Section 80EEA: Deduction on Home Loan Interest

Finance Minister Nirmala Sitharaman laid a vision of “Affordable Housing” in Budget 2019. This announcement brought a lot of changes in Income from House Property. One of them being the introduction of section 80EEA in budget 2019, that allows a deduction on home loan interest which will provide an additional home loan tax benefit for the year 2019-20 A lot of emphasis was laid on it in Budget 2020 as well. Under section 80EEA deductions can be claimed on Loans sanctioned on and after FY 19-20.

It was announced in the Budget 2021 that the deduction under section 80EEA is to be extended to loans taken up to 31st March 2022
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It was announced in the Budget 2021 that the deduction under section 80EEA is to be extended to loans taken up to 31st March 2022

Who can Claim Deduction Under Section 80EEA?

The deduction u/s 80EEA is only available to individuals. Additionally, it is important to meet the criteria listed below in order to claim deduction under this section:

  • The stamp duty value of residential houses shall be up to INR 45 lakh.
  • Only individual taxpayers can claim this deduction and not HUFs.
  • The loan is taken from a financial institution.
  • The loan has been sanctioned between 01-04-2019 to 31-03-2020.
  • Assessee is not claiming any deduction under section 80EE.
  • The assessee owns no residential house property on the date of sanction of loan.

The exemption limit of this deduction is INR 1,50,000. Deduction under Section 24 can also be claimed along with 80EEA which can give taxpayers a total benefit up to INR 3,50,000.

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Difference between Section 80EEA and Section 24

Sr. No. Parameter Under Section 80EEA Under Section 24
1. Possession Possession of the property is not required in order to claim deductions u/s 80EEA Possession of the property is required in order to claim deductions u/s 24
2. Deduction Limit INR 1,50,000 INR 2,00,000
4. Source of Loan Deduction can be claimed only if the loan is taken from banks and financial institutions Deduction can be claimed even if the loan is taken from friends and family
5. Value of the Property Stamp duty value of the house should not be more than INR 45 Lakh There is no such specification
6. Category of Buyers This deduction is available only to first time home buyers This deduction is available to all types of home buyers
7. Loan Period Deductions are available only if the loan is taken between April 1, 2019, and March 31, 2020 Deductions are available only if the loan is taken after April 1, 1999
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How is the Deduction Calculated Under Section 80EEA?

The total deduction that is available under section 80EEA is INR 1,50,000 or the payable interest amount which ever is lower.

To understand the situation better let’s take two different examples:

Scenario 1:

Mr Murthy in the FY 2019-20 took a home loan for a house whose stamp duty value is INR 40 Lakh and the interest payment that Mr Murthy made for the year was INR 4,00,000. Is Mr Murthy eligible to claim deductions under section 80EEA?

Yes, in this case, Mr Murthy claim deductions under section 80EEA of INR 1,50,000 as the stamp value of the house is less than INR 45 Lakh. Additionally, he can also claim INR 2,00,00 as deductions under section 24, so the total deduction that Mr Murthy can claim under both section 80EEA and 24 is INR 3,50,000

Scenario 2:

Mr and Mrs Mehta jointly purchased a house worth INR 45 Lakhs in FY 19-20 and Mr Mehta individually also took a home loan whose annual interest payment is INR 3,00,000. Can Mr and Mrs Mehta both claim deductions under section 80EEA?

No, only Mr Mehta can claim deduction u/s 80EEA as Mrs Mehta is not a co-borrower in the loan. The total deduction that Mr Metha can claim is INR 3,00,000. (INR 2,00,000 u/s 24 and INR 1,00,000 u/s 80EEA)

ITR Form Applicable for Section 80EEA

The taxpayer can claim deductions u/s 80EEA while filing ITR if all the above-mentioned conditions are full-filled. Individuals/HUFs can claim 80EEA in any of the ITR forms, i.e. ITR 1, ITR 2, ITR 3 and ITR 4 depending upon their income sources. The due date for filing ITR is 31st July of the next FY if the tax audit is not applicable.

Supporting Documents

Following are the supporting documents to claim 80EEA:

  • Form 16
  • Home Loan Certificate from the bank
  • Bank Account Statement through which the EMI is paid
  • Home Loan Sanction letter

The taxpayer can claim deduction under this section if he/she has actually made payment of a home loan. You can claim the deduction even if it is not present in your form 16, provided, you have supporting documents with you.

Deduction under section 80EEA is not allowed for Financial Year 2020-21 if the taxpayer opts for the new tax regime
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Deduction under section 80EEA is not allowed for Financial Year 2020-21 if the taxpayer opts for the new tax regime

FAQs

Can I claim interest payment deduction on home loan u/s 80EE & 80EEA simultaneously?

No, taxpayers cannot claim deduction u/s 80EEA if they are claiming section 80EE.

Can I claim deduction u/s 24 & 80EEA simultaneously?

Yes, deduction under both sections can be claimed simultaneously subject to other conditions.

What are the conditions to claim deduction u/s 80EEA?

Deduction u/s 80EEA is available subject to given below conditions :
– The stamp duty value of residential houses shall be up to Rs. 45 lakh.
– The deduction can be claimed only by individual taxpayers.
– The loan is taken from a financial institution.
– The loan has been sanctioned between 01-04-2019 to 31-03-2020.
– Assessee is not claiming any deduction under section 80EE.
– The assessee owns no residential house property on the date of sanction of loan.

What is section 80EE?

Before section 80EEA, taxpayers used to claim 80EE. If the loan is sanctioned during FY 16-17 you get deduction u/s 80EE. Under this, taxpayers can avail income tax benefits of Interest on home loans taken for a residential house. These benefits have a maximum exemption limit of Rs. 50,000 per FY. The exemption can be availed by all types of taxpayers until they repay their loan amount.

Can I claim deductions on principal repayment of home loan under section 80EEA?

No, deductions under section 80EEA can be claimed only for the interest repayment of the home loans.

Can my wife and I both claim deduction under section 80EEA?

Yes, provided that the property is registered under both names and the wife is also a co-borrower in the home loans.

ITR Documents : Income from other sources

Income from other source (IFOS) includes any income which is not taxed under the following Income heads:

  1. Salary Income
  2. Business and Profession income
  3. Capital gain Income
  4. House property Income

The Income From Other Source includes Bank Interests, Investment Interests, Dividend Income, Family Pension, Gifts, Royalty, etc.

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Document Checklist for Income From Other Source

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.

Form 26AS

Form 26AS is a consolidated Tax Credit Statement. It has the following details:

  • ​Details of TDS from the taxpayer’s income.
  • ​Details of TCS from taxpayer’s payments.
  • Advance Tax, Self Assessment Tax 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 ITR. Since it has details of TDS deducted on Interest and Other Income by deductors.

31st July
ITR filing Due Date for taxpayers having Income From Other Source.
31st July
ITR filing Due Date for taxpayers having Income From Other Source.

Investment proofs

A taxpayer can claim the deduction of certain Investments and expenses while filing ITR. Investments proofs, Donation Receipts, Fixed Deposit Statement, etc are required to claim Chapter VI-A deductions. These investments reduce the net taxable income of a taxpayer.

Bank Statements

Bank Statement with IFOS transactions is an essential document to prepare ITR. It is important to look at bank statements to derive total income earned in the form of Interest, Dividend, Gift, etc.

FAQs

What is Income from other sources?

Income from other sources is a residual income that cannot be taxed under other heads. It includes income from a savings bank account, Fixed deposits, Post office savings, Family pension, etc. It also includes any monetary/non-monetary gifts received by an individual.

What is the tax treatment of dividends received from a foreign company?

Dividend received from an Indian company is exempt from tax. However, Dividend received from a foreign company is taxable as “Income from other sources”. And you need to pay taxes at rates based on the income slab you fall under.

I have won a lottery of Rs 2 lakhs. Is this taxable?

Yes. When any individual receives any kind of lottery or price money it is taxable. It is converted under IFOS.

I have received Rs. 1,00,000 in cash from my father as a wedding gift. Is it taxable?

No. Gifts received on a wedding occasion is exempt from tax. Hence Rs, 1,00,000 will be exempted from tax. However, you should report the same while filing 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)

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)

ITR Documents Checklist : House Property Income

House property is any Land or Building or land attached to the building. The land could be a courtyard, parking space, or compound. A taxpayer needs to report income earned from such Property while filing ITR. Hence it is important to keep supporting documents checklist while calculating Income tax. It also includes:

  • Residential houses/Flats
  • Shops
  • Office space
  • Factory sheds
  • Farmhouses
  • Godowns
  • Cinema building
  • Workshop building
  • Hotel building etc.

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You can file ITR-1 if you have earned income from one property. However, you need to file ITR-2 if you own more than one property. You can file ITR online using ITR Utilities or through registered e-Return Intermediary (ERI) like Quicko.

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House Property Income Documents Checklist

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.

Utility Bill

While filing ITR taxpayers have to disclose the address of all the properties owned by them. Utility Bill contains property addresses and thus serves as a proof of address.

Rent Agreement

Rental Income is taxable income. Therefore, rent agreement between the owner and the tenant for a particular house property serves as proof of income earned during the financial year.

Form 16A 

Form 16A will be provided if TDS is deducted on your rental income. While filing your ITR you can claim this TDS using Form 16A.

Home loan repayment certificate/ Interest Certificate from the bank

This certificate consists of capital amount, repayment amount, the interest charged, and co-ownership details. This serves as proof for claiming a deduction on Interest Repayment and Principal Repayment. And reduces your net taxable house property income.

Municipal Tax Receipts

Municipal tax is paid on properties. Taxes paid on let out properties can bring down your net taxable rental income. Therefore, Municipal Tax receipts are required while calculating the income from house property.

31st July
ITR filing Due Date for taxpayers having House Property Income.
31st July
ITR filing Due Date for taxpayers having House Property Income.

FAQs

How to calculate self-occupied house property income?

A Self Occupied House Property is the one that you use as your own residence. This property can be in use by your children, spouse, and/or parents. Since there is no Income from such House Property, the gross annual value of this property is NIL (zero).

How do you calculate Income from House Property?

The assessee must be the owner of the properties. Identify the Gross annual value (GAV) of the house property. For self-occupied property, the GAV would be nil while for let out property the GAV will be the total rent received. Deduct municipal taxes paid by you (owner) towards the house property. Now you will realize the Net annual value of the house property. From NAV, deduct standard deduction of 30% and interest paid by you on a house loan. This will give you your Income from house property.
GAV- Municipal tax = NAV
NAV- Standard deduction- interest on borrowed capital= Income from house property.

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?

Every taxpayer whose income exceeds the Basic Exemption limit needs 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 basic 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

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.

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
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ITR for Salaried Individuals
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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
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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
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ITR for Gains from Sale of House / Property
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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
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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
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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
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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.).

Exempt Income under Income Tax

What is Exempt Income?

There is a common myth that if you are earning any income then you will have to pay tax on it. The more you earn, the more would be the tax liability. But it is not true. There exist certain types of income for which your tax liability is zero. Such incomes are known as Exempt Income u/s 10 of the Income Tax Act. Such income is different from Deduction under Income Tax. While exempted incomes are excluded from the total taxable income of a taxpayer, deductions are availed on taxable incomes.

Types of Exempt Income

  • Agriculture Income:
    • Any income earned by the taxpayer from agriculture activity is exempt from tax. However, the agriculture income must be included in the total income for the calculation of the applicable slab rate. Thus, it is indirectly taxed by taxing the non-agriculture income at higher tax slab rates.
  • Gift Received from Relatives: 
    • Any gift received by an individual from relatives is exempt from tax. Gift received on the marriage or by way of will is exempt. Monetary gift received from non-relative up to Rs. 50,000 is also exempt from tax.
  • Long Term Capital Gain: 
    • From FY 2018-19, LTCG up to INR 1,00,000 is exempt from tax. Earlier, the long-term capital gain on the sale of stocks and equity mutual funds was exempt from tax under section 10(38). This section is not applicable to debt mutual funds.
  • Interest on Securities: 
    • Income from securities in the form of interest, premium, etc from government-issued bonds, certificates, deposits are tax-free. For eg: Bonds issued by NHAI, IRFC, REC, etc.
  • Profit Share from Partnership Firm: 
    • Any share of profit from a partnership firm or LLP is exempt from tax in the hands of the partner. However, interest on capital and remuneration is taxable.
  • Provident Fund: 
    • Payment received from PF is exempt under Section 10. However, PF withdrawal is taxable for less than 5 years of service. In the case of EPF, the taxpayer can withdraw the balance subject to a few conditions.
  • Gratuity: 
    • Gratuity received by a government employee is totally exempt from tax. Whereas in the case of employees of a private organisation, it is exempt subject to certain conditions.
  • Commuted Pension: 
    • Commuted pension received by the government employee is fully exempt. However, for other employees, it is exempt subject to certain conditions.

Other Exempt Income

  • Life Insurance: 
    • The payment proceeds of a life insurance policy are exempt under section 10(10D). This includes a maturity amount as well as death claims.
  • Receipts From HUF: 
    • Any amount received out of family income is tax-free in the hands of a member. For example, a family owns an impartible estate. An amount received out of an income of family estate by the member of such HUF is tax-free in the hands of the member.
  • Scholarship and awards: 
    • Any type of scholarship or award granted to any deserving student to meet the cost of education is exempt from tax. The entire sum of money received as a scholarship gets that tax exemption.
  • Amount Received under VRS (Voluntary Retirement Service): 
    • When an employee receives an amount under the scheme of voluntary retirement as per Rule 2BA of the Income Tax Rules gets a tax exemption up to Rs. 5,00,000 from the amount received as voluntary retirement.
  • Allowance for Foreign Services: 
    • Any Indian resident rendering service outside India and receiving any allowances or prerequisite outside the country are exempt from income tax u/s 10(7) of the Act. Due to this section, any perquisite and allowances received by government servant while working outside India are tax-free.

Reporting Exempt Income in ITR

Taxpayers can declare their exempt income while filing for income tax every financial year. The taxpayer should report exempt income under the section ‘Exempt Income’ in the tab ‘Computation of Income and Tax’ of ITR-1 & ITR-4. You can add a row, select the nature of income from the dropdown list, add description and amount.

The taxpayer should report exempt income under Schedule EI i.e. Schedule Exempt Income of ITR-2 & ITR-3. The taxpayer should report the details under the specific row for Interest Income, Agriculture Income, Income not chargeable as per DTAA, other exempt income with a relevant option from the dropdown. The Exempt Income is separately reported and not added to the Gross Total Income.

Disclosure of Exempt Income for Salary and Non-Salary Allowances

For salary account holders, you need to make a disclosure of exempt income under Schedule S – Details of Income from Salary’ while filing income tax as per ITR-2. The various exemptions are:

  1. HRA – House Rent Allowance
  2. LTA – Leave Travel Allowance
  3. Leave Encashment Amount
  4. Pension Amount
  5. Gratuity Amount
  6. Any form of perquisites received
  7. Amount received from a Voluntary Retirement Scheme

For self-employed or non-salary account holders, there are certain incomes categorized under exempt income. They include dividends, agricultural income, interest on funds, capital gains which have to be disclosed under Schedule EI while filing income tax as per ITR-1.

FAQs

Is dividend income exempt from tax?

Earlier, the Dividend received from a Domestic Company was exempt from tax under Section 10(38). However, under Budget 2020, DDT was abolished thus making dividend a taxable income for a taxpayer. If dividend income exceeds INR 5,000, the company is liable to deduct TDS u/s 194 for dividend on equity shares and u/s 194K for dividend on equity mutual funds.

Is it mandatory to show exempt income in ITR?

Yes. You have to mention all your incomes while filing Income Tax Return, be it taxable or exempt. There is a separate tab to show exempt income in ITR. You need to mention the nature of exempt income and the amount of income received during the year.

Which ITR should I file if I have earned exempt income during a year?

You can file ITR-1 if you have earned only exempt income during a year. However, if you have earned agriculture income exceeding Rs. 5,000 then you should file ITR-2.

Income Tax for Freelancers, Consultants and Professionals

Who is a Freelancer?

Freelancer is a person who is self-employed, and have the freedom to choose their projects and companies they would like to be associated with. Just like every individual who receives income from salary, freelancers are also liable to pay income tax on their income. Some of the common professions for freelancing are:

  • a writer,
  • a software developer,
  • a photographer,
  • an interior decorator,
  • fashion designer, a blogger,
  • a gym instructor, etc.

Freelancers don’t earn a salary but run a business. The benefit that a freelancer gets while preparing income tax details is that expenses of a freelancer are allowed to be deducted from freelancers’ income.

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What does the Income of a Freelancer Include?

The sum of all the money one received against the work done is called gross receipt. If your receipts are received in a bank account then sum them up from your bank account statement. If you have received some money as loan from relatives or friends than it does not count as your income. Payment received towards freelancing work is considered as income from freelancing.

Income received from other sources such as interest on FD, rent from property are not included in the freelancing income. Such incomes are part of other heads of income in your return.

Books of Accounts for Freelancers

There are two methods of accounting to calculate the income of the freelancer:

  • Accrual Basis of Accounting: Here, the income is accounted for when it’s due.
  • Cash Basis of Accounting: Here, the Income is accounted only after it’s actually received.

Accrual Basis v/s Cash Basis Accounting

Let us first understand these methods of accounting. Here are some other aspects of these methods of accounting the Income:

Accrual Basis Cash Basis
Incomes are accounted when the right to receive occurs Incomes are accounted only when the cash is actually received.
For Example, you raise an invoice on your client on 7th February but receive the payment on 10th April, revenue would be booked in your accounts on the basis when invoice is raised to the client i.e, 7th February. Now, in the same case if it’s Cash Basis of Accounting, revenue would be accounted for only on 10th April (the tax year next to the year in which invoice was raised or work got completed) when payment is received.
Similarly, expenses are accounted right when the obligation is incurred. Expenses are accounted only after they’re paid off.
For Example, your Internet bill dated 18th February to 18th March has been received. This will be captured as an expense in the accounts of March, even if you don’t pay this until 31st March (even in the next tax year). Note that on an estimated basis your Internet cost for remaining 13 days of March may also be accrued when your books of accounts are closed on 31st March. Here, the same Internet bill will be booked as an expense in the month of March only if you pay it before the 31st March (in the same tax year). If you pay it in April, it will get booked as an expense in the next tax year (even when the expense pertains to the previous tax year)
Tax liability is considered for the booked income. So even the income yet not recieved may be liable for Tax. As here, the income is not booked until actually receiving it, the income not received yet will not be liable for Tax
This method can be followed for all types of income. In fact, it’s commonly used for Income from Salary, House Property, and Capital gains This method is only applicable to Profits and gains from Business and Profession and Income from Other Sources

It should be kept in mind that once you select a method of accounting, you’re not easily allowed to change it. You need to continue with it. That’s why it is very important to consider the pros and cons of both methods.

The Cash basis of accounting may seem a preferable option from the two, but one must consider that in the long run, it doesn’t help much with tax reduction, instead, it just postpones that particular amount of tax to the next year. If your payment receipts are not so irregular, Accrual Basis is a much logical option. The tax calculation can be done properly for the given year.

Calculate Income for Freelancers

When it comes to Income Tax for Freelancers, here’s how taxable income is calculated:

[Net Taxable Income = Gross Taxable Income – Deductions]

You’re liable to pay tax if your age is less than 60 years and your total taxable income is more than INR 2,50,000.

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Tax Payable for Freelancer

Now, if the total Tax Liability exceeds INR 10,000, the taxes are supposed to be paid every quarter. This is called the Advance tax. Here’s how to calculate Advance tax

  • Add up all your payments and determine your Total Income.
  • Subtract all the work-related expenses.
  • Add income from other sources if any.
  • Identify your slab rate applicable to you and calculate your tax due. (Deduct TDS)
  • If this Tax Due exceeds INR 10,000, you need to make the payment of Advance Tax by Due dates given below:
Due date of installment Advance Tax payable by Individual and Corporate Taxpayers
On or before 15th June 15% of the advance tax liability
On or before 15th September 45% of the advance tax liability
On or before 15th December 75% of the advance tax liability
On or before 15th March 100% of the advance tax liability

Freelancers and Professionals can opt for presumptive taxation scheme u/s 44ADA with effect from AY 2017-18. As a result, they can file ITR 4 and will not be required to maintain books of accounts. In the case of freelancers opting for a presumptive taxation scheme, the Advance Tax will have to be paid in a single installment before 31st March of the Financial year.

ITR for Professions u/s 44ADA (Presumptive Scheme)
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Freelancing Expenses Allowed as a Deduction

Freelancers can deduct expenses incurred exclusively towards the freelancing work. This could be anything from office rent, furniture or expense on a visit to a client. Freelancers cannot claim Personal expenditure as deduction. For example: If you are an app developer, you can deduct expenses on testing app and software purchase. If you have certain expenses like a cost of high speed internet connection that you use both for the personal and professional purpose you can allocate a reasonable percent to your freelancing work and deduct them.

  • Rent Expenses
  • Electricity Expenses/ Telephone Expenses/ Internet Expenses
  • Petrol/ Diesel Expenses
  • Travel Expenses relating to freelancing work
  • Local taxes and insurance of your business property
  • Meal, entertainment or hospitality expenses incurred on client
  • Depreciation on capital asset purchased for work( laptop, printers, car)
  • Office Expenses
  • Any other expenses incurred for the purpose of earning revenue

Deductions allowed under section 80C to 80U

Just like any salaried person, a freelancer can claim all the deductions listed under section 80, by fulfilling the conditions listed therein. For example, if you have made investments to PPF, NSCs, or paid life insurance premiums, you can avail deduction under Section 80C. In case of any medical premium paid by you, you can claim deduction under Section 80D.

TDS for Freelancers

The government of India has made regulations by which an individual/company paying an individual or another company for services offered needs to deduct TDSIn the case of freelance TDS is deducted at 10%. Individual/company from India having valid Tax Deduction Account Number (TAN) can only deduct TDS from your earnings. Unless your client has a TAN they are not eligible to deduct any TDS from your earnings. In many cases companies/individuals from outside India won’t have TAN, no TDS is applicable. In that case, depositing Advance Tax becomes freelancers’ liability. If any of your clients have deducted TDS on payments made to you, you can take credit for this tax deducted from your final tax dues.

You can claim a refund from the Income Tax Department if your income does not exceed the Basic Exemption Limit. You can also become eligible for a refund in case the total TDS exceeds the amount of your tax liability. Here are the other taxes applicable to Freelancers

  • Service Tax
  • Excise Duty
  • Sales Tax

ITR Form and Document Checklist

Freelancers need to either fill out ITR 3 or ITR 4 and need to keep ready the documents required to file the ITR. ITR 3 applies to income from business and profession. However, professionals can opt for the presumptive taxations scheme and declare 50% of their gross receipts as their income by filing ITR 4 from the AY 2017-18.

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Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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FAQs

As a Freelancer, do I need to pay taxes?

Yes, absolutely. You need to pay taxes and file your income tax returns on Income Tax Portal if your total income for a particular financial year exceeds the Basic Exemption Limit prescribed by Income Tax Department

Which ITR do freelancers need to file?

A person earning on his own is considered a Sole Proprietor and needs to file ITR-4. If you have any other income source, you need to include that as well while filing your Income Tax Return.

Is Advance Tax applicable to Freelancers?

If the total tax liability during the financial year exceeds Rs.10,000, the taxpayer is required to pay taxes on quarterly basis. Hence, freelancers also need to pay advance tax if their total tax liability exceeds Rs.10,000.

Do freelancers need to maintain Book of Accounts?

Yes. In order to calculate the income tax, the Freelancers need to maintain them. In fact, the Income Tax Act has specified the books of accounts under section 44AA and Rule 6F.


Guide : Income from Business and Profession

What is Business and Profession?

Income from business or profession is chargeable to tax only if the business or profession is carried on by a taxpayer at any time during the previous year. Let us first understand what is Business:

Business, in simple words, means an occupation carried on by a person with a view to earn a profit. Business does not include income from the Profession or partnership firm. The business includes any –

  • Trade,
  • Commerce,
  • Manufacturing,
  • Even rendering services to others is considered as business.

For example: Owning a shop, running a hotel, transportation, travel agency, share broking, etc.

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Profession may be defined as a vocation, or a job requiring some thought, skill, and special knowledge. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill like:

  • Legal
  • Medical
  • Engineering
  • Chartered Accountant
  • Architectural etc.

Any income generated from the above-mentioned activities will be taxed under the head “Income from Business and Profession”.

Maintaining Books of Accounts

In case of Business

A business meeting any of the following criteria needs to maintain the books of accounts as per the income tax act:

  • Income more than INR 1,20,000 or,
  • Total sales, turnover or gross receipts are more than INR 10,00,000 In any of the three immediately preceding previous years

Moreover, this condition has been relaxed for individuals and HUF where they will be bound by the mandate of maintaining books of accounts if:

  • Income is more than INR 2.5 Lakhs or,
  • Total sales, turnover or gross receipts are greater than INR 25 Lakhs in any of the 3 immediately preceding previous years.

In case of Profession

The taxpayers carrying out any of the above-mentioned professions are required to maintain the books of accounts in accordance with rule 6F of the Income Tax Rules. These professionals have to maintain the books of accounts if the gross receipts exceed INR 1.5 Lakhs in any of the 3 immediately preceding years.

Incomes chargeable under Business and Profession

Any income earned by a taxpayer with an intention to earn a profit is covered under the head business and profession. There are 3 types defined for Businesses/profession under the income tax act:

  • Non-Speculative Businesses/Profession: Includes profits/loss from all the normal business carried by a taxpayer. Any salary, remuneration, commission, etc received by a partner from a partnership firm is also considered as a business and professional income of a partner. However, the same is exempt from tax in the hands of the partner.
  • Speculative Businesses: As name suggests, it includes profits/loss from doing speculative transactions i.e, without taking actual delivery of goods. Although profits from the speculative business (eg. Share trading) are chargeable under this head, they should be maintained and shown separately while e-filing the income tax return
  • Specified Businesses: It includes profits/loss from businesses that are defined under section 35AD of the income tax act. These businesses include affordable housing projects, water fabrication manufacturing units, etc.

However, following are the incomes which are not chargeable as income from business and profession:

  • Any profits from activities other than above-mentioned businesses should be shown as casual income and will be shown under Income from Other Sources
  • Any income from salary, remuneration, bonus, etc. received by the director of the company is treated as Salary Income and not as a business and professional income.
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Expenses allowable from Business and Profession Income

All the expenses incurred wholly and exclusively in relation to the business and profession shall be allowed against the income from such business and profession. Here are some of the expenditures:

  • Rent and insurance of the building.
  • Payments for Legal and Professional services.
  • Remuneration, Bonus, Commission etc. to employees.
  • Interest and remuneration to working partners subject to certain conditions.
  • Traveling and conveyance expenses.
  • Membership fees.
  • Payment for know-how, patents, copyrights, trademark, licenses.
  • Depreciation on fixed assets.
  • Expenditures on scientific research for business purposes.
  • Preliminary expenses in case of a company.
  • Communication expenses
  • Discount allowed to customers.
  • Advertisement expenses in respect of promotion of business products.
  • Financial Charges (eg. Interest on loans).
  • Bank Charges/Bank Commission expenses.
  • Entertainment/Business Promotion expenses.
  • Staff Welfare expenses.
  • Printing and stationery expenses.
  • Postage expenses.
  • All other expenses relating to business/profession.

All these expenses are allowed on the basis of actual payments as well as on the accrual basis on the date of the finalization of the accounts. For eg: An employee receives an income for the month of March 2020 in the month of April 2020. However, since the income is related to the Financial Year 2019-20 (which ends on 31st March 2020), it can be claimed against the income from the business/professional income of the Financial Year 2019-20.

Expenses allowed only on a payment basis

Here are some of the examples of such expenses:

  • Any taxes, duty, cess or fees by whatever name called.
  • Expenses towards contribution to Provident fund, Employees’ state insurance premium, Gratuity fund, or other funds for the welfare of the employees.
  • Bonus, commission, or leave encashment payable to employees.
  • Interest on loan from public financial institutions, state financial corporations, or scheduled banks.

Computation of Taxable Income from Business and Profession

Taxable income from business and profession is profits after deducting expenses related to business activities. Taxpayer can find profits from books of accounts maintained during the year. Income earned from Business and Profession is taxable at a Slab Rate applicable to taxpayer. Following are the slab rates applicable for FY 2019-20/AY 2020-21:

Total Income Tax Rate
Up to INR 2,50,000 NIL
INR 2,50,000 to 5,00,000 5%
INR 5,00,000 to INR 10,00,000 20%
Above INR 10,00,000 30%

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

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Set off and Carry Forward of losses from Business and Profession

  • Non-Speculative Business Loss can be set off against any income except Salary in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against Business Income in future years.
  • Speculative Business Loss can be set off against Speculative Business Income only. The taxpayer can carry forward the remaining loss for 4 years and set off against future Speculative Business Income only.
  • Specifies Business Loss can be set off against any income except Salary in the current year. The taxpayer can carry forward the remaining loss for 9 years and set off against Business Income in future years.

TDS/Advance Tax on Income from Business and Profession

Taxpayer needs to pay tax on income earned from business and professional activity. Direct taxes on income can be paid in following 2 ways:

  • TDS (Tax Deducted at Source) : Due to pay while you earn concept TDS gets deducted on payments made to taxpayers for any goods or services sold. Hence business owner needs to keep in mind the TDS Deducted by the customers. Any TDS deducted can be claimed while filing ITR for business and profession. And it will become your refund if there is a loss from B&P. And it will reduce your tax liability if you have earned profits from B&P.
  • Advance Tax : If the tax liability is expected to exceed Rs. 10,000, the taxpayer must calculate and pay Advance Tax. This is so as to avoid Interest under Section 234B and 234C. Advance Tax is to be paid in quarterly installments as follows:
Due date of installment Advance Tax payable by Individual and Corporate Taxpayers
On or before 15th June 15% of the tax liability
On or before 15th September 45% of the tax liability
On or before 15th December 75% of the tax liability
On or before 15th March 100% of the tax liability

Tax for Freelancers

A freelancer is a person who is self-employed. They have the freedom to select their own projects and assignments. They do not earn a steady income. The nature of their income is more of a professional income. Hence it is covered under the head “Income from Business and Profession” under the Income Tax Act.

The sum of all the receipts received from different projects becomes their income. And all the expenses related to freelancers are allowed to be deducted. Following is the taxable income of a freelancer:

Net Taxable Income = Total Receipts – Freelancing Expenses

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What is Speculative Business Income?

First of all, we have to understand what is a speculative transaction in order to understand the Speculative Business income.

When a contract for purchase or sale of any commodities (including stocks and shares) is periodically or ultimately settled without the actual delivery or transfer of the commodities, it is called a speculative transaction and if your business is to earn income out of such transaction, then that will be your income from Speculative Business.

One of the examples of Speculative Business is stockbroking, where the broker earns money by way of buying and selling the commodities without taking delivery of the same. Incomes from normal business and speculative business calculated and maintained separately.

Presumptive Taxation Scheme

The presumptive taxation scheme is introduced to give relief to small taxpayers from the tedious job of maintaining books of account and from getting the accounts audited. The presumptive taxation scheme can be opted by individuals, HUFs, and Partnership Firms in India.

Professionals having gross revenue up to INR 50 Lakhs can opt for the presumptive taxation scheme wherein they can offer 50% of the gross revenue as the taxable income and pay taxes as per the applicable slab rates on such income. Once the taxpayers opt for this scheme, they cannot claim any of the profession related expenses as a deduction.

Tax Audit Applicability

Businesses having a gross turnover of more than INR 1 Cr. in a financial year are liable to a tax audit. The taxpayer needs to file Form 3CD for the tax audit report electronically. Furthermore, the Finance Minister Nirmala Sitharaman has announced that the tax audit due date of current Financial Year has been extended to October 31, 2020, from September 30, 2020

In the case of a profession, taxpayers will liable to carry out a tax audit if the gross receipt under this income head exceeds INR 50 Lakhs during any given financial year. If the taxpayers fail to have their books of account audited, then they’ll be liable to pay a fine of up to 0.5% of the gross revenue of 1.5 Lakhs or whichever is lower.

ITR Form and Document Checklist

ITR 3 form is meant for individual or HUF having income from business or Profession and from partnership firm/LLP. In simple words, ITR 3 needs to be filed when income is earned under the head “Profit or gain of business or profession”. It is also filed when Tax Audit is applicable. However, professionals can opt for the presumptive taxations scheme and declare 50% of their gross receipts as their income by filing ITR 4 from the AY 2017-18.

GST Applicability and Return Filing

GST (Goods and Service Tax) is also applicable if your turnover from business exceeds Rs. 40 lakhs in a particular financial year. In the case of the profession, GST is applicable if your receipts exceed Rs. 20 lakhs. One needs to take the GST Registration and file the GST Returns as well. Following are the different types of GST Registrations:

  1. Compulsory Registration,
  2. Voluntary Registration,
  3. Composite Scheme Registration.
GST Registration
CA Assisted Goods & Service Tax (GST) registration for startups, individuals, partnership firms and companies.
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GST Registration
CA Assisted Goods & Service Tax (GST) registration for startups, individuals, partnership firms and companies.
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FAQs

Can a company carry on a profession?

A company being an artificial person does not have a mind or a body and, therefore, cannot be engaged in any profession.  The skill involved in carrying out professional activity is predominantly mental or intellectual rather than physical or manual.

What is presumptive income from Profession?

A professional having a gross revenue upto Rs 50 lakhs can opt for the presumptive scheme of tax wherein he can straightaway offer 50% of the gross revenue as his taxable income and pay taxes as per his slab rates on suchincome.

Can a salaried person have business income?

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