Minimum Alternate Tax – MAT

What is Minimum Alternate Tax or MAT?

Minimum alternate tax was launched to reduce the gap between the tax accountability as per income calculation and book profits. To better understand it, MAT was introduced to target companies that make huge profits and pay the dividends to their shareholders but pay very minimal tax under the normal provisions of the income tax act. They do this by taking advantage of the deductions and exemptions allowed under the act. Therefore, with the introduction of MAT, the companies have to pay a fixed percentage of their profits as minimum alternate tax. Also, it is calculated under section 115JB. Below are the 2 provisions under which the companies should pay higher of the tax calculated:

  • Tax liability as per the normal provisions of the income tax act, i.e, tax rate 30% + 4% education cess and surcharge if applicable
  • Tax liability explanation as per the MAT provisions is in section 115JB. The tax rate is 15% with effect from AY 2020-21

Calculation of MAT or Minimum Alternate Tax

MAT includes 18.5% of book profits which include surcharge and cess if they are applicable (15% from AY 2020-21). Here, book profit means the net profit as shown in the profit and loss account for the year as increased and decreased by the following:

Additions to the Net Profit if Debited to the Profit & Loss Account

  • Income tax paid or payable if any calculated as per normal provisions of the income tax act
  • Transfer made to any reserve
  • Dividend proposed or payable
  • Provision for loss of subsidiary companies
  • Depreciation including depreciation on account of revaluation of assets
  • Amount/provision of deferred tax
  • Provision for unascertained liabilities
  • Amount of expense relating to exempt income under sections 10, 11, 12 except section 10AA and 10(38). This means income under section 10AA & long term capital gain are exempt under section 10(38) are subject to MAT.

Deletions to the Net Profit

  • Amount withdrawn from any reserves or provisions
  • The amount of income to which any of the provisions of section 10, 11 & 12 except 10AA & 10(38) applies.
  • The amount is withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset
  • Amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account. However, the loss shall not include depreciation. (if loss brought forward or unabsorbed depreciation is nil then nothing shall be deducted)
  • Amount of Deferred Tax, is any such amount is credited in the profit & loss account
  • Amount of depreciation debited to the Profit and Loss Account (excluding the depreciation on revaluation of Assets)

Applicability of MAT

As per section 115JB, every taxpayer being a company is liable to pay MAT, if the Income tax is payable on the total income, computed as per the provisions of the income tax act in respect of any year is less than 15% of its book-profit + surcharge (SC) + health & education cess. However, the provisions of MAT are not applicable on:

  • The domestic companies which have opted for tax regimes under Section 115BAA or Section 115BAB;
  • Any income accruing or arising to a company from the life insurance business referred to in Section 115B;
  • Shipping company, the income of which is subject to tonnage taxation.
    [As amended by Finance Act, 2020]. Further, as per Explanation 4 to section 115JB as amended by Finance Act, 2016 with retrospective effect from 1/4/2001, it is clarified that the MAT provisions shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if:
    • The assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 of the Central Government has adopted an agreement under subsection (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement or,
    • The assessee is a resident of a country with which India does not have an agreement of nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

Further, as per Explanation 4A to section 115JB as inserted by Finance Act, 2018, MAT provisions shall not be applicable to a foreign company, whose total income comprises profits and gains arising from a business referred to in section 44AB, 44BB, 44BBA, or 44BBB and such
income has been offered to tax at the rates specified in those sections

What is Minimum Alternate Tax Credit?

When any amount of tax is paid as minimum alternate tax by the company, it can claim the credit of such taxes paid in accordance with the provision of section 115JAA.

The allowable tax credit is the tax paid as per MAT calculation which is the income tax payable under the normal provision of the income tax act. However, no interest shall be paid on this tax credit by the department.

FAQs

When is MAT applicable?

It is applicable to all the companies including foreign companies.

What is the difference between MAT and Alternate Minimum Tax or AMT?

MAT stands for Minimum Alternate Tax and AMT stands for Alternate Minimum Tax. Initially the concept of MAT was introduced for companies and progressively it has been made applicable to all other taxpayers in the form of AMT.

AS 2 – Valuation of Inventories

AS 2 is the Accounting Standard for the valuation of inventories and their accounting treatment. This accounting standard covers methods to value the inventory of a business and its disclosure in the financial statements. The general rule mentions valuing inventories i.e. closing stock of a business at cost or market value whichever is lower. Let us understand AS 2 in detail.

Applicability of AS 2

AS 2 applies to the valuation of following types of inventory:

  • Raw Materials – input goods or services consumed during the production process of rendering of services.
  • Work In Progress – input goods or services that are in the process of production.
  • Finished Goods – final goods or services held for sale in the normal course of business.

AS 2 for Valuation of Inventories is not applicable in the following cases:

  • Work in progress i.e. WIP stock in the construction business
  • WIP stock in the service business
  • Shares, debentures, or other financial instruments held as stock-in-trade
  • Stock of livestock, mineral oils, agricultural and forest product, etc.

    In the above cases, inventory valuation is at net realisable value.

Valuation of Inventory

Follow these steps for valuation of inventory:

  1. Calculate Cost of Inventory

    Cost of Inventory is the sum of purchase cost, conversion cost and other direct costs to bring the inventory in its present condition.

  2. Calculate Net Realisable Value (Market Value)

    Net Realisable Value is the estimated selling price of the inventory in the market i.e. the market value of the inventory.

  3. Lower of Step 1 or Step 2

    Valuation of inventory is the lower of cost or net realisable value (NRV).

For valuation of inventory, we should understand the following terms:

  • Purchase Cost – It is the price at which inventory is purchased. It also includes freight inwards, duties and taxes, trade discounts, rebates, duty drawbacks, and other expenses directly related to purchase.
  • Conversion Cost – It is the cost incurred in the process of production to convert the raw materials into finished goods. Conversion Costs include both fixed costs (depreciation, maintenance expense, etc) and variable cost (labour cost, raw material cost, etc) incurred in the process of production.
  • Other Cost – Any other cost incurred to bring the inventory in its current location and condition should form part of inventory valuation. Other costs include selling and distribution expense, abnormal loss of material or labour, storage cost, etc.
  • Net Realisable Value – NRV is the estimated selling price of the inventory after deducting the estimated costs of completion and expenses on the sale of such inventory.

Methods of Inventory Valuation

  • First In First Out (FIFO) – As per this method, it is assumed that the goods that come in first are sold out first. The cost of goods sold comprises the cost of goods produced first. The closing inventory will include the goods purchased recently.
  • Weighted Average Cost Method (WAC) – Under this method, the average cost of each sale item is calculated. The closing inventory is calculated by taking the weighted average cost of items at the beginning of the year and purchased during the year.
  • Specific Identification Method – If each item in the closing inventory is easily identifiable, the business should use a specific identification method to value the inventory. Thus, include the items sold at a specific cost in the cost of goods sold and the cost of items left on hand in the closing stock.

Accounting Disclosure

As per AS 2, the financial statements must reflect the following details of inventory of a business:

  • Accounting policy and method used for valuation of inventory
  • Classification of inventory i.e. raw material, work-in-progress, or finished goods
  • Carrying amount of inventory = Fair Value – Sale Cost
  • Amount of inventory that business recognizes as an expense
  • Amount of inventory that business writes down and recognizes as an expense
  • Reversal amount of a write-down identified as a reduction in the inventory amount

AS 2 for Manufacturers & Traders

Any manufacturing or trading business that has inventory or stock must follow the accounting principles for the valuation of a stock.

  • Opening Stock – Value of the closing stock of the previous year
  • Purchases – Sum of the purchase value and direct expenses incurred during the financial year
  • Sales – Sum of sales value during the financial year
  • Closing Stock – Value of closing inventory should be lower of cost or market value
  • Gross Profit = Opening Stock + Purchases – Sales – Closing Stock

The business should calculate the net profit by deducting other expenses from gross profit, report it as taxable income under the head PGBP and file ITR on income tax website.

FAQs

What is the cost of inventory for a service provider?

The cost of inventory for a service provider includes labour cost and the cost of personnel who provide the services. It does not include the expenses not directly related to the service.

How to calculate value of inventory using weighted average cost method?

As per the weighted average cost method, you should calculate the value of closing inventory by using the average price of inward values of the inventory. The formula is as below:
Average cost per unit = Total inward value / Total inward quantity

AMT – Alternative Minimum Tax under Section 115JC

The Income Tax Department had introduced the provision of AMT i.e. Alternate Minimum Tax for taxpayers other than Company. The government had introduced incentives and deductions to specified industries to encourage investment and growth. There were many taxpayers who misused the provision by paying zero tax. Thus, the IT department introduced MAT (Minimum Alternate Tax) for Companies and AMT (Alternative Minimum Tax) for taxpayers other than Company. As part of AMT, the government ensured collecting minimum tax from such taxpayers. Further, it also gave an option to carry forward the AMT Credit and adjust it in future years.

Applicability of AMT

The provisions of Alternative Minimum Tax are applicable to the following category of taxpayers:

  1. Individual, HUF, AOP (Association of Persons) or BOI (Body of Individuals) if the adjusted total income exceeds INR 20 lacs
  2. Any other taxpayer (other than Company) irrespective of the total income.

The AMT provisions are applicable to the above category of taxpayers only if:

  • Taxpayer claims a deduction under Section 80H to Section 80RRB (except Section 80P)
  • Taxpayer claims a deduction under Section 35AD.
  • The taxpayer claims a deduction under Section 10AA.

AMT Rate & Adjusted Total Income

Rate of Alternative Minimum Tax is 18.5% of the Adjusted Total income. In addition to this, surcharge and cess are applicable. Calculate the adjusted total income in the following manner:

  Particulars Amount (INR)
  Taxable Income XXXX
Add Deduction claimed u/s 80H to 80RRB (except 80P) XXXX
Add Deduction claimed u/s 35AD reduced by regular depreciation allowed as per Section 32 XXXX
Add Deduction claimed u/s 10AA XXXX
  Adjusted Total Income XXXX
  AMT – 18.5% of Adjusted Total Income XXXX

Tax Liability if AMT is applicable

If the provisions of Alternative Minimum Tax are applicable, Tax Liability would be higher of the following:

  • Tax Liability as per normal provisions of the Income Tax Act
    Calculate Total Income of the taxpayer from all sources of income and after claiming Chapter VI-A deductions. Calculate Tax Liability on the Total Income as per the applicable slab rates.
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  • Tax Liability as per AMT Rate
    Calculate Adjusted Total Income of the taxpayer as per the above table. Calculate Tax Liability on the Adjusted Total Income at the rate of 18.5%.

Example

Taxable Income of Samir for FY 2019-20 is INR 18,00,000. The taxable income is computed after claiming the deduction of INR 3,00,000 under Section 80QQB for a royalty on books. Is he covered under the provisions of AMT? Calculate Tax Liability.

Solution

  1. Calculate Adjusted Total Income

    Taxable Income = INR 18,00,000
    Add: Deduction u/s 80QQB = INR 3,00,000
    Adjusted Total Income = INR 21,00,000

  2. Applicability of AMT

    Adjusted Total Income exceeds INR 20 lacs. Therefore, the provisions of Alternative Minimum Tax are applicable.

  3. Calculate Tax Liability as per normal provisions

    Tax on Total Income of INR 18,00,000 as per slab rates
    Basic Tax = INR 3,52,500
    Total Tax = Basic Tax + Cess = 3,52,500 + 4% Cess = INR 3,66,600

  4. Calculate Tax Liability as per AMT provisions

    Tax on Adjusted Total Income of INR 21,00,000 at 18.5%
    Basic Tax = INR 3,88,500
    Total Tax = Basic Tax + Cess = 3,88,500 + 4% Cess = INR 4,04,040

  5. Final Tax Liability

    Higher of the above = INR 4,04,040

  6. AMT Credit

    Tax as per AMT – Tax as per Slab rates = 4,04,040 – 3,66,600 = INR 37,440. The AMC Credit can be carried forward for 15 years.

AMT Credit

A taxpayer to whom provisions of Alternative Minimum Tax are applicable pays tax as per normal provisions or as per the rate of 18.5% whichever is higher. When the tax liability for a financial year is paid as per Alternative Minimum Tax, the taxpayer can claim the credit of excess tax paid in the future financial years as per Section 115JD of the Income Tax Act. Excess Tax is the amount of Alternative Minimum Tax paid in excess of tax as per normal provisions.

The AMT Credit can be carried forward for a period of 15 financial years. If the taxpayer is unable to utilise the AMT Credit in 15 years, this credit will lapse. No interest is paid on such credit.

Example

Aryan Enterprises is a Partnership Firm covered under the provisions of Alternative Minimum Tax. Below are the details:

FY 2019-20

Tax Liability as per normal provisions = INR 15,00,000
Tax Liability as per AMT provisions = INR 18,00,000

Final Tax Liability = INR 18,00,000 (higher of the above)
Carry Forward AMT Credit = INR 3,00,000 (18,00,000-15,00,000)

FY 2020-21

Tax Liability as per normal provisions = INR 10,00,000
Tax Liability as per AMT provisions = INR 9,00,000
Brought forward AMT Credit from FY 2019-20 = INR 3,00,000

Final Tax Liability = INR 10,00,000 (higher of the above)
Since there is an AMT Credit of the previous financial year, the taxpayer can utilise AMT Credit up to the extent of difference between tax liability as per normal provisions and tax liability as per AMT.

Thus, the credit can be utilised for INR 1,00,000 (10,00,000-9,00,000). Remaining Credit of INR 2,00,000 can be carried forward to future years.

Report from CA

A taxpayer to whom the provisions of Alternative Minimum Tax are applicable should obtain a report from a Chartered Accountant in Form 29C. It is the report under Section 115JC of the Income Tax Act Under this report, the CA would certify that the Adjusted Total Income and AMT is calculated as per the provisions of the Income Tax Act.

Section 44AD – Presumptive Taxation for Business

To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Section 44AD is the presumptive taxation scheme for business. A business with turnover up to INR 2 Crore can take the benefit of presumptive taxation under Section 44AD.

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Who can opt for Presumptive Income under Section 44AD?

The following taxpayers engaged in any business can opt for the Presumptive Taxation Scheme under Section 44AD.

  • Resident Individual
  • Resident HUF
  • A resident partnership firm (not LLP)

The following taxpayers cannot opt for the Presumptive Taxation Scheme under Section 44AD.

  • Non-Resident Taxpayer
  • LLP i.e. Limited Liability Partnership
  • A taxpayer other than individual, HUF, partnership firm
  • Taxpayer claiming deductions under Section 10A/ 10AA/ 10B/ 10BA or Section 80H to 80RRB
  • Business of plying, hiring or leasing of goods carriages under Section 44AE
  • A taxpayer with agency business
  • Taxpayer earning brokerage or commission income. Eg: Insurance Agent

Calculation of Presumptive Income under Section 44AD

To opt for Presumptive Taxation Scheme under Section 44AD, the following two conditions should be satisfied:

  1. The gross sales or turnover of the business should be less than or equal to INR 2 Crore.
  2. The taxpayer should report 6%/8% or more of the gross sales or turnover as income in the ITR.

Note: The prescribed rate of 8% is for non-digital transactions in the business and the rate of 6% is for digital transactions in the business.

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Example

Akshay runs a trading business. The gross sales for FY 2019-20 are INR 1.8 Crore. Sales include cash payments of INR 80 lacs and non-cash payments of INR 1 Crore. Total Purchases are of INR 50 lacs. The total expenses are INR 20 lacs that includes a salary, rent, electricity, maintenance, travelling, etc. Can he opt for the Presumptive Taxation Scheme under Section 44AD?

Since the gross sales are less than INR 2 Crore, Akshay can opt for Presumptive Taxation Scheme under Section 44AD.

  • Pay tax on INR 12,40,000 lacs as per the slab rate.
  • Do not maintain books of accounts as per Sec 44AA.
  • Do not go for Tax Audit since the income reported is atleast 6% of gross receipts for digital transactions and atleast 8% of gross receipts for non-digital transactions.

Income Tax on Presumptive Income under Section 44AD

  • Income Head and Tax Rate – Income under the presumptive taxation scheme is a business income classified under the head PGBP. Such income is taxable at slab rates as per the Income Tax Act.
  • Claiming Expenses – Since the taxpayer reports a fixed percentage of gross receipts as the income, he/she cannot claim expenses. However, they can claim deductions under Chapter VI-A. Partner’s remuneration and interest on capital can be claimed as an expense in case of a partnership firm opting for presumptive taxation.
  • Payment of Advance Tax – Taxpayer opting for presumptive taxation scheme under Sec 44AD should pay the entire amount of advance tax on or before 15th March of the financial year. If the advance tax payment is not done before the due date, interest under Section 234C is levied. The interest would be levied only if the tax liability exceeds INR 10,000.
  • ITR Form – Taxpayers opting for presumptive taxation under Section 44AD should report such income as PGBP Income and file Form ITR 4 on the Income Tax Website. They must mention the specified Business and Profession Codes based on the nature of the profession. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.

Tax Audit and Books of Accounts for Presumptive Income under Section 44AD

  • Books of Accounts under Sec 44AA – If a taxpayer opts for a presumptive taxation scheme u/s 44AD and reports income at 6%/8% or more of the gross receipts, he/she is not required to maintain books of accounts as per Sec 44AA.
  • Applicability of Tax Audit – If a taxpayer declares income less than 6%/8% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption limit), he/she should maintain books of accounts and get the books of accounts audited under Section 44AB(e)
Check Tax Audit Applicability u/s 44AB
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Section 44AD of Income Tax – 5 Year Rule

As per this rule, if a taxpayer opts for the presumptive taxation scheme in a financial year, he/she should opt for it for the next 5 financial years continuously. However, if the taxpayer fails to do so, he/she would not be able to take the benefit of presumptive taxation scheme for the next 5 financial years. For eg: A professional opts for Sec 44AD for AY 2018-19 and AY 2019-20. However, for AY 2020-21, he does not opt for the presumptive taxation scheme. In this case, he will not be eligible to claim the benefit of the presumptive taxation scheme for the next five AYs, i.e. from AY 2021-22 to AY 2025-26.

FAQs

Do I need to pay advance tax if I opt for the Presumptive Taxation Scheme under Section 44AD?

Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.

Do I need to maintain books of accounts if I opt for the Presumptive Taxation Scheme under Section 44AD?

A person engaged in a business having gross sales or turnover up to INR 2 Cr has the option to opt for the Presumptive Taxation Scheme under Sec 44AD. He/she can report 6%/8% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.

Section 44ADA of Income Tax Act – Presumptive Taxation for Profession

What is Section 44ADA of Income Tax Act?

To provide relief to small taxpayers from the tedious task of maintaining books of accounts and getting books of accounts audited, the CBDT had introduced the Presumptive Taxation Scheme. Under Budget 2016, the finance minister introduced the presumptive taxation scheme for specified professionals under Section 44ADA of Income Tax Act. FY 2016-17 onwards, a professional with gross receipts up to INR 50 lacs can take the benefit of presumptive taxation under Section 44ADA.

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Who can opt for Presumptive Taxation under Section 44ADA of Income Tax Act?

A resident taxpayer engaged in any of the following professions can take advantage of the Presumptive Taxation Scheme under Section 44ADA:

  1. Legal
  2. Medical
  3. Engineering
  4. Architecture
  5. Accountancy
  6. Technical Consultancy
  7. Interior Decoration
  8. Any other specified profession that CBDT notified
    • Film Artists – cameraman, producer, editor, dance director, actor, director, music director, art director, lyricist, story writer, screenplay or dialogue writer, singer, and costume designers.
    • Authorised Representatives – a person who represents someone before a tribunal or any legal authority in exchange for a fee. It does not include an employee of the person or a person who is carrying on the profession of accountancy.

Calculation of Presumptive Income under Section 44ADA of Income Tax

To opt for Presumptive Taxation Scheme under Section 44ADA of Income Tax Act, the following two conditions should be satisfied:

  1. The gross receipts of the profession should be less than or equal to INR 50 lacs.
  2. The taxpayer should report 50% or more of the gross receipts as income in the ITR.
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Example

Arjun is a freelance designer. His total receipts for FY 2019-20 is 45 lacs. The total expenses are INR 25 lacs that includes a subscription for designing software, salary, rent, electricity, travelling, etc.

Particulars Amount
Gross Receipts 45,00,000
Expenses (25,00,000)
Net Profit 20,00,000

Does not opt for Presumptive Taxation u/s 44ADA

  • Pay tax on INR 20 Lakhs as per the slab rate.
  • Maintain books of accounts as per Sec 44AA.
  • Go for Tax Audit since the profit is less than 50% of gross receipts and total income is more than the basic exemption limit of INR 2.5 lacs.

Opts for Presumptive Taxation u/s 44ADA

Particulars Amount (INR)
Gross Receipts 45,00,000
Presumptive Income (50%) 22,50,000
  • Pay tax on INR 22.5 lacs as per slab rate.
  • Do not maintain books of accounts as per Sec 44AA.
  • Do not go for Tax Audit since the profit is at least 50% of gross receipts.

Income Tax on Presumptive Income under Section 44ADA

  • Income Head and Tax Rate – Income under the presumptive taxation scheme is a business income classified under the head PGBP. Such income is taxable at slab rates as per the Income Tax Act.
  • Claiming Expenses – Since the taxpayer reports a fixed percentage of gross receipts as the income, he/she is not allowed to claim expenses. However, they can claim deductions under Chapter VI-A.
  • Payment of Advance Tax – Taxpayer opting for presumptive taxation scheme under Sec 44ADA should pay the entire amount of advance tax on or before 15th March of the financial year. If the advance tax payment is not done before the due date, interest under Section 234C is levied. The interest would be levied only if the tax liability exceeds INR 10,000.
  • ITR Form – Taxpayers opting for presumptive taxation under Sec 44ADA should report such income as PGBP Income and file Form ITR-4 on the Income Tax Website. They must mention the specified Business and Profession Codes based on the nature of the profession. If the taxpayer has income from capital gains along with presumptive income, he/she should file Form ITR 3.

Tax Audit and Books of Accounts for Presumptive Income under Section 44ADA

  • Books of Accounts under Sec 44AA – If a taxpayer opts for a presumptive taxation scheme u/s 44ADA and reports income at 50% or more of the gross receipts, he/she is not required to maintain books of accounts as per Sec 44AA.
  • Applicability of Tax Audit – If a taxpayer declares income less than 50% of gross receipts and the total income exceeds INR 2,50,000 (basic exemption limit), he/she should maintain books of accounts and get the books of accounts audited under Section 44AB(d)
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FAQs

I am a freelancer and I opted for Presumptive Scheme u/s 44ADA. Can I claim expenses like internet, rent, travelling, etc?

A freelancer who has opted for Presumptive Scheme u/s 44ADA should report 50% or more of gross receipts as income. There is an option to declared a fixed percentage of receipts as profit and not maintain any books of accounts. Thus, the freelancer cannot claim any further expenses. However, he/she can claim Chapter VI-A deductions like LIC premium, mediclaim premium, donations, etc.

Do I need to pay advance tax if I opt for Presumptive Taxation Scheme under Section 44ADA?

Yes. If the total tax liability for a financial year exceeds INR 10,000, you must pay advance tax. If you have opted for presumptive taxation scheme u/s 44AD or 44ADA, you are required to pay advance tax on or before 15th March instead of 4 installments in other cases. However, if you fail to pay advance tax by 15th March of the financial year, interest is Sec 234B and Sec 234C is required to be paid.

Do I need to maintain books of accounts if I opt for Presumptive Taxation Scheme under Section 44ADA?

A person engaged in specified profession having gross receipts up to INR 50 lacs has the option to opt for Presumptive Taxation Scheme under Sec 44ADA. He/she can report 50% or more of gross receipts as income and pay tax on it. If they opt for Presumptive Taxation, they are not required to maintain books of accounts as per Section 44AA. They are also not liable for Tax Audit as per Section 44AB.

Securities Transaction Tax – STT

STT i.e. Securities Transaction Tax is levied on the purchase and sale of securities listed on a recognized stock exchange in India. The STT Act has a list of securities on which STT is applicable. Such securities include equity, derivatives, and units of equity mutual fund. The STT rate is prescribed by the Government. STT should be paid by buyer or seller.

  • The recognized stock exchange collects STT from the buyer or seller
  • The recognized stock exchange deposits STT with the government on or before 7th of the next month
  • Buyer or Seller can claim STT as a business expense against trading income

If the recognized stock exchange is unable to collect STT from the trader, it is still liable to deposit STT with the government to avoid interest and penalty.

Securities on which STT is levied

Securities Transaction Tax is charged on the Securities that are traded on a recognized stock exchange in India. Following is the list of securities on which STT is levied.

Securities Transaction Tax Rates

Transaction STT Rate Who pays? Value
Purchase of equity share (delivery based) or unit of business trust 0.1% Buyer Purchase Value
Sale of equity share (delivery based) or unit of business trust 0.1% Seller Sale Value
Purchase of equity mutual fund (delivery based) NIL Buyer Not Applicable
Sale of equity mutual fund (delivery based) 0.001% Seller Sale Value
Sale of equity share (intraday) and equity mutual fund (without actual delivery) 0.025% Seller Sale Value
Sale of Exchange Traded Funds (ETFs) 0.001% Seller Sale Value
Sale of Futures 0.01% Seller Sale Value
Sale of Options (option not exercised) 0.017% Seller Option Premium
Sale of Options (option is exercised) 0.125% Buyer Settlement Price
Sale of unlisted equity shares under an IPO which are later listed on a recognized stock exchange 0.2% Seller Sale Value

Income Tax on Securities with STT paid

The income tax rate for securities on which STT is paid is lower than the income tax rate for other assets. Here are the Income Tax rates for securities on which STT is paid.

Type of Security Period of Holding LTCG STCG
Equity Shares / Equity MF / ETF / ESOP / RSU 12 months 10% in excess of INR 1 lac 15%
Foreign Shares 24 months 10% without indexation slab rate

In the case of Equity Shares and Equity MF, the investor should calculate the cost of acquisition after applying the grandfathering rule. Read about how to calculate income tax on LTCG on sale of equity shares and equity mutual funds.

A trader having income from trading in securities and report such income as Business Income can claim STT as a valid business expense. STT paid on trading transactions is a direct expense related to trading income. The trader can report it as an expense in the P&L Account while filing ITR-3 on the Income Tax Website.

FAQs

How is STT charged on Intraday Trading?

STT is charged on the sell value of the transaction at 0.025%. Here is an example:
Trader buys 100 shares of HDFC at Rs.1000 each at 11:30 AM on Monday & sells them off at Rs.1006 at 2:00 PM. STT will be Rs.25.13 calculated as Rs.1006*100*0.025% = Rs.25.15

How is STT charged on F&O Trading?

STT is charged on the sell value of the transaction at 0.01%. Here is an example:
A trader sells 1 lot of NIFTY on at 9000. His total volume comes to Rs.9000*75 = Rs.6,75,000. STT on this trade will be calculated as Rs.6,75,000*0.01% = Rs.67.5

How is STT different from CTT?

STT is Securities Transaction Tax and CTT is Commodity Transaction Tax. STT is levied on trading in securities such as equity delivery, equity intraday, equity F&O, ETFs, Mutual Funds etc. CTT is levied on trading in non-agri commodity derivatives.

Updated Codes: Nature of Business and Profession

Introduction

The Central Board of Direct Taxes (CBDT) has changed the business and profession codes for the Income Tax Return (ITR) from Assessment Year 2019-2020. Hence, you must select the correct codes for the nature of the business or nature of the profession to report the correct information in the ITR. The nature of business code should be selected while filing ITR-3 and ITR-4 on the Income Tax Website.

  • ITR-3 – Taxpayer having income from business/profession who do not opt for the Presumptive Taxation Scheme should prepare financial statements and file ITR-3. The taxpayer should select the correct codes and category under which the business or profession can be classified from the drop-down list. Description of business/profession activity and Trade Name of the business/profession can also be added.
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  • ITR-4 – Taxpayer having income from business or profession and opting for Presumptive Taxation Scheme u/s 44AD or 44ADA is not required to maintain books of accounts and should file ITR-4. However, the taxpayer should select the correct codes and category under which the business or profession can be classified from the drop-down list. Description of business/profession activity and Trade Name of the business/profession can also be added.
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List of Business and Profession Codes

I. Profession Codes

Select the code from the list below in case of Income from Profession under ITR-3 or for opting Presumptive Taxation Scheme under Sec 44ADA under ITR-4:

Sub-Sector Code
Advertising  16006
Auctioneers  16010
Business brokerage 16011
Market research and public opinion polling  16012
Labour recruitment and provision of personnel  16014
Investigation and security services  16015
Building-cleaning and industrial cleaning activities  16016
Packaging activities  16017
Other professional services n.e.c. 16019

II. Business Codes

Code Sub-Sector
14001 Software development
14002 Other Software consultancy 
14003 Data processing
14004 Database activities and distribution of electronic content
14005 Other IT enabled services
14006 BPO Service
14008 Maintenance and repair of office, accounting, and computing machinery
16001 Legal Profession
16002 Accounting, Auditing, and book-keeping profession
16003 Tax Consultancy 
16004 Architectural Profession
16005 Engineering and technical consultancy 
16007 Fashion design
16008 Interior decoration
16009 Photography
16013 Business and Management Consultancy activities 
16018 Secretarial activities
16019_1 Medical profession
16020 Film artist
General hospitals 18001
Specialty and super-specialty hospitals 18002
Nursing homes 18003
Diagnostic centers 18004
Pathological laboratories  18005
Medical clinics  18010
Dental practice  18011
Ayurveda practice  18012
Unani practice  18013
Homeopathy practice  18014
Nurses, physiotherapists or other para-medical practitioners 18015
Veterinary hospitals and practice 18016
Other healthcare services  18017
Medical research  18018
Practice of other alternative medicine 18019
Individual artists excluding authors 18020
Individual artists excluding authors 20010
Literary activities 20011
Other cultural activities n.e.c. 20012

Agricultural, Animal, Husbandry & Forestry

Sub-Sector Code
Growing and manufacturing of tea 01001
Growing and manufacturing of coffee 01002
Growing and manufacturing of rubber 01003
Market gardening and horticulture specialties 01004
Raising of silkworms and production of silk 01005
Raising of bees and production of honey 01006
Raising of poultry and production of eggs 01007
Rearing of sheep and production of wool 01008
Rearing of animals and production of animal products 01009
Agricultural and animal husbandry services 01010
Soil conservation, soil testing, and soil desalination services 01011
Hunting, trapping and game propagation services 01012
Growing   of   timber,   plantation,   operation   of   tree   nurseries   and
conserving of forest
01013
Gathering of tendu leaves 01014
Gathering of other wild-growing materials 01015
Forestry   service   activities,   timber   cruising,   afforestation   and
reforestation
01016
Logging service activities, transport of logs within the forest 01017
Other agriculture, animal husbandry or forestry activity n.e.c 01018

Fish Farming

 Sub-Sector Code 
Fishing on a commercial basis in inland waters 02001
Fishing on commercial basis in ocean and coastal areas 02002
Fish farming 02003
Gathering of marine materials such as natural pearls, sponges, coral
etc.
02004
Services related to marine and fresh water fisheries, fish hatcheries
and fish farms
02005
Other Fish farming activity n.e.c 02006

Mining and Quarrying

Sub-Sector  Code 
Mining and agglomeration of hard coal 03001
Mining and agglomeration of lignite 03002
Extraction and agglomeration of peat 03003
Extraction of crude petroleum and natural gas 03004
Service  activities  incidental  to  oil  and  gas  extraction  excluding
surveying
03005
Mining of uranium and thorium ores 03006
Mining of iron ores 03007
Mining of non-ferrous metal ores, except uranium and thorium ores 03008
Mining of gemstones 03009
Mining of chemical and fertilizer minerals 03010
Mining of quarrying of abrasive materials 03011
Mining of mica, graphite and asbestos 03012
Quarrying of stones (marble/granite/dolomite), sand and clay 03013
Other mining and quarrying 03014
Mining and production of salt 03015
Other mining and quarrying n.e.c 03016

Manufacturing

Sub-Sector  Code 
Production, processing and preservation of meat and meat products 04001
Production, processing and preservation of fish and fish products 04002
Manufacture of vegetable oil, animal oil and fats 04003
Processing of fruits, vegetables and edible nuts 04004
Manufacture of dairy products 04005
Manufacture of sugar 04006
Manufacture of cocoa, chocolates and sugar confectionery 04007
Flour milling 04008
Rice milling 04009
Dal milling 04010
Manufacture of other grain mill products 04011
Manufacture of bakery products 04012
Manufacture of starch products 04013
Manufacture of animal feeds 04014
Manufacture of other food products 04015
Manufacturing of wines 04016
Manufacture of beer 04017
Manufacture of malt liquors 04018
Distilling and blending of spirits, production of ethyl alcohol 04019
Manufacture of mineral water 04020
Manufacture of soft drinks 04021
Manufacture of other non-alcoholic beverages 04022
Manufacture of tobacco products 04023
Manufacture of textiles (other than by handloom) 04024
Manufacture of textiles using handlooms (khadi) 04025
Manufacture  of  carpet,  rugs,  blankets,  shawls  etc.  (other  than  by
hand)
04026
Manufacture of carpet, rugs, blankets, shawls etc. by hand 04027
Manufacture of wearing apparel 04028
Tanning and dressing of leather 04029
Manufacture of luggage, handbags and the like saddler and harness 04030
Manufacture of footwear 04031
Manufacture  of  wood  and  wood  products,  cork,  straw and  plaiting
material
04032
Manufacture of paper and paper products 04033
Publishing, printing and reproduction of recorded media 04034
Manufacture of coke oven products 04035
Manufacture of refined petroleum products 04036
Processing of nuclear fuel 04037
Manufacture of fertilizers and nitrogen compounds 04038
Manufacture of plastics in primary forms and of synthetic rubber 04039
Manufacture of paints, varnishes and similar coatings 04040
Manufacture of pharmaceuticals, medicinal chemicals and botanical
products
04041
Manufacture of soap and detergents 04042
Manufacture of other chemical products 04043
Manufacture of man-made fibers 04044
Manufacture of rubber products 04045
Manufacture of plastic products 04046
Manufacture of glass and glass products 04047
Manufacture of cement, lime and plaster 04048
Manufacture of articles of concrete, cement and plaster 04049
Manufacture of Bricks 04050
Manufacture of other clay and ceramic products 04051
Manufacture of other non-metallic mineral products 04052
Manufacture of pig iron, sponge iron, Direct Reduced Iron etc. 04053
Manufacture of Ferro alloys 04054
Manufacture of Ingots, billets, blooms and slabs etc. 04055
Manufacture of steel products 04056
Manufacture of basic precious and non-ferrous metals 04057
Manufacture of non-metallic mineral products 04058
Casting of metals 04059
Manufacture of fabricated metal products 04060
Manufacture of engines and turbines 04061
Manufacture of pumps and compressors 04062
Manufacture of bearings and gears 04063
Manufacture of ovens and furnaces 04064
Manufacture of lifting and handling equipment 04065
Manufacture of other general purpose machinery 04066
Manufacture of agricultural and forestry machinery 04067
Manufacture of Machine Tools 04068
Manufacture of machinery for metallurgy 04069
Manufacture of machinery for mining, quarrying and constructions 04070
Manufacture of machinery for processing of food and  beverages 04071
Manufacture of machinery for leather and textile 04072
Manufacture of weapons and ammunition 04073
Manufacture of other special purpose machinery 04074
Manufacture of domestic appliances 04075
Manufacture of office, accounting and computing machinery 04076
Manufacture of electrical machinery and apparatus 04077
Manufacture  of  Radio,  Television,  communication  equipment  and apparatus 04078
Manufacture of medical and surgical equipment 04079
Manufacture of industrial process control equipment 04080
Manufacture  of  instruments  and  appliances  for  measurements  and
navigation
04081
Manufacture of optical instruments 04082
Manufacture of watches and clocks 04083
Manufacture of motor vehicles 04084
Manufacture of body of motor vehicles 04085
Manufacture of parts & accessories of motor vehicles &  engines 04086
Building & repair of ships and boats 04087
Manufacture of railway locomotive and rolling stocks 04088
Manufacture of aircraft and spacecraft 04089
Manufacture of bicycles 04090
Manufacture of other transport equipment 04091
Manufacture of furniture 04092
Manufacture of jewellery 04093
Manufacture of sports goods 04094
Manufacture of musical instruments 04095
Manufacture of games and toys 04096
Other manufacturing n.e.c. 04097
Recycling of metal waste and scrap 04098
Recycling of non- metal waste and scrap 04099

Electricity, Gas and Water

Sub-Sector  Code 
Production, collection and distribution of electricity 05001
Manufacture and distribution of gas 05002
Collection, purification and distribution of water 05003
Other essential commodity service  n.e.c 05004

Construction

Sub-Sector  Code 
Site preparation works 06001
Building of complete constructions or parts- civil contractors 06002
Building installation 06003
Building completion 06004
Construction and maintenance of roads, rails, bridges, tunnels, ports,
harbour, runways etc.
06005
Construction and maintenance of power plants 06006
Construction  and maintenance of industrial plants 06007
Construction  and maintenance of power transmission and
telecommunication lines
06008
Construction of water ways and water reservoirs 06009
Other construction activity n.e.c. 06010

Real Estate and Renting Services

Sub-Sector Code
Purchase, sale, and letting of leased buildings (residential and non-residential) 07001
Operating of real estate of self-owned buildings (residential and non-residential) 07002
Developing and subdividing real estate into lots 07003
Real estate activities on a fee or contract basis  07004
Other real estate/renting services n.e.c 07005

Renting of Machinery

Sub-Sector  Code 
Renting of land transport equipment 08001
Renting of water transport equipment 08002
Renting of air transport equipment 08003
Renting of agricultural machinery and equipment 08004
Renting of construction and civil engineering machinery 08005
Renting of office machinery and equipment 08006
Renting of other machinery and equipment n.e.c. 08007
Renting of personal and household goods n.e.c. 08008
Renting of other machinery n.e.c. 08009

Wholesale and Retail Trade

Sub-Sector  Code 
Wholesale and retail sale of motor vehicles 09001
Repair and maintenance of motor vehicles 09002
Sale of motor parts and accessories- wholesale and retail 09003
Retail sale of automotive fuel 09004
General commission agents, commodity brokers and auctioneers 09005
Wholesale of agricultural raw material 09006
Wholesale of food & beverages and tobacco 09007
Wholesale of household goods 09008
Wholesale of metals and metal ores 09009
Wholesale of household goods 09010
Wholesale of construction material 09011
Wholesale of hardware and sanitary fittings 09012
Wholesale of cotton and jute 09013
Wholesale of raw wool and raw silk 09014
Wholesale of other textile fibres 09015
Wholesale of industrial chemicals 09016
Wholesale of fertilizers and pesticides 09017
Wholesale of electronic parts & equipment 09018
Wholesale of other machinery, equipment and supplies 09019
Wholesale of waste, scrap & materials for re-cycling 09020
Retail sale of food, beverages and tobacco in specialized stores 09021
Retail sale of other goods in specialized stores 09022
Retail sale in non-specialized stores 09023
Retail sale of textiles, apparel, footwear, leather goods 09024
Retail sale of other household appliances 09025
Retail sale of hardware, paint and glass 09026
Wholesale of other products n.e.c 09027
Retail sale of other products n.e.c 09028

Hotels, Restaurants and Hospitality Services

Sub-Sector  Code
Hotels – star rated 10001
Hotels – non-star rated 10002
Motels, inns, and Dharmshalas 10003
Guesthouses and circuit houses 10004
Dormitories and hostels at educational institutions  10005
Short stay accommodations n.e.c 10006
Restaurants – without bars 10007
Canteens 10008
Independent caterers 10009
Casinos and other games of chance 10010
Other hospitality services n.e.c 10011

Transport & Logistics Services

 

Sub-Sector Code
Travel agencies and tour operators  11001
Packers and movers 11002
Passenger land transport  11003
Air transport 11004
Transport by urban/sub-urban railways 11005
Inland water transport 11006
Sea and coastal water transport 11007
Freight transport by road 11008
Freight transport by railways 11009
Forwarding of freight  11010
Receiving and acceptance of freight 11011
Cargo handling  11012
Storage and warehousing 11013
Transport via pipelines (transport of gases, liquids, slurry, and other commodities) 11014
Other transport and logistics services n.e.c 11015

Post and Telecommunication Services

Sub-Sector Code
Post and courier activities  12001
Basic telecom services 12002
Value added telecom services 12003
Maintenance of telecom network 12004
Activities of the cable operators 12005
Other post & telecommunication services n.e.c 12006

Financial Intermediation Services

Sub-Sector Code
Commercial, saving banks and discount houses 13001
Specialized institutions granting credit 13002
Financial leasing  13003
Hire-purchase financing  13004
Housing finance activities  13005
Commercial loan activities  13006
Credit cards 13007
Mutual funds 13008
Chit fund 13009
Investment activities 13010
Life insurance  13011
Pension funding  13012
Non-life insurance  13013
Administration of financial markets 13014
Stockbrokers, sub-brokers and related activities 13015
Financial advisers, Mortgage advisers, and brokers 13016
Foreign exchange services 13017
Other financial intermediation services n.e.c 13018

Sub-Sector Code
Cybercafe 14007
Computer training and educational institutes 14009
Other computation related services n.e.c 14010

Research and Development

Sub-Sector  Code 
Natural sciences and engineering 15001
Social sciences and humanities 15002
Other Research & Development activities n.e.c. 15003

Education Services

Sub-Sector  Code
Primary education 17001
Secondary/senior secondary education 17002
Technical and vocational secondary/senior secondary education  17003
Higher education  17004
Education by correspondence  17005
Coaching centers tuitions  17006
Other education services n.e.c 17007

Health Care and Services

Sub-Sector Code
Independent blood banks  18006
Medical transcription  18007
Independent ambulance services 18008
Medical suppliers, agencies and stores 18009

Social and Community Work

Sub-Sector  Code 
Social work activities with accommodation (orphanages and old age homes) 19001
Social work activities without accommodation (Creches) 19002
Industry associations, chambers of commerce 19003
Professional organisations 19004
Trade unions 19005
Religious organizations 19006
Political organisations 19007
Other membership organisations n.e.c. (rotary clubs, book clubs and 19008
philatelic clubs)  
Other Social or community service n.e.c 19009

Culture and Sport

Sub-Sector  Code 
Motion picture production 20001
Film distribution 20002
Film laboratories 20003
Television channel productions 20004
Television channels broadcast 20005
Video production and distribution 20006
Sound recording studios 20007
Radio – recording and distribution 20008
Stage production and related activities 20009
Circuses and race tracks 20013
Video Parlours 20014
News agency activities 20015
Library and archives activities 20016
Museum activities 20017
Preservation of historical sites and buildings 20018
Botanical and zoological gardens 20019
Operation and maintenance of sports facilities 20020
Activities of sports and game schools 20021
Organisation and operation of indoor/outdoor sports and promotion and production of sporting events 20022
Other sporting activities n.e.c. 20023
Other recreational activities n.e.c. 20024

Other Services

Sub-Sector Code
Hairdressing and other beauty treatment 21001
Funeral and related activities 21002
Marriage bureaus  21003
Pet care services 21004
Sauna and steam baths, massage salons, etc. 21005
Astrological and spiritualists’ activities  21006
Private households as employers of domestic staff 21007
Other services n.e.c 21008

Extra Territorial Organisations and Bodies

Sub-Sector  Code 
Extraterritorial organizations and   bodies   (IMF,   World   Bank, European Commission etc.) 22001

FAQs

What is the full form of “n.e.c”?

“n.e.c” stands for “not elsewhere classified.” Hence, the information given here is exclusive and not available elsewhere.

How to Choose the Correct Business or Profession Codes?

Follow these steps to select the correct business or profession codes:

-Select the codes by verifying the nature of the product or services involved to determine the sector of business or profession.
-Under each sector, the nature of the activity involved is to be seen for determining the sub-sector.
-In case you are undertaking multiple activities, different businesses, or professions, then you have to select various codes under the same trade name.
-In cases where there is more than one trade name for the under single PAN, then you have to mention multiple codes under different trade names.
-Each Sector has an others code n.e.c., in case your product or services or activity is not specifically listed in the main classification, then one can choose n.e.c.

ITR Documents : Business and Professional Income

Any Income earned from the Business and Profession of a taxpayer is taxed under the head “Income from Business and Profession“. Business is an occupation that is carried by a person with the intent of earning profits. Any income earned from that is considered as Business Income. A profession is a job requiring specialized knowledge, skill, or thought. Any income earned from that is called Professional income.

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Document Checklist for Business and Profession Income

PAN

Income Tax Department (ITD) issues Permanent Account Number (PAN). It is an alphanumeric ID of a taxpayer who is liable to pay taxes. PAN enables the department to link all transactions of the “Person” with his “Income”. Hence it is the most essential document while filing ITR.

Aadhaar

Aadhaar (Aadhaar Card) a 12 digit unique identification number issued by the UIDAI (Unique Identification Authority of India). It is mandatory for Resident Individuals to provide details of Aadhaar while filing ITR.

Books of accounts

A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity for a particular year. While profit & loss statement/Income-Expense statement discloses incomes and gains that are credited and expenses and losses that are debited in order to show the net profit or loss for a given period of time. Supporting documents are also required in case of any extra expenses incurred that has been mentioned in the P&L/I&E Statement.

Bank account statement

Bank Statement with details of business transaction is an essential document to prepare ITR. Details of incomes and expenses can also be derived using the Bank Statement to prepare financial statements such as Balance Sheet and P&L Account.

Cash Register

Cash transactions reported in the Cash Register is used to prepare the Income Tax Return of the business. It is important to disclose information such as Cash Balance as on 31st March, details of cash payments for expenses etc

Form 26AS

Form 26AS is a consolidated Tax Credit Statement which provides the following details to a taxpayer.

  • ​Details of taxes deducted from the taxpayer’s income.
  • ​Details of taxes collected from taxpayer’s payments.
  • Advance Taxes, Self Assessment Taxes and Regular Assessment Taxes paid by the taxpayers.
  • Details of the refund received during the year.
  • Details of any high-value transactions (for eg. Shares, Mutual Funds, etc.).

It is very important to check Form 26AS before e-filing the Income Tax Return because no one would want their tax credits to be unclaimed. 

Investment Proofs

Investment proofs such as Donation Receipts, Fixed Deposit Statement, Rent Agreement, etc are required to claim eligible deductions under Chapter VI-A while filing ITR of a business or profession.

31st July
ITR filing Due Date for taxpayers having Business and Profession Income to whom Tax Audit is not applicable.
31st July
ITR filing Due Date for taxpayers having Business and Profession Income to whom Tax Audit is not applicable.

FAQs

Do I have to submit an Audit report while filing ITR for business income?

Tax Audit is applicable if your turnover from the business is more than 1 Cr. and the net profit of a business in less than 6%. Or if your gross receipts from the profession are more than 50 lakhs or net receipts are less than 50%. In this case, the Audit Report also has to be included while filing ITR.

Which financial statements are prepared to file ITR for business or professional income?

Balance sheet and Profit and loss statement are required to filed in ITR for business and professional income. A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity for a particular year. Profit and loss statement is used by businesses to record their incomes and gains credited and expenses and losses debited.

Which ITR to file for business income?

In the case of proprietor having a business income, he can file either ITR-3 or ITR-4. ITR-3 for business income and trading income. ITR-4 for business under presumptive taxation scheme. Moreover, Partnership Firm and LLP carrying business need to file ITR-5 and Companies have to file ITR-6.

What happens if I delay filing my ITR?

Firstly, If your income falls under the taxable bracket you have to file your ITR without fail. Secondly, If you missed the deadline to file the ITR you can still file it but you may attract penalties. Moreover, If you don’t pay your taxes on time then if you are claiming any refunds they will get delayed. You will get lesser time to revise your ITR. and Lastly, You will have to pay interest on the taxable amount if you delay filing your ITR.

Who is required to file ITR?

If your age is below 60 years and your income is more than rupees 2.5 lakh p.a then you are eligible to file your ITR.

What are the documents required to file ITR?

Following are the documents required to file ITR:
-PAN
-Aadhaar
-Form 26AS
-Bank Account Details
-Tax Payment Challan
-Original Return (if filed)

Equity Trading Income: Delivery, Intraday, Futures & Options

Equity trading includes means buying and selling of various financial instruments such as delivery stocks, intraday, futures, and options, etc. The buying and selling of stocks and securities are done with an intention to create an investment portfolio or to earn profits due to fluctuations in prices.

Different forms of trading include Equity Delivery, Intraday, Futures, Options, Commodity Trading, Currency Trading, etc. Therefore, it is important to understand the different types of trading to calculate trading turnover, determine the applicability of Tax Audit, determine applicable ITR Form, calculate tax liability, etc. Let us understand the different types of equity, intraday, futures, and options trading in detail.

Equity Intraday Trading

When a trader buys an equity share and sells it on the same day, it is called Equity Intraday Trading. The intention is to earn profits from the fluctuation of prices in a single day. In the case of Equity Intraday Trading, there is no delivery of shares and therefore ownership is not transferred. For Income Tax, Equity Intraday Trading is considered as a Speculative Business Income since trading is done without the delivery of shares and with an intention to earn quick profits.

ITR for Intraday Traders
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Example of Equity Intraday Trading

Below is the Price of 1 Equity Share of Sun Pharma

Date Time Price (INR)
29th January 2020 11:00 AM 445
29th January 2020 2:30 PM  451

Akshay buys 100 shares of Sun Pharma on 29th January 2020 11:00 AM and sells them on 29th January 2020 2:30 PM

  • This is called Equity Intraday Trading since the shares are bought and sold on the same day
  • Profit = 100 shares * (451 – 445) = Rs. 600
  • Since the shares are not transferred to the trader’s Demat account, it is considered as a Speculative Business Income

Equity Delivery Trading

When a trader buys an equity share from the stock market and retains it for more than 1 day, it is called Equity Delivery Trading. It is called delivery trading because the intention of this purchase is to hold the share for a time long enough for the ownership to be transferred to the buyer. In this case, the share is delivered to the trader’s Demat account.

The intention is to earn short/long term capital gains. Equity Delivery Trading is considered as either Capital Gains or Non-Speculative Business Income.

ITR for Capital Gains from Investment in Stocks
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Types of Equity Shares

Equity shares are also referred to as ordinary shares. They are one of the most common kinds of shares. Equity shares are classified as per the type of share capital.

  • Authorised share capital: This is the maximum amount of capital a company can issue. A company can raise such capital by issuing equity shares. However, companies can increase the authorized share from time to time.
  • Issued share capital:
    • This is the portion of authorised capital that a company offers to its investors
    • For example, if the nominal value of one stock is INR 100 and a company has issued 40,000 such shares, then its issued share capital will be INR 40 lakh
  • Subscribed share capital:
    • This refers to the portion of issued capital upon which investors accept and agree
    • Referring to the above example, in case investors have purchased 25,000 shares of that company, then its subscribed capital would be INR 25 lakh. If investors buy all the stocks that a company has issued, then issued and subscribed equity shall be the same
  • Paid-up capital:
    • The amount of money investors pay against its holdings of a company’s stock is its paid-up capital
    • Since most companies accept the entire subscription amount at one go, and therefore, subscribed and paid capital are the same thing.
    • Furthermore, if a stock is trading at a premium, then that excess amount is accounted as shares premium

There are a few other types of shares

  • Right shares:
    • Right shares refer to the shares that a company issues to its existing shareholders to purchase new shares at a specific price within a particular period
    • In other words, the right shares are those new stocks on which existing stakeholders can lay claim before such issuing company opens them up to public trading
    • Such stocks are issued to protect the ownership rights of existing shareholders
    • Similar to bonus shares, companies issue the right shares on a pro-rata basis as well
  • Sweat equity shares:
    • Organizations often compensate employees or directors for their exceptionally well performance by issuing sweat equity shares to reward them
    • Several companies use this compensation method to enhance employee retention by endowing them with a stake in that organization’s assets and ownership
  • Bonus shares:
    • Bonus shares are those stocks that companies issue to the existing shareholders without any additional charge
    • Usually, companies provide these bonus shares to shareholders instead of paying out dividends
    • Furthermore, organizations issue bonus shares on a pro-rata basis.
    • So, if Mr. Ansh holds 100 shares of ITC Ltd and the company announces its decision to issue 1:4 as a bonus, then he will receive 25 additional shares for free
  • Voting and non-voting shares:
    • Generally, most types of equity shares carry voting rights because of the stake in ownership it entails.
    • However, in some cases, companies can issue shares with the condition that it will confer differential or no voting right at all to such shareholders

Example of Equity Delivery Trading

Below is the Price of 1 Equity Share of Sun Pharma

Date Time Price (INR)
29th January 2020 11:00 AM  445
29th January 2020 2:30 PM 451
30th April 2020 1:00 PM 441

Akshay buys 100 shares of Sun Pharma on 29th January 2020 11:00 AM and sells them on 30th April 2020 1:00 PM

Equity Futures

When a trader expects the price of a share to move up or move down in the near future, they can enter into a Futures Contract. Therefore, a Futures contract is an agreement to buy or sell an underlying asset on a future date at a pre-agreed price. The trader is required to deposit advance money called ‘Margin’ with the brokerage house to ensure that they do not default in case of a loss. Once the trader squares off the futures position or the Futures Contract expires, the margins are unblocked. In the case of a Futures Contract, the buyer’s gain equals the seller’s loss and vice versa.

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Example of Futures Trading

The price of the Futures contracts constantly fluctuates based on demand. Therefore, in the developed market today the futures price is based on demand and supply and one can check the average price on the stock exchange to see the price at which the future is available for them to buy.

  • Underlying Asset – Sun Pharma Share
  • Current Price of Underlying Asset – Rs. 451.55
    This is the current price of the stock which changes based on the trading done.
  • Price of Futures – Rs. 452
    This is the minimum buy price of one shares’ future and also fluctuates with demand for the futures contract.
  • Minimum Lot Size – 1250
    Lot Size is the minimum number of shares that a trader needs to buy or sell to enter a Futures Contract. So it means that the trader should buy or sell in multiples of 1250 shares of Sun Pharma to enter into this Futures Contract.
  • Current Date– 29th January 2020
  • Expiry Date – 30th Jan 2020
    This is the date on which the Futures Contract would expire. The Futures Contract expires on the last Thursday of the month. So in the case of Sun Pharma, the contract would expire on 30th Jan 2020 which is the last Thursday of January

Interpretation of Example: Since the expiry date is in less than a day and the futures price is close to the shares’ current price. However, this also means that the delivery of this share on the future date will be at Rs. 452 regardless of the current price of the share then i.e. even if the shares’ price was to increase to Rs. 460 on 30th Jan 2020 you would still buy them for Rs. 452. The future allows you protection from price fluctuation.

Given below is the snapshot of Futures Contract of Sun Pharma:

Options Trading

Options is a contract with the right to buy or right to sell an underlying asset at an agreed-upon price today (strike price) on a specified future date. Hence, the buyer of an Option receives the ‘Right to Buy’ or ‘Right to Sell’ the underlying asset at a specified future date. Therefore, the seller of an Option has the ‘Obligation to Buy’ or ‘Obligation to Sell’ the underlying asset at a specified future date. The buyer may or may not exercise the option and thus pays a premium to the seller to attain this right. This is called ‘Option Premium’.

  • Buyer of Call Option – Right to Buy the underlying asset at the strike price on a future date
  • Buyer of Put Option – Right to Sell the underlying asset at the strike price on a future date
  • Seller of Call Option – Obligation to Buy the underlying asset at the strike price on a future date
  • Seller of Put Option – Obligation to Sell the underlying asset at the strike price on a future date
Buyer of an Option has a limited loss (premium paid) and unlimited profit while the Seller of an Option has an unlimited loss and limited profit (premium received)
Tip
Buyer of an Option has a limited loss (premium paid) and unlimited profit while the Seller of an Option has an unlimited loss and limited profit (premium received)

Example of Call Option

Akshay buys a Call Option on Nifty Index from Raj at a price of Rs. 1000 and expiry of one month from today. Akshay pays a premium of Rs.10 to Raj.

  • Buyer of Call Option – Akshay
  • Seller of Call Option – Raj
  • Option Premium – Rs.10
  • Expiry of Contract – 1 month
  • Strike Price or Exercise Price – Rs. 1000

If the price of Nifty on expiry is Rs. 1200

  • Akshay’s Call Option is ‘in the money’. He will exercise the Call Option
  • So, Akshay has the ‘Right to Buy’ Nifty at Rs.1000 from Raj
  • Therefore, Akshay’s Total Profit = 1200 – 1000 – 10 = Rs. 190
  • And since Raj has the ‘Obligation to Sell’ Nifty at Rs.1000 to Akshay
  • Raj’s Total Loss = 1000 – 1200 + 10 = Rs. -190

If the price of Nifty on expiry is Rs. 800

  • Akshay’s Call Option is ‘out of the money’. Therefore, he will not exercise the Call Option
  • And hence, The Call Option lapses
  • Therefore, Akshay’s Total Loss = Rs. -10
  • And Raj’s Total Profit = Rs. 10

Example of Put Option

Akshay buys a Put Option on Nifty Index from Raj at a price of Rs. 1000 and expiry of one month from today. And, Akshay pays a premium of Rs.10 to Raj.

  • Buyer of Put Option – Akshay
  • Seller of Put Option – Raj
  • Option Premium – Rs.10
  • Expiry of Contract – 1 month
  • Strike Price or Exercise Price – Rs. 1000

If the price of Nifty on expiry is Rs. 800

  • Akshay’s Put Option is ‘in the money’. So, he will exercise the Put Option
  • And so, Akshay has the ‘Right to Sell’ Nifty at Rs. 1000 to Raj
  • Therefore, Akshay’s Total Profit = 1000 – 800 – 10 = Rs. 190
  • Since Raj has the ‘Obligation to Buy’ Nifty at Rs. 1000 from Akshay
  • Therefore, Raj’s Total Loss = 800 – 1000 + 10 = Rs. -190

If the price of Nifty on expiry is Rs. 1200

  • Akshay’s Put Option is ‘out of the money’. So, he will not exercise the Put Option
  • Hence, the Put Option lapses
  • And Akshay’s Total Loss = Rs. -10
  • Therefore, Raj’s Total Profit = Rs. 10
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FAQs

How do I calculate my Trading Turnover?

Trading turnover is calculated in case of equity intraday, futures, and options. In the case of Equity Intraday Trading, Absolute Profit is Trading Turnover. Trading turnover is required for understanding Tax applicability and Tax audit applicability as well.

What is Absolute Profit?

Absolute Profit means the sum of positive and negative differences in a trade transaction. Eg: Loss from Scrip X is Rs. -5000 and profit from Scrip Y are Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000.

Is Trading Turnover same as Contract Turnover?

No. Trading Turnover is different than Contract Turnover.
Contract Turnover is the sum of the purchase value and sales value. It is not considered for income tax purposes. Trading Turnover or Business Turnover is the absolute profit i.e. sum of positive and negative differences. This turnover is considered to determine the applicability of the tax audit and the applicable ITR form.

Set Off and Carry Forward of Losses under Income Tax Act

Set-Off Losses under Income Tax means adjusting the loss against the taxable income earned; after that, the amount of loss remaining can be carried forward to future years. Therefore, the carry forward of losses can be set off against future incomes. The Income Tax Act has, however, specified rules to set off and carry forward of losses under each head of income. The taxpayer cannot carry forward losses to future years if the income tax return for the year in which loss is incurred is not filed on the Income Tax Website within the due date as per Sec 139(1). However, loss under the head Income from House Property can be carried forward even if the return is filed after the due date.

Set Off Losses

Intra-Head Set Off

A taxpayer who has incurred losses during any year from a particular income head is allowed to adjust such losses against income from any other source falling under the same income head. Hence, the adjusting of loss from a source under a particular income head against income from any other source under the same income head is called Intra Head adjustment.

Restrictions to keep in mind while making Inter Head Adjustment of Loss

  • Loss from speculative business cannot be set off against any income other than
    income from speculative business. However, non-speculative business loss can be
    set off against income from speculative business.
  • Long-term capital loss cannot be set off against any income other than income
    from long-term capital gain. However, short-term capital loss can be set off
    against long-term or short-term capital gain.
  • No loss can be set off against income from winnings from lotteries, crossword
    puzzles, race including horse race, card game, and any other game of any sort or
    from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off
    against any income other than income from the business of owning and
    maintaining race horses.
  • Loss from business specified under section 35AD cannot be set off against any
    other income except income from specified business (section 35AD is applicable
    in respect of certain specified businesses like setting up a cold chain facility,
    setting up and operating warehousing facility for storage of agricultural produce,
    developing and building a housing projects, etc.).

Inter-Head Set Off

Inter Head adjustments are made post Intra Head adjustments. If a taxpayer has incurred loss in any year under one head of income and is also having income from another income head, then he/she can adjust the loss from one income head against the other income head. This is called Inter Head adjustment.

Restrictions to be kept in mind while making Inter Head Adjustment of Loss

  • Before making inter-head adjustment, the taxpayer has to first make intra-head
    adjustment.
  • Loss from speculative business cannot be set off against any other income.
    However, non-speculative business loss can be set off against income from
    speculative business.
  • Loss under head “Capital gains” cannot be set off against income under other
    heads of income.
  • No loss can be set off against income from winnings from lotteries, crossword
    puzzles, race including horse race, card game, and any other game of any sort or
    from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off
    against any other income.
  • Loss from business specified under section 35AD cannot be set off against any
    other income (section 35AD is applicable in respect of certain specified
    businesses like setting up a cold chain facility, setting up and operating
    warehousing facility for storage of agricultural produce, developing and building
    housing projects, etc.)
  • Loss from business and profession cannot be set off against income chargeable to
    tax under the head “Salaries”.
  • With effect from the assessment year 2018-19, loss under the head “house
    property” shall be allowed to be set-off against any other head of income only to
    the extent of Rs. 2,00,000 for any assessment year.
  • However, unabsorbed loss shall be allowed to be carried forward for set-off in
    subsequent years as per the existing provisions of section 71B. (Provisions
    relating to carry forward of loss from house property is discussed later.)

For Example

Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000

Solution

Non-Speculative Business Loss should be set off in the following order:

  1. Speculative Business Income (Intra-head set off) – INR 1,00,000
  2. House Property Income (Inter-head set off) – INR 2,50,000
  3. Carry Forward Loss to future years – INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)

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Carry Forward of Loss

Once the taxpayer adjusts losses using intra-head set off and inter-head set off rules, then the taxpayer can carry forward the remaining losses to future years. The carry forward loss can be adjusted against future incomes. Therefore, any Loss under any head of income except House Property Loss cannot be carried forward to future years if the ITR has not been filed within the due date as per Sec 139(1). Below is the table with rules to carry forward loss and set off against future incomes.

For Example

  • FY 2018-19 (AY 2019-20)
    Non-Speculative Business Loss: INR 5,00,000
    Speculative Business Income: INR 1,00,000
    House Property Income: INR 2,50,000
  • FY 2019-20 (AY 2020-21)
    Speculative Business Income: INR 30,000
    Non-Speculative Business Income: INR 1,40,000

Solution

  • FY 2018-19 (AY 2019-20)
    Non-Speculative Business Loss should be set off in the following order:
    1. Speculative Business Income (Intra-head set off) – INR 1,00,000
    2. House Property Income (Inter-head set off) – INR 2,50,000
    3. Carry Forward Loss to future years – INR 1,50,000 (5,00,000-1,00,000-2,50,000)
  • FY 2019-20 (AY 2020-21)
    Non-Speculative Business Loss should be set off in the following order:
    1. Carry Forward Loss – INR 1,50,000
    2. Non-Speculative Business Income – INR 1,40,000
    3. Speculative Business Income – INR 10,000

Carry Forward and Set Off of Business Loss other than Loss from Speculative Business

If loss of any business or profession, apart from that of speculative business cannot be adjusted in the year in which it is incurred, then the adjustment loss can be carried forward for making adjustment in the next year. However, such loss can only be adjusted against income charged to tax under the income from business and profession.

Taxpayer can only carry forward their loss if they have filed their return before the due date of filing the ITR u/s 139(1). Losses in this case can be carried forward for 8 years. Loss from business specified under section 35AD cannot be set off against any other
income except income from specified business.

Loss from the business of owning and maintaining race horses cannot be set off against
any income other than income from the business of owning and maintaining race horses.
Such loss can be carried forward only for a period of 4 years.

Carry Forward and Set Off of House Property Loss

Taxpayers can carry forward loss incurred under the head income from house property if they are unable to adjust these losses in the current year. Losses from this income head can only be adjusted against income from the same head, or, income from house property. These losses can be carried forward for 8 years.

Carry Forward and Set Off of Capital Loss

Losses from the income head – capital gains can only be adjusted against the income head capital gains. However, long term capital loss can be adjusted only against long term capital gains, yet, short term capital loss can be adjusted against long term capital gains as well as short term capital gains. These losses can be carried forward for 8 years.

Treatment of Loss as per New Tax Regime

With the introduction of Section 115BAC in Budget 2020, there were few changes in the treatment of losses as follows:

  1. House Property Loss: As per the new income tax regime, only current year losses from house property can be set off against income from house property and not against any other Income.

    Moreover, losses from income from house property cannot be carried forward in the new income tax regime.
  2. Setting-Off Business/Profession Loss: In the case of a business income, an individual/ HUF cannot set off the brought forward business loss or unabsorbed depreciation and cannot carry forward these B&P losses and unabsorbed depreciation if they relate to deductions/exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.

    In simple terms, you can carry forward short-term & long-term capital losses, derivatives trading losses in the new tax regime. Since, only the losses relating to deductions & exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC cannot be set off or carried forward, for eg: House property losses, additional depreciation, etc.

    The image below gives a clear understanding of the treatment of losses in the new and old tax regime.

FAQs

I have incurred losses under equity intraday trading. Can I adjust it against F&O trading income?

Loss from equity intraday trading is a speculative business loss. Speculative loss can be set off against Speculative Profits only. Thus, it cannot be adjusted against F&O trading income. However, you can carry forward the loss for 4 years and adjust it against speculative profits in future.

I have incurred losses of Rs. 10 lacs from F&O trading. I also have an Interest Income of Rs. 2 lacs and Salary Income of Rs. 6 lacs. Can I adjust F&O trading loss with salary income and interest income?

Loss from F&O trading is a non-speculative business loss. Non-Speculative Loss can be set off against any income except Salary Income in the current year. Thus, you can adjust non-speculative loss against interest income (2 lacs) but not salary income. However, you can carry forward the remaining loss (8 lacs) for 8 years and adjust it against business & profession income (speculative and non-speculative) in future.

I have not filed Income Tax Return before the due date of filing the return. Can I file the ITR to carry forward loss to future years?

You cannot carry forward loss to future years if the income tax return for the year in which loss is incurred is not filed within the due date as per Sec 139(1). However, if you have incurred loss under head house property, you can carry forward the loss even if the return is filed after the due date.