs.100,000 (Profits from F&O trading) + Rs.100,000 (Intraday equity trading)  = Rs 1,200,000/-

I now have to pay tax on Rs 12,00,000/- based on the tax slab –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,
• 1,000,000 – 1,200,000: 30% – Rs.60,000/-
• Hence total tax : 25,000 + Rs.100,000 + Rs.60,000 = Rs.172,500/-

Now, I also have an additional income of Rs.100,000/- classified under short term capital gains from delivery based equity. The tax rate on this is flat 15%.

STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-

Total tax = Rs.185,000 + Rs.15,000 = Rs.200,000/-

I hope this example gives you a basic orientation of how to treat your income and evaluate your tax liability.

We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.

Carry forward business loss

If you file your income tax returns on time July 31st for non-audit case and Sept 30th for audit case, you can carry forward any business loss that is incurred.

Speculative losses can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.

Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

You carry forward non-speculative losses to the next 8 years; however, do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

For example, consider this – my hotel business income is Rs 1,500,000/-, my interest income for the year is Rs.200,000/-, and  I make a non-speculative loss of Rs 700,000. In such a case, my tax liability for the year would be –

My gain is Rs 1,500,000/ from business and Rs.200,000/- from interest, so total of Rs.1,700,000/-.

I have a non-speculative business loss of Rs.700,000/-, which I can use to offset my business gains, and therefore lower my tax liability. Hence

Tax liability = Rs.1,700,000 – 700,000 = Rs.1,000,000/-

So I pay tax on Rs.1,000,000/- as per the tax slab I belong to, which would be –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,

Hence, Rs.112,500/- goes out as tax.

Offsetting Speculative and non-speculative business income

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and a non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit and carry forward the speculative loss.

For example, consider this –

• Income from Salary = Rs.500,000/-
• Non Speculative profit = Rs.100,000/-
• Speculative loss = Rs.100,000/-

I calculate my tax liability as –

Total income = Income from Salary + Gains from Non Speculative Business income

= Rs.500,000 + Rs.100,000 = Rs.600,000/-

I’m required to pay the tax on Rs.600,000 as per the slab rates –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.600,000 : 20% – Rs.20,000/-,

Hence total tax = Rs.12,500 + Rs.20,000 = Rs.32,500/-

I can carry forward speculative loss of Rs.100,000/-, which I can set-off against any future (up to 4 years) speculative gains. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward. Speculative losses can’t be set-off against other business gains.

But if I had a speculative gain of Rs 100,000/- and non-speculative loss of Rs 100,000/- they can offset each other, and hence tax in the above example would be only on the salary of Rs 500,000/-.

What is Tax Loss Harvesting?

Towards the end of a financial year, you might have realized profits and unrealized losses. If you let it be, you will end up paying taxes on realized profits and carrying forward your unrealized losses to next year. This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital which goes away as taxes.

You can very easily postpone this tax outgo by booking the unrealized loss, and immediately getting back on the same trade. By booking the loss, the tax liability for the financial year would reduce.

BTST (ATST) – Is it speculative, non-speculative, or STCG?

BTST (Buy today Sell tomorrow) or ATST (Acquire today sell tomorrow) is quite popular among equity traders. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock.

Since you are not taking delivery, should it be considered as speculative similar to intraday equity trading?

There are both schools of thought, one which considers it to be speculative because no delivery was taken. However, I come from the second school, which is to consider it as non-speculative/STCG as the exchange itself charges the security transaction tax (STT) for BTST trades similar to regular delivery based trades. A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income.

Advance Tax – Business Income

Paying advance tax is important when you have a business income. Like we discussed in the previous chapter, the advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. I guess the question that will arise is % of what?

The % of the annual tax that you are likely to pay, yes! When you have a business income you have to pay most of your taxes before the year ends on March 31st. The issue with trading as a business is that you might have a great year until September, but you can’t extrapolate this to say that you will continue to earn at the same rate until the end of the financial year. It could be more or less.

But everything said and done, you are required to pay that advance tax, otherwise, the penalty is 12% annualized for the time period it was not paid for. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15th pay for what was earned until then, and by March 15th close to the year-end, you can make all balance payments as you would have a fair idea on how you will close the year. You can claim a tax refund if you end up paying more tax than what was required to pay for the financial year. Tax refunds are processed in a quick time by the IT department.

You can make your advance tax payments online by clicking on Challan No./ITNS 280 

Also, here is an interesting link that helps you calculate your advance tax –  https://eportal.incometax.gov.in/iec/foservices/#/TaxCalc/calculator

Turnover and Tax Audit

When is an audit required?

An audit is required if you have a business income and if your business turnover is more than Rs 5 crore for a financial year (from FY 20-21). In the case of digital transactions (equity transactions are 100% digital), this turnover limit is Rs 5 crores. For equity traders, an audit is also required as per section 44AD in cases where turnover is less than Rs.5 Crores but profits are lesser than 6% of the turnover and total income is above the minimum exemption limit.

However, let us understand what audit really means.

The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc. Likewise, the Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law if he meets the above-mentioned turnover criteria.

An audit can also be defined as having an accountant verify if you have prepared all your accounts right. In this case, it is getting an accountant to check if you have created a correct balance sheet and P&L statement for the year. Ideally, this audit should be done by the IT department itself, but considering the number of balance sheets out there, it is surely impossible for the IT department to audit each one of them. Hence we need a Chartered accountant (CA), who is a qualified professional and authorized by the Income-tax department to perform audits on the balance sheet and P&L statements. You the taxpayer can use any CA of your choice.

What role should a CA play?

Ideally, a CA is required to only audit and sign on the balance sheets and P&L statements. But a CA also typically ends up creating your balance sheets and P&L statements and will audit them only if required.  We will in the next chapter briefly explain how a CA typically creates these two statements.

The importance of the audit process by a CA cannot be understated, apart from all the reporting requirements an audit also helps traders/investors know their financial health, ensure it faithfully reflects the income, and claims for deduction are correctly made. It also helps lenders evaluate credibility, and act as a check for any fraudulent practices.

Which ITR form to use? – ITR3 (ITR 4 until 2016), we will discuss more on this in the last chapter. I have come across incidents where people have declared both speculative and non-speculative as capital gains to avoid having to declare business income, and not having to use ITR3. Taking a shortcut like this could mean a lot of trouble if called for an IT scrutiny.

Business expenses when trading – Advantage of showing trading as a business is that you can show all expenses incurred as a cost which can then be used to reduce your tax outgo and if a net loss for the year after all these costs, it can be carried forward as explained above.

Following are some of the expenses that can be shown as a cost when trading

• All charges when trading (STT, Brokerage, Exchange charges, and all other taxes). I hope you remember that STT can’t be shown as a cost when declaring income as capital gains, but it can be in case of business income.
• Internet/phone bills if used for trading (portion proportionate to your usage on the bill)
• Depreciation of computer/other electronics (used for trading)
• Rental expense (if the place used for trading if a room used – a portion of your rent)
• Salary paid to anyone helping you trade
• Advisory fees, cost of books, newspapers, subscriptions, and more…

Tax Audit in case of Income from trading in F&O

Since the Income from F&O Trading is considered as a normal business income, normal provisions of the Income Tax Act will apply in this case. The trader would be required to prepare normal books of accounts under Section 44A of the Income Tax Act.

Moreover, if the turnover is more than Rs. 5 Crore or if the Profit disclosed is less than 8%, the taxpayer would also be required to get the Tax Audit conducted under Section 44AB. This tax audit would be required to be conducted by a practicing Chartered Accountant for each year for which the turnover exceeds Rs. 5 Crores.

Computation of Turnover in case of F&O Transactions for Tax Audit purposes

The value of transactions in F&O is usually very high but the profit margin is fairly low.  Although, the tax audit is required only in cases where the where the annual turnover is more than Rs. 1 Crores, but in case of Traders who deal in the F&O Market, they are easily able to generate such turnover in a month. Although the turnover is very high but the profit margin is fairly low.

Moreover, the transactions in F&O Market are completed without the delivery of shares or securities. The transactions are also squared up by payment of differences. The contract notes are issued for the full value of the asset purchased or sold but the entries in the books of accounts are made only for the difference. The transactions may be squared up at any time on or before the expiry date.

Therefore in case of Derivatives Transactions in the F&O Market, the manner of computation of turnover is different from the manner of computation of turnover in case of other businesses. In case of F&O Transactions, the turnover would be determined as follows:-

• The total of favorable and unfavorable trades would be taken as the turnover
• Premium received on the sale of options is also to be included in the turnover
• In respect of any reverse trade entered, the difference thereon, should also form a part of the turnover.

This can be explained with the help of an example. Assuming an F&O Trader enters into the following 2 transactions:-

• Purchases 1 Lot of Futures of Reliance worth Rs. 5 Lakhs and sells it for Rs. 5.50 Lakhs thereby receiving a profit of Rs. 50,000.
• Purchases 1 Lot of Futures of Tata Motors worth Rs. 2 Lakhs and sells it for 1.90 Lakhs thereby incurring a loss of Rs. 10,000.

In case of the above 2 transactions:-

• Total profit = Rs. 50,000 – Rs. 10,000 = Rs. 40,000
• Turnover for the purpose of Tax audit = Rs. 50,000 + Rs. 10,000 = Rs. 60,000

Nature of Income in case of Delivery Based Transactions

If the transactions in share market are entered into for the purpose of Investment – the gains arising on such transactions would be treated as However, if the transactions are entered into as a Business transaction – the income arising on sale would be treated as Income from Business/Profession.

It would be determined on the facts of each case whether the delivery based transactions are to be treated as Capital Gains or are to be treated as

If these transactions are treated as Business Transactions, then the tax would be levied as mentioned above. If the transactions are considered as Investments, then the tax would be levied in the manner as described in this article – Treatment of Capital Gains on sale of Delivery based Shares.

Treatment of Loss arising in F&O Transactions

As the transactions entered into in the F&O Market are treated as Non Speculative Transactions, the loss arising out of F&O Transactions would be allowed to be set off against all other incomes except

If the Loss is not set off against the incomes of the same financial year, then such loss can be carried forward and set off against future incomes. However, for the loss to be carried forward and set off, the loss should be disclosed in the Income Tax Return and the ITR should be filed before the due date of filing of income tax return.

If the Loss is not disclosed in the income tax return or the income tax return is not filed before the due date – the loss would not be allowed to be carried forward. Loss claimed in ITR filed after the due date of filing of Return as Belated Return is not allowed to be carried forward.

Frequently Asked Questions:

1. Who are the CAs who’ll be filing my return?
   Witcorp taps into its CA network and puts you in touch with a qualified CA. These CAs bring a combined experience of 40 years in foreign taxation
2. How to calculate Trading Turnover?
   Turnover for Future and Options is the absolute value of each Profit and Loss trade during the year. For example, if you have a Profit of Rs.1000 and Loss of ₹500 from F&O, the turnover is ₹1,500.
3. Do I have to provide login credentials to upload the audit report?
   Yes, you will need to provide login credentials so that the CA can upload the audit report.
4. What are other requirements if I am under a tax audit?
   Apart from regular documents and the tax audit report you would require Class 2 Digital Signature for submitting your tax return.
5. What are the types of transactions under share trading and where are they reflected in the tax return?
   Short Term and Long Term Capital Gains form part of Income under the Head Capital Gains while trading in intra-day markets, F&O, Commodity, etc. fall under Income from Business and Profession
6. What happens to the loss incurred in Share Market?
   Losses from shares in speculation business can be carried forward for 4 years, while all the other losses can be carried forward for 8 years provided the tax return is filed within the due date of the original tax return

Presumptive Tax

Income Tax Filing for Professionals

If you are an eligible businesses and professionals opting for presumptive taxation scheme under section 44AD/44ADA or small taxpayers earning casual income like tuition income, interest income etc, get an expert file your taxes.

Presumptive Tax – Easiest way to File Returns & Save Taxes for Creative Professionals

Professions for the purpose of Indian tax laws

Engineering

Legal

Architectural profession

Accountant

YouTuber

TikToker

Vlogger

Blogger

Medical

Technical consultant

Interior decoration

Consultant

Artists

Freelancers

About This Plan

Are you eligible business under Presumptive tax Scheme? Disclose income under section 44AD & sec 44ADA and file tax return with Witcorp.

Timeline

It usually takes 3 to 5 working days.

Services Covered

• CA-Assisted Tax returns Filing
• Business hours CA-Support
• Documented follow up

Who Should Buy

• Businesses having annual turnover under Rs. 2cr and declaring income above 8% (no audit)
• Professionals & Freelancers having annual gross receipts under Rs. 50 lakh and declaring income at 50% or above (no audit)
• Any other person having casual income.

How It’s Done

• Purchase of plan
• Upload documents
• Review computation sheet
• Return filed & acknowledgement generated

Documents Required

• Bank statements for the financial year
• Income and Expense statements
• Gross Receipts
• Form 26AS Tax Credit Statement
• Bank statement if interest received is above Rs. 10,000/-

Q. What is Presumptive Taxation?

For professionals & freelancers, the government has introduced a new scheme of presumptive Taxation (Section 44ADA). Professionals can file their Income-tax return declaring 50% of their gross receipts (which must be up to ₹50 lakhs) income. After deducting the section 80 deductions, professionals need to pay tax on the total balance income. The creative professionals who are eligible to opt for this scheme are architectural professionals, interior decorators, advertisers or technical consultants.

If you receive foreign income from another country or client in your foreign bank account, even then, you will be taxed in India if you are an Indian resident.
Suppose you are paying taxes on your foreign income in that foreign country. Presumptive return is the way to claim tax relief on your taxed income while filing an Income tax return here. The amount which was taxed twice) in India and that particular foreign country should be revised under DTAA.
Presumptive taxation involves using indirect methods to compute tax liability. In presumptive returns, taxable income is assumed to calculate the income instead of actuals. Here, the professional is required to declare a given percentage of gross receipts of professional income as its income and pay a fixed percentage of it as tax. As per Finance Act 2016, professionals (as notified by CBDT) with gross receipts up to ₹50 Lakhs from April 1st, 2016 to March 31st, 2017, can opt for presumptive taxation. Also applicable for all financials years after financials years 2016-17.

Q. What if you have a day job and do freelancing work on the side?

Very often, salaried employees with a regular day job do additional freelance or consulting work in their leisure time. Can a presumptive taxation scheme be beneficial here?

Well, of course! Being in a job and also do freelance work, you have two kinds of income–salary income and non-salary income. Since both forms are income, you have to pay tax on both. Taxation on the salary income is computed regularly. It would be easy to club your freelance income to this salary to calculate your total taxable income for the year. In doing this, your presumptive taxation will be beneficial and will add only half of your freelance income to your taxable income for the year.

For example, if your salary is ₹10 lakh and your freelance income is ₹20 lakh, you can use presumptive taxation and add only half of the latter, i.e. 10 Lakh out of 20 Lakh, to your taxable income. This way, your total taxable income will be ₹20 lakh. Remember that you will have to use ITR-4 to file your income tax returns in such a case.

Q. What is included in my Income as a Freelancer?

Any amount you receive against specified services that you provide to your clients is freelance income. It won’t matter if your client is in India or abroad. Your taxable income will also include:

Salary Income- if you are in part-time employment.
House property Income- Renting your house generates rental income.
Capital Gain – If you trade in the share market or have gained from selling assets.
Other Sources Income – This will pertain to include interest received on FDs, lotteries etc.

Q. What are the Benefits to File Returns under Presumptive Tax

• Easy to File: The tax form is much shorter and simpler as compared to a complex 30 pages ITR form for filing.
• Save Money: Professionals can now file tax returns on their own instead of paying a tax consultant. Typically, consultants charge anywhere from Rs. 5000 – 15000 for such filings. Witcorp offers the same service for much less.
• Save Tax: Usually, professionals do not have much expenses to declare. By declaring 50% of income as profit and balance as expense, a lot of tax saving can be done.

National Defence Fund set up by the Central Government.

Prime Minister’s National Relief Fund.

In presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will pay tax on that income.

If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay tax on that income.

You don’t have to maintain accounting records.

You don’t have to get your accounting records audited.

You have to pay advance tax – but instead of estimating income and paying tax each quarter, you can pay all your advance tax before March 31. Advance tax, for taxpayers having opted for the presumptive scheme, is to be paid by 15th March of the relevant financial year if you expect that your income tax liability will exceed Rs.10,000 in the financial year.

Maintaining Books of accounts for freelancers u/s 44ADA?

The best part of section 44ADA is the non-maintenance of bookkeeping which means no audit!!

However, you’re required to maintain books of account if:

You claim profits and gains from the professional income lower than 50% of gross receipts, but your total income exceeds the basic exemption limit. Then as per section 44AA, prepare your books and get them audited u/s 44AB.

You’re a specified professional, but his gross receipts exceed Rs. 50 lakhs and you’re unable to opt sec 44ADA then also you must get your books prepared & audited.

Books of Accounts that are required to be maintained?

The books of account required to be maintained by the specified professionals have been specified in Rule 6F of the Income Tax Act, 1961. They are namely:

Journal,
Ledger,
Cashbook,
Original as well as carbon copies of bills issued and
The Payment vouchers.

But this requirement of maintenance of books is to be fulfilled if gross receipts of a person carrying on specified profession exceed Rs. 1,50,000. This limit is to be checked in all the three immediately preceding years. And in the case of a new profession, only if it is likely to exceed Rs.1,50,000 in the year of set up. In simple words, the books specified under Rule 6F are not required to be maintained only in the case of the following specified professionals:

Who are eligible to opt for section 44ADA.
Whose gross receipts do not exceed Rs. 1,50,000 and are also not eligible to opt for section 44ADA.

How Presumptive Taxation is calculated?

Let’s try to understand this with a basic example. Pooja is a fashion model. She earned ₹40 lakh in FY2019-20, which leads to a lot of tax. In the ordinary course of things, without using the benefit of presumptive taxation, Pooja’s taxable income would be something like this.

Taxable income without using presumptive taxation scheme

If there was no presumptive taxation scheme, Shweta would pay income tax on ₹30 lakh. But by availing the benefit of presumptive taxation, she can show her taxable income to be half of her gross income–that is ₹20 lakh.

Taxable income after availing presumptive taxation scheme

The presumptive taxation scheme allows her to save tax on ₹10 lakh. Let’s calculate how much tax she would actually save.

So, now you know, by using the presumptive taxation scheme, Pooja will save approx ₹3 lakh in taxes. She will now have to pay ₹3 lakh less as income tax. Do note that a 4% cess is additionally added to the taxable income anyhow in both cases. Moving forward, Pooja will claim all deductions of Section 80 & investments above the presumptive taxation scheme. 

Consultants, Freelancers, Professionals and those who earn an income by providing their services and expertise avail of this presumptive taxation scheme under Section 44ADA. But what if you maintain proper books of accounts and your net taxable income is less than half of your total gross income?

In Pooja’s example, her work-related expenses were much higher, reducing her taxable income to ₹15 lakh. This amount is less than 50% of the total gross income in this FY. In such a case, you should pay tax on the taxable income after getting your books of account audited and should not avail of the presumptive taxation scheme.

However, such cases would be very few such cases. Typically, freelancers and professionals do not have a lot of work-related expenses to claim. Hence, the presumption of 50% of your total income being your profit works out in their favour under Section 44ADA.

Tax Implications if Professional Income is more than 50 Lakhs

If the professional receipts of a person are more than Rs. 50 Lakhs – the benefit of Presumptive Tax under Section 44ADA cannot be taken. In such a case, the person would be required to prepare a Profit & Loss Account and Balance Sheet as well as get his audit conducted by a practicing Chartered Accountant.

Compliances to be done in case the Professional Income is more than Rs. 50 Lakhs

If the Professional Receipts is more than Rs. 50 Lakhs, the following compliances need to be taken care of:-

• Preparation of Books of Accounts along with Balance Sheet and Profit & Loss A/c

If the professional receipts of a person exceed Rs. 50 Lakhs in any financial year, he is required to prepare proper books of accounts along with Balance Sheet and Profit & Loss A/c and use ITR 3 form to file his Income Tax Return.financial year, he is required to prepare proper books of accounts along with Balance Sheet and Profit & Loss A/c and use ITR 3 form to file his Income Tax Return.

• Audit under Section 44AB by a Chartered Accountant

As the annual receipts are more than Rs. 50 Lakhs, he would also be required to get an Income Tax Audit conducted by a practicing Chartered Accountant. The CA will verify all the facts and check copy of all invoices and accordingly prepare the Audit Report which is also required to be submitted along with the Income Tax Return. Income Tax Audit conducted by a practicing Chartered Accountant. The CA will verify all the facts and check copy of all invoices and accordingly prepare the Audit Report which is also required to be submitted along with the Income Tax Return.

• TDS Deduction on Payments

As the annual receipts are more than Rs. 50 Lakhs, TDS would also be required to be deducted on expenses. For the purpose of deducting and depositing the TDS, the person would also be required to obtain a TAN No. The above are the compliances to be done under the Income Tax Act. In addition to the above mentioned compliances, the person would be required to do GST Compliances as well as the receipts are more than Rs. 20 Lakhs p.a.

Which is better: freelancing or work as a salaried person?

The answer is not simple. Every one has pros and cons of its own, which one is the right option will depend on one’s perspective, and many other spheres like one may prefer to work freely, and another may choose to work under an employer. Regarding taxes, if we compare a salaried person or a freelancer, then obviously, a salaried person stands in a better position. We will let you know-how.

Firstly, in the case of a salaried person, the deduction of TDS shall be a recurring process every month, so the requirement of payment of advance tax gets dispensed in their case. Whereas in freelancing, one has the responsibility to deposit advance tax during the year if his taxes during the year if the amount of tax exceeds Rs. 10,000

Secondly, a salaried person gets Form 16 from his employer covering all income, deduction etc. This form16 facilitates a lot to him while filing his return. At the same time, a freelancer has to jot down all his incomes and expenses during the year and take care of the taxes.

How to Save Taxes on such Income

The person can also claim the benefit of the following deductions i.e.

• Deduction for Home Loan
• Deductions under Section 80C
• Deductions for Education Loan
• Deductions for Health Insurance

The complete list of deductions which can be claimed are mentioned here – List of Income Tax Deductions

Pro Tip: Even after claiming all expenses as well as the benefit of deductions, the income tax in most cases turns out to be abnormally high. To save out on taxes, smart people have started creating entities in Tax Havens like Dubai and pay Zero Tax on their Income.

Frequently Asked Questions:

Who can opt for the presumptive taxation scheme?

Only proprietors, Hindu Undivided Families(HUFs) and general partnership firms can opt for the scheme.

2.I am a shopkeeper and wish to declare income less than 8% of my gross turnover. How can I do that?

If you declare income less than 8% of turnover and your income exceeds Rs. 2,50,000 (Individual Tax Slab), you are required to maintain the books of account as per the provisions of section 44AA and has to get accounts audited as per section 44AB. If your case falls under the above category, you should opt for our Business ITR(Regular) plan.

3.Can I revise my return to correct a mistake in the original return filed?

Yes, the return can be revised within one year before completion of the assessment year or from the end of the current assessment year, whichever is earlier.

4.Am I required to keep a copy of the return filed as proof and for how long?

Yes, under the Income-tax Act, legal proceedings can be initiated up to 4 to 6 years (depending upon case to case) before the current financial year.

However, in some instances, the department can initiate the Income Tax proceedings even after 6 years. Hence, it is advised to preserve the return copy for at least 6 years or maintain it as long as possible.

5.What are the benefits under Presumptive Taxation Scheme?

The benefits include:

No requirement to maintain books of accounts

No requirement to get accounts audited

No need to assess advance tax. It’s paid by 15th March of the previous year. Note: Any amount paid by way of advance tax on or before the 31st day of March is also treated as advance tax paid during the financial year ending on that day. Note: The scheme applies only to a resident assessee who is an individual, HUF, partnership but not limited liability partnership

6.I am a Life insurance agent. My gross receipts are Rs. 40 lakh. Am I eligible under the presumptive taxation scheme?

Certain businesses are explicitly barred from claiming benefits under presumptive taxation schemes, including:

Business involved in renting, leasing, plying or hire of goods carriages

Any agency business

Individuals receiving brokerage income or commission.

Individuals involved in any profession mentioned under section 44AA(1)

Insurance agents, who receive any income via commission

Non government org

Income Tax Filing for Section-8/Non-Profit/Trust/NGO

Income Tax Filing for Section 8 Company or NGO is different from normal tax filing, where many other things are needed to be taken care of to avoid any notices in future. Every trust, shall, if the total income before exemption under section 11 and 12 exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year.

About This Plan

Income Tax Filing for Section 8 Company or NGO, prepare your business accounts and file returns with Witcorp.

Timeline

It usually takes 3 to 5 working days.

Services Covered

• Account Summary – Income & Expenses Statement and Balance Sheet (up to 250 entries per year)
• Expert Assisted Tax Filing for business and professionals
• Tax Savings & Planning Advice
• Documented follow up

Who Should Buy

• Not for Profit Organisation
• Section 8 Company
• Trust

How It’s Done

• Purchase of plan
• Upload documents
• Financial Statements Preparation
• Review computation sheet
• Return filed & acknowledgement generated

Documents Required

• KYC, Email, Phone No. of Trust
• Bank statements for the financial year
• Income and Expense statements
• Previous Auditor reports

All About NGO’s and their Tax Filing in India

Number of NGO’s in country is estimated to be 31 Lakhs as compared to the total population of 1.28 billion. Comparatively, the number of NGO’s is highly inadequate.

Examples of NGO’s –

• Child Rights and You commonly abbreviated as CRY is a non-profit organization working in India, which aims to restore children’s rights.
• Help Age(NGO India) – A Non Profit Organization in India caring for disadvantaged elderly senior citizens

Formation of NGO

NGO’s have multiple options to select the form of constitution. The different forms of constitution which can be chosen:

1. a) Trust
2. b) Society
3. c) Section 8 Company

Selection of form depends on various factors. Some of the factors are as below:

1. Size of the institution
2. Cost

III. Number of persons required

1. Compliances
2. Global Appearance

Apart from it there are various other factors which may be considered while selecting a particular form for NGO. Each form of constitution has its own enactment and the provisions contained therein would apply to the respective form:

1. a) Trust– Trust is created for the purpose of charitable and religious purposes. Trust can be constituted by Trust deed. In case of formation of trust there are no specific statues available. However, charitable endowment act’1890 and Charitable and religious act’1920 have bearing on the formation of a charitable trust.
2. b) Society– Society is an association of persons who come together by mutual consent to act jointly for common purpose. The compliance has to be made under the Societies registration act’1860.
3. c) Section 8 Company– Company Act’2013 applies in case of a registration of Section 8 Company. The main object of company is to give benefit to public. It is company formed for charitable objects.

It is important to note that NGO has to comply with the provisions of its governing act.
Filing of Income Tax Returns

Charity trusts or NGOs are expected to allocate at least 85% of its income to the said cause. These causes include religious as well as charitable ones. Major ones are as follows.

• Education.
• Relief of the poor.
• Medical relief.
• Yoga.
• Environment conservation (this includes historical monuments, places of artistic interests among others).

Moreover, charitable institutions may require engaging in commercial activity in order to conduct their operations. For example, an orphanage for blind people may require employing the needy to produce handicrafts in order to provide them with boarding and housing. However, under the charitable act, such activities cannot constitute more than 20% of the yearly operation.

Income expenditure for repayment of the loan, for purchasing capital assets, donation to trust, and revenue expenditure registered is also treated as essential for charitable purposes and is hence exempted from tax.

Furthermore, the tax code does not define the term ‘religious purpose’ precisely. Hence, religious purposes largely refer to support and advancement of religious principles and its tenets. However, it is important to remember that this exemption available for all communities is only applicable to public trusts. It is not available to trusts which are privately owned.

Every trust, shall, if the total income before exemption under section 11 and 12 exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year.

a) Form of Income Tax Return:

ITR 7 – ITR-7 is filed when persons including companies fall under section 139(4A) or section 139 (4B) or section 139 (4C) or section 139 4(D).

b) Whether e-filing of return is mandatory for a trust?

It is mandatory for a trust to file return of income electronically with or without digital signature. A trust may also file return of income under Electronic Verification Code. However, a trust liable to get its accounts audited under section 44AB shall furnish the return electronically under digital signature.

c) Due dates for filing of return?

A trust who is required to get its accounts audited under the Income-tax Act or under any other law – September 30 of the assessment year

A trust who is required to furnish a report in Form No. 3CEB under section 92E – November 30 of the assessment year

In any other case – July 31 of the assessment year

d) What is the tax rate?

A trust is chargeable to tax as per the slab rates which are applicable to an individual (not being a senior citizen or super senior citizen).

e) Penalty for delay in furnishing return of Income

It shall pay by way of penalty a sum of Rs. 100 for everyday during which the failure continues.

Important Note:

Entities registered under section 12AA are required to file their return of income within the time allowed under section 139 of the act.

Section 80G Donations

Section 80G of the Income Tax Act’1961 provides deduction while computing the total income in the hands of donor.

It is important to note that when registration is granted under section 12A, it does not mean that section 80G approval is to be given i.e. registration under section 12AA will not provide automatic approval under section 80G. Section 80G applies only to charitable trusts or institution. It does not apply to religious trust or institutions.

The recipient of money or the donee gives a receipt of donation, based on which the donor is entitled to claim deduction provided, the donee institution is approved under section 80G of the Income Tax Act’1961.

The institution or fund should be established for charitable purposes in India.

What if 85% income is not applied?

Trusts and NGOs can find it difficult to allocate 85% of their income held under the property to the needy. In some cases, this income still receives an exemption. For example, if the tax authorities deem the institution worthy regardless. For example, charities are often prone to receiving expected income with delays. If your charity or trust has received income late from the previous year, you might not have resources to allocate. In such cases, charities are looked at as exceptions and can receive the benefit of the doubt while filling for income.

If you wish to apply for the special exemptions, you will need to exercise your rights using Form 9A. These can be sent electronically with or without a digital signature. When you are submitting your tax returns under u/s 139(1), then Form 9A needs to be submitted along with it.

Income Tax Benefits to Charitable Trusts/NGO

Let’s now have a look at the tax obligations from various categories of income of a charitable trust:

Only Charitable/ religious trust or institution registered under Section 12AA enjoys the exemption
Accumulation of 85% Income of Trust

Moreover, charities can also accumulate income for specified goals under the current tax laws. For example, some charities may need to acquire properties to serve the needy. These charities can set aside funds for the assigned activities in the following manner.

• These charities will be required to submit form no. 10. The form is a notice of accumulation of income by a trust or a charity institution. These forms are required to be submitted during the filing of income period and can be sent electronically.
• Accumulation of income requires mentioning the purpose and time frame within which the said income would be accumulated and used.
• Currently, the tax laws limit the accumulation for the period of 5 years. During these, the notice by courts or injunctions is separated as part of the tax code from the calculation of time periods.
• It is important to invest or deposit money in a specified mode in order to avail this exemption.

However, if the charity fails to invest funds as specified, the funds are taxable as outlined below.

Ways to invest accumulated Income

There are also many ways for trusts and NGOs to save and invest the accumulated income and gain tax benefits in the process. As mentioned earlier, NGOs or trusts can set aside over 85% of their income. However, doing so requires one of the following routes for saving and investment.

• Investment through post office savings bank or co-operative banks or scheduled banks.
• Investment in government UTI/ saving certificate.
• Investment in security bonds or savings options issued by the state and central government.
• Trusts can also invest in company debentures, provided they are completely or unconditionally guaranteed by the state or central government.
• Investment in public sector company through deposits or investment.
• Invest income in publicly traded companies or in bonds. These companies aid the growth of the country’s industrial development and financing them is seen as a long-term investment in the future.
• The cases of no exemptions.

Certain modes are barred from receiving any exemptions. These are as follows-

• Income from private religious trusts which do not benefit the public at large. If the entire income is generated from such institutions, it does not qualify for any tax exemptions.
• The entire income of religious institutions or charitable trusts which comes from serving a particular community or caste.
• If the entire income is generated by serving a specific person, it is also not liable for a tax exemption.
• If the modes of investment and the due process are not followed as specified.
• The value of educational services and medical services made available to a specified person through charitable trusts and religious institutions.
• Unless business objectives are incidental to the objectives of the charitable trust or NGOs, the income generated from it is not liable from tax exemptions.

Additionally, charitable trusts are also barred from aiding specified individuals in the process of their charitable work. These exceptions include the following.

• The founder of the charitable trust or author
• Individuals who have contributed substantially to charitable trusts. In these cases, anyone who makes above Rs. 50,000 in contributions are barred from benefits in the same financial year.
• People in charge of charitable trusts, including managers, founders, trustees, and others.
• Family members of people associated with trusts and NGOs are also barred from benefitting if they make substantial contributions.
• Any person who has a substantial interest among the various designated members and if their total contributions are greater than 50% of the total income.