Income from business or profession is chargeable to tax only if the business or profession is carried on by a taxpayer at any time during the previous year. Let us first understand what is Business:
Business, in simple words, means an occupation carried on by a person with a view to earn a profit. Business does not include income from the Profession or partnership firm. The business includes any –
For example: Owning a shop, running a hotel, transportation, travel agency, share broking, etc.
Profession may be defined as a vocation, or a job requiring some thought, skill, and special knowledge. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill like:
Any income generated from the above-mentioned activities will be taxed under the head “Income from Business and Profession”.
A business meeting any of the following criteria needs to maintain the books of accounts as per the income tax act:
Moreover, this condition has been relaxed for individuals and HUF where they will be bound by the mandate of maintaining books of accounts if:
The taxpayers carrying out any of the above-mentioned professions are required to maintain the books of accounts in accordance with rule 6F of the Income Tax Rules. These professionals have to maintain the books of accounts if the gross receipts exceed INR 1.5 Lakhs in any of the 3 immediately preceding years.
Any income earned by a taxpayer with an intention to earn a profit is covered under the head business and profession. There are 3 types defined for Businesses/profession under the income tax act:
However, following are the incomes which are not chargeable as income from business and profession:
All the expenses incurred wholly and exclusively in relation to the business and profession shall be allowed against the income from such business and profession. Here are some of the expenditures:
All these expenses are allowed on the basis of actual payments as well as on the accrual basis on the date of the finalization of the accounts. For eg: An employee receives an income for the month of March 2020 in the month of April 2020. However, since the income is related to the Financial Year 2019-20 (which ends on 31st March 2020), it can be claimed against the income from the business/professional income of the Financial Year 2019-20.
Here are some of the examples of such expenses:
Taxable income from business and profession is profits after deducting expenses related to business activities. Taxpayer can find profits from books of accounts maintained during the year. Income earned from Business and Profession is taxable at a Slab Rate applicable to taxpayer. Following are the slab rates applicable for FY 2019-20/AY 2020-21:
|Total Income||Tax Rate|
|Up to INR 2,50,000||NIL|
|INR 2,50,000 to 5,00,000||5%|
|INR 5,00,000 to INR 10,00,000||20%|
|Above INR 10,00,000||30%|
An additional 4% Health and Educational Cess will be applicable to the tax amount calculated
Taxpayer needs to pay tax on income earned from business and professional activity. Direct taxes on income can be paid in following 2 ways:
|Due date of installment||Advance Tax payable by Individual and Corporate Taxpayers|
|On or before 15th June||15% of the tax liability|
|On or before 15th September||45% of the tax liability|
|On or before 15th December||75% of the tax liability|
|On or before 15th March||100% of the tax liability|
A freelancer is a person who is self-employed. They have the freedom to select their own projects and assignments. They do not earn a steady income. The nature of their income is more of a professional income. Hence it is covered under the head “Income from Business and Profession” under the Income Tax Act.
The sum of all the receipts received from different projects becomes their income. And all the expenses related to freelancers are allowed to be deducted. Following is the taxable income of a freelancer:
Net Taxable Income = Total Receipts – Freelancing Expenses
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First of all, we have to understand what is a speculative transaction in order to understand the Speculative Business income.
When a contract for purchase or sale of any commodities (including stocks and shares) is periodically or ultimately settled without the actual delivery or transfer of the commodities, it is called a speculative transaction and if your business is to earn income out of such transaction, then that will be your income from Speculative Business.
One of the examples of Speculative Business is stockbroking, where the broker earns money by way of buying and selling the commodities without taking delivery of the same. Incomes from normal business and speculative business calculated and maintained separately.
The presumptive taxation scheme is introduced to give relief to small taxpayers from the tedious job of maintaining books of account and from getting the accounts audited. The presumptive taxation scheme can be opted by individuals, HUFs, and Partnership Firms in India.
Professionals having gross revenue up to INR 50 Lakhs can opt for the presumptive taxation scheme wherein they can offer 50% of the gross revenue as the taxable income and pay taxes as per the applicable slab rates on such income. Once the taxpayers opt for this scheme, they cannot claim any of the profession related expenses as a deduction.
Businesses having a gross turnover of more than INR 1 Cr. in a financial year are liable to a tax audit. The taxpayer needs to file Form 3CD for the tax audit report electronically. Furthermore, the Finance Minister Nirmala Sitharaman has announced that the tax audit due date of current Financial Year has been extended to October 31, 2020, from September 30, 2020
In the case of a profession, taxpayers will liable to carry out a tax audit if the gross receipt under this income head exceeds INR 50 Lakhs during any given financial year. If the taxpayers fail to have their books of account audited, then they’ll be liable to pay a fine of up to 0.5% of the gross revenue of 1.5 Lakhs or whichever is lower.
ITR 3 form is meant for individual or HUF having income from business or Profession and from partnership firm/LLP. In simple words, ITR 3 needs to be filed when income is earned under the head “Profit or gain of business or profession”. It is also filed when Tax Audit is applicable. However, professionals can opt for the presumptive taxations scheme and declare 50% of their gross receipts as their income by filing ITR 4 from the AY 2017-18.
GST (Goods and Service Tax) is also applicable if your turnover from business exceeds Rs. 40 lakhs in a particular financial year. In the case of the profession, GST is applicable if your receipts exceed Rs. 20 lakhs. One needs to take the GST Registration and file the GST Returns as well. Following are the different types of GST Registrations:
A company being an artificial person does not have a mind or a body and, therefore, cannot be engaged in any profession. The skill involved in carrying out professional activity is predominantly mental or intellectual rather than physical or manual.
A professional having a gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax wherein he can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on suchincome.
Yes, a salaried individual can have business income. And if you have made any sort of business income, then you should file ITR-3.