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  • Amount withdrawn from any reserves or provisions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  • The amount is withdrawn from revaluation reserve and credited to profit & loss account to the extent of depreciation on account of revaluation of asset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.

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)
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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 the 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 to calculate the Long Term Capital Gain on shares.

A trader having income from trading in securities and reporting 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 defined the business and profession codes for filing the Income Tax Return (ITR). These business codes are divided into business income under Section 44AD, Section 44ADA, Section 44AE, and other businesses. To avoid a notice from the tax department, you must select the correct business or profession code based on your nature of business or profession. The nature of the business or profession code should be selected while filing ITR-3 and ITR-4 on the Income Tax Website.

  • ITR-3 – Taxpayers 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.
  • 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 the 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.

List of Business and Profession Codes

I. Profession Codes – Professions opting for Section 44ADA

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

Sub-Sector Code
Software development 14001
Other software consultancy 14002
Data processing 14003
Database activities and distribution of electronic content 14004
Other IT enabled services 14005
BPO services 14006
Maintenance and repair of office, accounting and computing machinery 14008
Legal profession 16001
Accounting, book-keeping and auditing profession 16002
Tax consultancy 16003
Architectural profession 16004
Engineering and technical consultancy 16005
Fashion designing 16007
Interior decoration 16008
Photography 16009
Business and management consultancy activities 16013
Secretarial activities 16018
Medical Profession 16019_1
Film Artist 16020
General hospitals 18001
Speciality and super speciality hospitals 18002
Nursing homes 18003
Diagnostic centres 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
Medical education 18017
Medical research 18018
Practice of other alternative medicine 18019
Other healthcare services 18020
Individual artists excluding authors 20010
Literary activities 20011
Other cultural activities n.e.c. 20012

II. Business Codes – Business opting for Section 44AD

Select the code from the list below in case of Income from Business under ITR-3 or for opting for Presumptive Taxation Scheme under Sec 44AD under ITR-4.

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 silk worms 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 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 and accessories of motor vehicles and engines 04086
Building and 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 sub-dividing 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
Wholesale of agricultural raw material 09006
Wholesale of food and 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 and equipment 09018
Wholesale of other machinery, equipment and supplies 09019
Wholesale of waste, scrap and 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
Guest houses and circuit houses 10004
Dormitories and hostels at educational institutions 10005
Short stay accommodations n.e.c. 10006
Restaurants – with bars 10007
Restaurants – without bars 10008
Canteens 10009
Independent caterers 10010
Casinos and other games of chance 10011
Other hospitality services n.e.c. 10012

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 and 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

Professions

Sub-Sector Code
Advertising 16006
Auctioneers 16010
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

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 philatelic clubs) 19008
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
Sports Management 20023_1
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
Event Management 21008_1
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

III. Business Codes – Business opting for Section 44AE

Select the code from the list below in case of Income from Business under ITR-3 or for opting for Presumptive Taxation Scheme under Sec 44AE under ITR-4.

Renting of Machinery

Sub-Sector Code
Renting of land transport equipment 08001

Transport & Logistic Services

Sub-Sector Code
Packers and movers 11002
Freight transport by road 11008
Forwarding of freight 11010
Receiving and acceptance of freight 11011
Cargo handling 11012
Other Transport and Logistics services n.e.c 11015

IV. Business & Profession Codes – Business not Opting for 44AD, 44AE & Professions not opting for 44ADA

A taxpayer who does not opt for Presumptive Business under Section 44AD or Section 44AE or Presumptive Profession under Section 44ADA can report any of the above mentioned codes for Business and Profession. In addition to it, below are other codes that can be opted for by such business for commission or brokerage income.

Wholesale & Retail Trade

Sub-Sector Code
General commission agents, commodity brokers and auctioneers 09005

Professions

Sub-Sector Code
Business brokerage 16011

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 under a 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)

Set Off and Carry Forward of Losses under Income Tax Act

The Income Tax Act has laid down provisions for set off and carry forward of losses. Set off of loss means adjusting the loss against the taxable income. The taxpayer can carry forward the remaining loss to future years to set off against future incomes. The Income Tax Act prescribes rules to set off and carry forward of losses under each head of income. Further, if the taxpayer has not filed the ITR on the Income Tax Website within the due date as per Sec 139(1), he/she cannot carry forward losses to future years. However, the taxpayer can carry forward the loss under the head Income from House Property to future years even if he/she files the ITR after the due date.

Set Off Losses

Intra-Head Set Off of Loss

Intra-Head set off is the adjustment of loss from an income source against the profit from another income source under the same head. For example, set off of loss from self-occupied property against profit from another rented house property is an intra-head set-off.

Inter-Head Set Off of Loss

Inter-Head set off is the adjustment of loss under an income head against the profit under another income head. For example, set off of loss from self-occupied house property against income from salary. Before making the inter-head set-off, the taxpayer has to first make the intra-head set-off.

Restrictions for making Adjustment of Loss (Set Off) in Current Financial Year

  • Business (PGBP) Loss
    • You can set off Non-Speculative Business Loss against any income except salary income.
    • However, you cannot set off Speculative Business Loss against any income other than Speculative Business Profit.
  • Loss under Capital Gains
    • You cannot set off loss under the head “Capital Gains” against income under other heads of income.
    • You cannot set off LTCL i.e. long-term capital loss against any income other than LTCG i.e. long-term capital gain.
    • Further, you cannot set off STCL i.e. short-term capital loss against any income other than STCG i.e. short-term capital gain, and LTCG i.e. long-term capital gain.
  • House Property Loss
    • You can set off loss under the head ‘House Property’ against any income. There is no restriction to set off house property loss.
    • From AY 2018-19, you can set off loss under the head ‘house property’ against any other income head to the extent of Rs. 2,00,000 only for any assessment year. However, you can carry forward unabsorbed loss for set-off in subsequent years as per provisions of Section 71B.
  • Loss from trading in Cryptocurrency and other Virtual Digital Assets (VDA)
    • You cannot set off loss from the transfer of cryptocurrency, NFT or VDA against any other income.
    • Further, you cannot set off loss under any other head of income against profit on transfer of cryptocurrency, NFT or VDA.
  • Horse-Race Loss
    • You cannot set off loss from the business of owning and maintaining race horses against any income other than income from the business of owning and maintaining race horses.
  • Specified Business Loss
    • You cannot set off loss from business specified under section 35AD against any other income except for income from specified business. Section 35AD is applicable for specified businesses like cold chain facility, warehousing facility for storage of agricultural produce, developing and building housing projects, etc.
  • You cannot set off loss against income from winnings from lotteries, crossword puzzles, horse race, card games, and games having gambling or betting.

Example for Set Off Loss

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

Solution

Taxpayer can set off Non-Speculative Business Loss 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)

Carry Forward of Loss

Loss remaining after set off is the loss that taxpayer can carry forward to future years to set off against future incomes. For example, loss from self-occupied house property remaining after intra-head and inter-head set off, the taxpayer can carry forward for 8 years and adjust against future income from house property.

It is important that the taxpayer files the Original ITR within the due date as per Section 139(1) to carry forward the loss to future years. However, it is possible to carry forward loss under the head House Property to future years even if the taxpayer files a Belated ITR under Section 139(4). Below is the table with rules for carry forward and set off of losses against future incomes.

Example for Carry Forward of Loss

  • FY 2020-21 (AY 2021-22)
    Non-Speculative Business Loss: INR 5,00,000
    Speculative Business Income: INR 1,00,000
    House Property Income: INR 2,50,000
  • FY 2021-22 (AY 2022-23)
    Speculative Business Income: INR 30,000
    Non-Speculative Business Income: INR 1,40,000

Solution

  • FY 2020-21 (AY 2021-22)
    The taxpayer can set off Non-Speculative Business Loss 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 2021-22 (AY 2022-23)
    The taxpayer can set off Non-Speculative Business Loss 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 Non-Speculative Business Loss

The taxpayer can carry forward Non-Speculative Business Loss that remains after set off for 8 assessment years. The taxpayer can only carry forward loss if they have filed ITR before the due date u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward Non-Speculative Loss against profits from both non-speculative and speculative business. Further, the taxpayer can set off a specified business loss under Section 35AD against profits from specified business under Section 35AD only.

The taxpayer can carry forward Speculative Business Loss that remains after set off for 4 assessment years. The taxpayer can only carry forward their loss if they have filed their income tax return before the due date of filing the ITR u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward Speculative Business Loss against profits from speculative business only.

The taxpayer can carry forward loss from the business of owning and maintaining racehorses for 4 assessment years. In the coming years, the taxpayer cannot set off such loss against any income other than income from the business of owning and maintaining race horses.

Carry Forward and Set Off of House Property Loss

The taxpayer can carry forward and set off losses from House Property for 8 assessment years. The taxpayer can carry forward their loss even if they have filed ITR after the due date of u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward House Property Loss against income from House Property.

Carry Forward and Set Off of Capital Loss

The taxpayer can carry forward loss under the head ‘Capital Gains’ that remains after set off for 8 assessment years. The taxpayer can only carry forward their loss if they have filed ITR before the due date of u/s 139(1). In the coming financial years, the taxpayer can set off the brought forward STCL (Short Term Capital Loss) against both STCG (Short Term Capital Gain) and LTCG (Long Term Capital Gains). Further, the taxpayer can set off the brought forward LTCL against LTCG only.

Carry Forward and Set Off of Crypto Loss

Budget 2022 brought changes to the tax on cryptocurrency, NFT, and other virtual digital assets (VDA). As per the budget provisions, here is the treatment of loss on the sale of cryptocurrency, NFT, and other VDA.

The taxpayer cannot set off the loss from the transfer of one VDA against profit from the transfer of another VDA or any other income. Further, the taxpayer cannot carry forward such loss to future years. If there is a loss under any other head of income, the taxpayer cannot set it off against profit on the transfer of VDA.

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, the taxpayer can set off only current year loss from house property against income from house property and not against any other Income. Moreover, the taxpayer cannot carry forward house property loss to future years if he/she opts for the new tax regime.
  2. Set 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. Further, they 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 Section 115BAC(2)(i) 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.

Documents required for Income Tax Return filing in India

Income Tax Return or ITR forms are different on the basis of income sources. Specific documents of the taxpayer are required to file ITR.
Other documents required may differ based on the income situation. These documents are not required to be submitted to the IT Department while filing the Income Tax Return. Since ITR is an annexure-less form. However, if a taxpayer receives a notice from the ITD such documents may be required to be submitted.

List of Basic Documents required for filing the Income Tax Return – ITR

Following are the basic documents mandatory to file an ITR in India:

ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
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ITR for Salaried Individuals
CA Assisted Income Tax Return filing for individuals having salary, one house property & income from other sources.
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Documents Required for Different Income Heads

Salary Income/ Pension Income

Following documents are required from taxpayer having salary/ pension income:

  • Form 16
  • Salary Slips (If form 16 is not available)
  • Pension Statement / Passbook

House Property Income

The following documents are required to determine when rental income is earned by a taxpayer or there is a home loan. These documents will help determine the correct deduction and Income from House Property.

  • Property Address
  • Rent Agreement
  • Co-ownership details in case of co-owned property
  • Municipal Tax Receipts
  • Form 16A if TDS is deducted on rental income
  • Home loan repayment certificate/ Interest Certificate from the bank
  • Pre-Construction Interest Details
ITR for Multiple House Properties
CA Assisted Income Tax Return filing for Individuals and HUFs having multiple house property income, multiple salaries and income from other sources.
[Rated 4.8 stars by customers like you]
ITR for Multiple House Properties
CA Assisted Income Tax Return filing for Individuals and HUFs having multiple house property income, multiple salaries and income from other sources.
[Rated 4.8 stars by customers like you]

Capital Gains Income

When an individual sells any movable or immovable property a Capital Gain arises. It also includes the sale of shares and securities.

  • Sales and Purchase deed, stamp duty valuation in case of sale of the land/ building
  • Details of Improvement cost.
  • Details of expenses incurred on the transfer of capital assets
  • Proof of cost of the asset, cost of improvement and sales receipts in case of movable assets
  • Details of investment made to claim exemptions
  • Capital Gains Deposit Account details if any
  • For shares & securities- Trading statement/ Stock Ledger/ Contact Notes
ITR for Gains from Sale of House / Property
CA Assisted Income Tax Return filing for individuals and HUFs having Capital Gains / Loss income from sale of house, property, land, etc.
[Rated 4.8 stars by customers like you]
ITR for Gains from Sale of House / Property
CA Assisted Income Tax Return filing for individuals and HUFs having Capital Gains / Loss income from sale of house, property, land, etc.
[Rated 4.8 stars by customers like you]

Business and Professional Income

Following are the documents required to file the return if you are earning any income from Business and Profession during the year:

  • Balance Sheet and Profit & Loss Statement
  • Bank Account Statement/ Passbook
  • Supporting documents for expenses incurred
  • Cash Register
  • Any other documents required to maintain the books of accounts of the business & profession
  • Audit Report in case the profit from the business is less than 8% of the Total Turnover.
ITR for Proprietors with Professional Income
CA Assisted Income Tax Return filing Plan for Individuals & HUFs earning professional income from proprietary firm.
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ITR for Proprietors with Professional Income
CA Assisted Income Tax Return filing Plan for Individuals & HUFs earning professional income from proprietary firm.
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Income from Other Source

Any income which does not fall under any of the above heads of income, in that case, it will come under the head Income From Other Source.

  • Total Interest income earned from savings/ current account
  • Interest certificate from deposits/ Bonds/ NSC
  • PPF Account Statement/ Passbook
  • Dividend Warrants/ counterfoils
  • Proof of details of receipt of any other incomes
  • Rent Agreement in case of let out machinery
ITR for Pensioners
CA Assisted Income Tax Return filing for individual senior citizens receiving pension income.
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ITR for Pensioners
CA Assisted Income Tax Return filing for individual senior citizens receiving pension income.
[Rated 4.8 stars by customers like you]

Documents Required for Tax Saving Investments (Section 80)

One can invest in some of the tax-saving investment schemes to save taxes and claim a tax deduction. Following are the documents that come in handy for tax saving investment made:

  • ELSS/ ULIP/ NSC investment details
  • PPF account passbook/ statement
  • Life/Medical Insurance Receipts
  • Details of Tax Saving FD
  • National Pension Scheme investment details
  • Senior Citizen Saving scheme investment details
  • Donation Receipts
  • Children Tuition Fees Paid Receipts
  • Repayment Certificate for home loan/ education loan
  • Certificate from specified medical authorities in case of disability
  • Receipts/proof of any other tax saving investment/contributions

Documents Required for Foreign Income and Foreign Investments

  • Details of foreign income and taxes deducted on the same
  • Details of Assets held outside India including the foreign bank accounts.
ITR for Residents with Foreign Income
CA Assisted Income Tax Return filing plan for resident individuals having foreign income.
[Rated 4.8 stars by customers like you]
ITR for Residents with Foreign Income
CA Assisted Income Tax Return filing plan for resident individuals having foreign income.
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FAQs

What is the list of documents required for filing basic ITR?

The basic list of documents required to file ITR is as follows:
PAN (Permanent Account Number)   
Aadhar Number
Form 26AS
Bank Account Details
Challan of any advance tax or self-assessment tax (if paid during the year)
Details of the original return (if filing a revised return)

What is Form 16?

It is a certificate of TDS on salary. Every employer issues Form 16 to an employee after the end of a Financial year. Employees usually receive Form 16 before 31st May of the next financial year. It contains details of income earned and the taxes deducted. Furthermore, Form 16 is divided into two parts: Form 16 Part A and Form 16 Part B.

What is Form 26AS?

It is a consolidated Tax Credit Statement which provides the following details to a taxpayer:

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