- What is Business and Profession?
- Maintaining Books of Accounts
- Incomes chargeable under Business and Profession
- Expenses allowable from Business and Profession Income
- Computation of taxable income from business and profession
- Set off and Carry Forward of business and profession losses
- TDS/Advance Tax on income from business and profession
- Tax for Freelancers
- What is Speculative Business Income?
- Presumptive Taxation Scheme
- Tax Audit Applicability
- ITR Form and Document Checklist
- GST Applicability and Return Filing
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 –
- Even rendering services to others is considered as business.
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:
- Chartered Accountant
- Architectural etc.
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:
- Income more than INR 1,20,000 or,
- Total sales, turnover or gross receipts are more than INR 10,00,000 In any of the three immediately preceding previous years
Moreover, this condition has been relaxed for individuals and HUF where they will be bound by the mandate of maintaining books of accounts if:
- Income is more than INR 2.5 Lakhs or,
- Total sales, turnover or gross receipts are greater than INR 25 Lakhs in any of the 3 immediately preceding previous years.
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.
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:
- Non-Speculative Businesses/Profession: Includes profits/loss from all the normal business carried by a taxpayer. Any salary, remuneration, commission, etc received by a partner from a partnership firm is also considered as a business and professional income of a partner. However, the same is exempt from tax in the hands of the partner.
- Speculative Businesses: As name suggests, it includes profits/loss from doing speculative transactions i.e, without taking actual delivery of goods. Although profits from the speculative business (eg. Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return
- Specified Businesses: It includes profits/loss from businesses that are defined under section 35AD of the income tax act. These businesses include affordable housing projects, water fabrication manufacturing units, etc.
However, following are the incomes which are not chargeable as income from business and profession:
- Any profits from activities other than above-mentioned businesses should be shown as casual income and will be shown under Income from Other Sources
- Any income from salary, remuneration, bonus, etc. received by the director of the company is treated as Salary Income and not as a business and professional income.
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:
- Rent and insurance of building.
- Payments for Legal and Professional services.
- Salary, Bonus, Commission etc. to employees.
- Salary, interest and remuneration to working partners subject to certain conditions.
- Traveling and conveyance expenses.
- Membership fees.
- Payment for know-how, patents, copyrights, trademark, licenses.
- Depreciation on fixed assets.
- Expenditures on scientific research for business purposes.
- Preliminary expenses in case of a company.
- Communication expenses
- Discount allowed to customers.
- Advertisement expenses in respect of promotion of business products.
- Financial Charges (eg. Interest on loans).
- Bank Charges/Bank Commission expenses.
- Entertainment/Business Promotion expenses.
- Staff Welfare expenses.
- Printing and stationery expenses.
- Postage expenses.
- All other expenses relating to business/profession.
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:
- Any taxes, duty, cess or fees by whatever name called.
- Expenses towards contribution to Provident fund, Employees’ state insurance premium, Gratuity fund, or other funds for the welfare of the employees.
- Bonus, commission, or leave encashment payable to employees.
- Interest on loan from public financial institutions, state financial corporations, or scheduled banks.
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 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
Set off and Carry Forward of losses from Business and Profession
- Non-Speculative Business Loss can be set off against any income except Salary in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against Business Income in future years.
- Speculative Business Loss can be set off against Speculative Business Income only. The taxpayer can carry forward the remaining loss for 4 years and set off against future Speculative Business Income only.
- Specifies Business Loss can be set off against any income except Salary in the current year. The taxpayer can carry forward the remaining loss for 9 years and set off against Business Income in future years.
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:
- TDS (Tax Deducted at Source) : Due to pay while you earn concept TDS gets deducted on payments made to taxpayers for any goods or services sold. Hence business owner needs to keep in mind the TDS Deducted by the customers. Any TDS deducted can be claimed while filing ITR for business and profession. And it will become your refund if there is a loss from B&P. And it will reduce your tax liability if you have earned profits from B&P.
- Advance Tax : If the tax liability is expected to exceed Rs. 10,000, the taxpayer must calculate and pay Advance Tax. This is so as to avoid Interest under Section 234B and 234C. Advance Tax is to be paid in quarterly installments as follows:
|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|
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.
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.
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.
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:
- Compulsory Registration,
- Voluntary Registration,
- Composite Scheme Registration.
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.