Guide : Income from Business and Profession

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Hiral Vakil

Income from Business & Profession
Income Source
Speculative Income

Index

What is Business and Profession?

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.

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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”.

Maintaining Books of Accounts

In case of Business

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:

In case of Profession

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.

Guide : Book Keeping and Audit for Business and Profession
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Guide : Book Keeping and Audit for Business and Profession
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Incomes chargeable under Business and Profession

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:

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ITR for Proprietors with Professional Income
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Expenses allowable from Business and Profession Income

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: Employee receives a salary for the month of March 2020 in the month of April 2020. However, since the salary 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.

Expenses allowed only on a payment basis

Here are some of the examples of such expenses:

Computation of Taxable Income from Business and Profession

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 IncomeTax Rate
Up to INR 2,50,000NIL
INR 2,50,000 to 5,00,0005%
INR 5,00,000 to INR 10,00,00020%
Above INR 10,00,00030%

An additional 4% Health and Educational Cess will be applicable to the tax amount calculated 

Income Tax Calculator
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Income Tax Calculator
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Set off and Carry Forward of losses from Business and Profession

TDS/Advance Tax on Income from Business and Profession

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 installmentAdvance Tax payable by Individual and Corporate Taxpayers
On or before 15th June15% of the tax liability
On or before 15th September45% of the tax liability
On or before 15th December75% of the tax liability
On or before 15th March100% of the tax liability

Tax for Freelancers

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 salary 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.

Guide: Income Tax for Freelancers and Professionals
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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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What is Speculative Business Income?

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.

Presumptive Taxation Scheme

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.

Tax Audit Applicability

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.

Section 44AB of Income Tax Act
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Section 44AB of Income Tax Act
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ITR Form and Document Checklist

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.

Documents required for Income Tax Return filing in India
Here are the list of documents required to file ITR under the Income from Business and Profession Head
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Documents required for Income Tax Return filing in India
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GST Applicability and Return Filing

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:

  1. Compulsory Registration,
  2. Voluntary Registration,
  3. Composite Scheme Registration.
GST Registration
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FAQs

Can a company carry on a profession?

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.

What is presumptive income from Profession?

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.

Can a salaried person have business income?

Yes, a salaried individual can have business income. And if you have made any sort of business income, then you should file ITR-3. 

  • Raj says:

    Hey Hiral,

    Thanks for your valuable Post.

    I have query to get 50% Deduction for the freelancing income or not,
    I am a freelancer software developer as fulltime and annual income is 30 Lakh.
    I usually doing a Stock Trading and my income was around 4 lakhs for the FY 2019.

    Which ITR Form I have to fill up?

    Is there I got benifits of Presumptive Income for the freelancing income(50% tax of amount)?

    For the Capital Income, I have to pay tax as normal slab rate?

    Give me your suggestions.
    Thanks.

    • Anushka Shah says:

      Hi Raj,
      In your case you will be able to opt for Presumptive Taxation Scheme for your Professional Income since gross receipts are less than Rs. 50 lakhs. You can show the actual profits or minimum 50% of Rs. 30 lakhs as income while filing ITR.
      For your trading income if it is only from Long Term and Short Term Capital Gain trades then tax rate will be 10% and 15% respectively. And if it is intraday trading then it will be considered as speculative income and taxed at slab rate. And you will be required to file ITR-3 for AY 2020-21.

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