The final stage of taxation is filing your Income tax returns (ITR), and this can be achieved by using ITR forms. This article provides a brief overview of what every investor or trader needs to know about these forms.
I have noticed many people being uncertain of the difference between paying and filing income tax. Some assume that if they pay the tax, there is no need to file it. But this is untrue; allow me to explain why.
Paying Income tax – If you have an income aside from your salary, you should be aware that your employer will deduct tax (according to your tax slab) and pay the income tax for you. This is generally referred to as ‘Tax Deducted at Source (TDS)’.
To illustrate, let’s say you earned a salary in addition to profiting from delivery-based equity trading for a given year. We now know this activity comes under the category of “Non-speculative Business Income.” Since your employer is unaware of it, you must make sure that you declare this income to the Income-tax department and pay the due taxes.
Filing Income tax returns – Filing Income Tax Returns is a required process for informing the tax department of all the sources of income, including your salary. An Income Tax Return Form is simply a document that you must fill in, which will report said sources. There are various ITR forms depending on what type of income you have. You may ask why it’s necessary to file when your only source of income is salaries – by submitting an appropriate ITR form, you are showing the tax authorities that this is indeed the case.
Essentially, with your returns, you are informing the IT department of all your sources of income and the tax paid against them. This is done through the prescribed ITR forms.
ITR is a form one needs to use to communicate the details of their yearly income and taxes paid on that amount to the Income-tax Department. There are several types of forms, depending on your various sources of income; all can be found at https://incometaxindiaefiling.gov.in/. It is important to select the most appropriate one for your situation.
For this module, which centres around people with investments as capital gains or trading as business income, it is essential to understand the various ITR forms, such as…
ITR 1 – ITR 1 is generally the most suitable form for when you have an income from a salary, interest or a single house property. However, if your income includes capital gains or is from trading as a business, then this form cannot be used and another form should be selected instead. Individuals whose total income does not exceed 50 lakhs can use this form to file their tax returns.
ITR 2 – Individuals and HUFs with salary, interest income, income from house property, or income from capital gains can file their taxes using ITR 2. Those who merely invest in the market should use this form too.
ITR 3(ITR 4 renamed to ITR3 from 2017) – If you receive income from any of salary, interest, house property, capital gains or business/profession then ITR 3 is the type of form that should be used. This form has replaced ITR 4 starting from the 2017 tax year.
If you’re an individual trader, ITR 3 is the form to use, as it allows you to declare trading as a business income and investments as capital gains.
ITR 4 (ITR 4S earlier) – ITR 4 is similar to ITR 3, but it follows a presumptive taxation scheme when computing business income through the use of sections 44AD and 44AE. It should not be used for declaring any capital gains, or if you intend to carry forward losses. In such cases, you should use ITR 4 only if your income comes from business activities (both speculative and non-speculative); however, it is advisable to avoid this form if it reduces your tax liability.
ITR 4 is the perfect choice for taxpayers who do not keep a regular book of accounts or need to have it audited (as per chapter 2), and as long as their turnover does not exceed Rs 5 Crores annually.
You can avoid having to keep records and undergo an audit if you initially calculate your turnover, following the chapter on Section 44AD. Then, you must declare 6% of this turnover as your presumptive income when paying taxes, which should include this 6% in addition to any other income. Pay according to the tax bracket you fall under.
If you are a trader with annual turnover below Rs 5 Crores (up from Rs 2 crore in FY 19/20) and profits lower than 6%* of turnover comprised of business income (not possible if capital gains are involved), you can declare a presumptive income of 6%* of turnover, thus avoiding the requirement for an audit. When using ITR4 (formerly 4S), advance taxes do not need to be paid, but business expenses may not be claimed against your income.
Let’s assume that in the last financial year, my salary was Rs. 600,000/-, and I incurred a F&O loss of Rs. 30,000/- from a turnover of Rs. 500,000/-. Since the profit was less than 6%* (30,000/500,000) of the turnover, I am required to use ITR4 and maintain audited books. Alternatively, I can choose ITR4S and declare a presumptive trading business income of 6%* of Rs. 500,000/-, which is Rs. 30,000/-, despite incurring a loss.
Update: The percentage is reduced from 8% to 6% starting from Assessment Year (AY) 2017/18 or Financial Year (FY) 2016/17.
Now, let’s calculate my tax liability based on the total income for the year, which is Rs. 600,000/- (salary) + Rs. 30,000/- (business income) = Rs. 630,000/-. The tax liability is as follows:
Up to Rs. 250,000 – No Tax
Between Rs. 250,000 to Rs. 500,000 – 5% – Rs. 12,500/-
Between Rs. 500,000 to Rs. 630,000 – 20% – Rs. 26,000/-
Total tax = Rs. 12,500 + Rs. 26,000 = Rs. 38,500/-
By declaring a presumptive business income of Rs. 30,000/-, I am required to pay an additional tax of Rs. 6,000/-. This is a more affordable option compared to getting an audit done by a certified accountant, which would likely cost Rs. 15,000/- or more. Using the ITR-4 form makes sense when the turnover is low, as declaring 6% of the turnover as income would be much cheaper than paying for an audit.