7.1 – Income Tax Return (ITR) Forms

The last step of taxation is filing your Income tax returns (ITR), and this can be done using ITR forms. Find below a brief explanation of everything important on ITR that you need to know as an investor/trader.

I have noticed from my interactions with many that they are confused between the two actions i.e ‘paying income tax’ and ‘filing income tax’. Many are of the opinion that if they pay income tax the act of filing income tax is not really necessary. This is not true, let me explain why.

Paying Income tax – If you are employed and draw a salary you very clearly know that your employer on your behalf deducts tax (based on your tax slab) and pays the income tax on your behalf. This is usually called ‘Tax Deducted at Source (TDS)’. Now, what if you have an income source besides your salary?

For example for the given year assume besides drawing a salary, you also made a profit by actively trading delivery based equity trading. As we now know this activity falls under “Non-speculative Business Income”. Since the employer is not privy to this activity it becomes your responsibility to declare this source of income to the Income-tax department and paying the appropriate amount as tax.

Filing Income tax returns – Filing income tax returns is a mandatory way of communicating to the IT department all the sources of income you have including your salary. An Income Tax Return Form (ITR) form is simply a form that you need to fill up declaring your sources of income. There are different ITR forms for different sources of income. You may wonder why I should file my returns when I don’t have any other source of income besides salary. Well, in such a case by virtue of filing your income tax returns (via appropriate ITR form) you are officially communicating to the income tax department that you do not have any other source of income.

So in essence, the act of filing your returns is your official communication to the IT department about all the sources of income that you have along with the tax you have paid against that income. You do this via the prescribed ITR forms.

More formally, an ITR is a prescribed form through which the particulars of income earned by a person in a financial year and taxes paid on such income are communicated to the Income-tax Department. There are different types of ITR forms, one needs to select the appropriate ITR form, based on the different sources of income. These forms can be downloaded from here https://incometaxindiaefiling.gov.in/

7.2 – Different ITR forms

In the context of this module, which is focused on individuals having investments as capital gains or trading as a business income, the important ITR forms to know about are:

ITR 1 – when you earn a salary, interest income, or rental income from only one house property, you can use ITR 1 forms to file your income tax returns (total income up to Rs 50lks). This is the most common type, but if you have capital gains or trading as a business income, you can’t use this ITR form.

ITR 2 – for individuals and HUF not carrying out any business/profession and when you have a salary, interest income, income from house property or income from capital gains, you can use ITR 2. So if you are an individual who only invests in the market (remember investor, hence capital gains), you need to use ITR2

ITR 3(ITR 4 renamed to ITR3 from 2017) – when you have a salary, interest income, income from house property, income from capital gains, and income from business/profession, you can use ITR 3.

So if you are an individual who is declaring trading as a business income, you have to use ITR 3. If you are an investor and trader, you can show trading under business income and investments as capital gains on the same ITR 3 form.

ITR 4 (ITR 4S earlier) – this is similar to ITR3 but with a presumptive scheme, if section 44AD and 44AE used for computation of business income. ITR 4 can’t be used to declare any capital gains or if losses have to be carried forward. So you can use ITR 4 only if you have business income (speculative + non-speculative), but it is best avoided if by use of this form you are reducing your tax liability. 

7.3 – Exploring ITR 4 (4S until 2017)

The advantage of ITR 4 is that it can be used by taxpayers who do not maintain a regular book of accounts or want it to be audited (refer chapter 2) provided your turnover is lesser than Rs 10 Crores for the year.

You can get away without maintaining books or getting audited if you firstly calculate turnover based on section 44AD (check the previous chapter) and then declare 6%* of this turnover as your presumptive income. You have to then pay taxes adding this 6%* of the turnover to your other income and pay tax as per the slabs. 

To opt for Section 44AD, the maximum turnover should be Rs 2 Crores until FY2022-23; from FY 2023-24; the threshold limit has been increased to Rs 3 Crores provided 95% of the receipts are by way of digital mode.

You will not be able to opt for 44AD; if you are declaring more than 3 Crore.

So if you are a trader with turnover less than Rs 10 Crores for the year (was Rs 1 crore until FY 19/20) and profit less than 6%* of the turnover with only business income (not possible if you have capital gains), you can declare presumptive income of 6%* of the turnover, and get away from the need to get your books audited. You need to pay Advance Tax only for the 4th Quarter i.e 15th March installment.

For example, assume my salary was Rs.500,000/- for the last FY, and I had incurred F&O loss of Rs.25,000/- on a turnover of Rs.400,000/-. Since my profit is less than 6%* (25,000/400,000) of my turnover I will need to use ITR4, maintain books, and have them audited. Instead of this, I could use ITR4S and declare 6%* of Rs.400,000/- (business turnover) or Rs.24,000/- as my presumptive trading business income even though I have incurred a loss.

Update:  % is reduced from 8% to 6% from AY 2017/18 or FY 2016/17

My total income for the year is Rs 500,000 (salary) + R 24,000 (business income) = Rs.524,000/-. Therefore my tax liability would be as follows –

Upto Rs.250,000 – No Tax

Between Rs.250,000 to Rs.500,000 – 5% – Rs.12,500/-

Between Rs.500,000 to Rs.524,000 – 20% –  Rs.4,800/-

Total tax = Rs.12,500 + Rs.4,800 = Rs.17,300/-

Here, by virtue of declaring a presumptive business income of Rs.24,000/- I’m paying an additional tax of Rs.4,800/-. This works out to be a cheaper alternative than getting an audit done for which the CA fees could have been Rs.15,000/- and above. So using ITR4 would make sense only if your turnover is low, hence declaring 6% of turnover as income would work out cheaper than paying an audit fee to the CA.

7.4 – Exploring ITR 3

ITR 3

ITR 3 is a comprehensive ITR form. As said above, it is applicable when you have all heads of incomes say, salary; income from house property; capital gains; income from business or profession and income from other sources (say interest income).

Declaring FNO Income under presumptive scheme (44AD)

From FY 2018-19 onwards, one can use ITR-3 even when he or she wants to declare business income under presumptive scheme. The income tax department has inserted the option to declare income presumptive scheme in Schedule PL. Hence, traders can make use of it. One can use this form to declare capital gains or capital losses or if losses have to be carried forward and any interest income.

As shown in the above image, assume the turnover in Rs 1Cr – one can declare 6% on Turnover i.e Rs 6Lacs profit and pay tax accordingly as per applicable slab rate.

Further, you can set off current year losses and the brought forward business losses against this presumptive income (Rs 6Lacs). You can also claim deductions under Chapter VI-A Part B i.e 80C to 80GGC. These eligible deductions will reduce your income further which in turn taxes as well. We will discuss more on this in upcoming chapters.

Consider this example: 

• Income from Business: Rs 6Lacs (as above)
• Loss from House Property: Rs 1.5 Lacs
• Carry forward business loss from previous years: Rs50K
• Investment eligible under 80C: Rs 50K

Taxable income will be 3.5Lacs. 

What did I do?

I set off F&O Income of 6Lacs with loss from house property (interest paid on housing loan) and business loss from previous years.

Net business income after set off becomes Rs 4Lacs. I further reduced it by 50K which makes taxable income: Rs 3.5Lacs.

Important note: Once you opt out of the presumptive scheme in a financial year, you cannot declare income/take benefit under this scheme for next 5 years.

Say, you declare F&O income under presumptive scheme (44AD) for FY 2022-23 and for FY 2023-24 assume you incur losses and you decide to carry forward such F&O losses. Thus, you opt out of 44AD and declare loss under normal provisions of the income tax act.

Suppose, in FY 2024-25 you make profit and if you decide to declare F&O profits under the presumptive scheme; you can’t for FY 2024-25 and until FY 2028-29. 

Further, assume you declare income under presumptive scheme for FY 2022-23 as you see in Image 1 and next year i.e FY 2023-24 you decide to declare less than 6% under normal provisions and your total taxable income is more than basic exemption limit, then tax audit is applicable and you are required to maintain books of account.

This applies for 5 consecutive years from where you opt out of presumptive scheme – which means say; you opt out of presumptive in FY 2023-24 and for FY 2024-25 to FY 2028-29 

1. you are required to get audit done
2. you are required to maintain books of account
   if your total income exceeds the basic exemption limit.

Hence one should be careful before switching into or switching out of presumptive scheme.

One who opts for presumptive scheme has to pay whole advance tax in one go on or before 15th March of the Financial Year.

44AD is not applicable for a Non-Resident.
Declaring FNO Income under normal provisions i.e maintaining books (to carry forward loss)

What are normal provisions?

Normal provisions means a tax payer or trader is required maintain books of accounts i.e Balance Sheet, Profit and Loss account unlike in presumptive scheme where you one need not maintain books of account.

Consider the following example:

I have entered the sell value of and option premiums and sale value of futures under Point 4(image 3) since there is no option to exclusively declare the sale details of FNO.

Next, I have entered the buy value of options premium and futures under Point 9(image 3).

If you see, there is a loss of Rs 83,329/-

As part of expenses, you can claim all the expenses attributable to earning the FNO Income. Some of the examples:

• Salaries, if you have people helping you trade.
• Rent, if you are using a dedicated office for the trading activity.
• Brokerage charges, taxes, and all other trade-related expenses.
• Advisory fees, consultancy, depreciation of laptop, and etc.

After the calculation of net profit or loss, you will pay tax as per applicable slab rates.

Trading options is considered as a non-speculative business income irrespective of being intraday or delivery.

Declaring Speculative Income:

Speculative Incomes basically consists of intraday gains as most of them are leverage based trades and done without the intention of taking delivery. 

You need to declare the speculative income in the Schedule PL.

As shown above, I have filled indicative figures to a give a perspective. These speculative gains are taxed based on slab rates which you fall.

Declaring Capital Gains:

Short-Term Capital Gains:

Capital gains are declared in Schedule CG and 112A. Short Term Capital gains are straight away declared in Schedule CG and Long Term capital gains are declared in Schedule 112A.

Refer above; I have details of Short Term Capital Gains (again indicative figures) in Schedule CG.

Example: 

Sale Consideration: Rs 1 Lacs

Cost (Purchase Price): Rs 90K

Expenses: Rs 1K

Short Term Capital Gain: 9K

Long Term Capital Gains:LTCG are taxed @ 10%/12.5% depending upon the date of sale on or after 23rd July 24 exceeding Rs 1.25 Lacs

Continued…

Consider this example:

Assume I have purchased 30 shares before 31st Jan 2018 @ Rs 535.56 and 50 shares after 31st Jan 2018 @ Rs 412.96. I have sold entire 80 shares in April 2024.

For shares purchased before 31st Jan 2018, grandfathering clause shall apply and there will be no tax on gains accrued upto 31st January 2018.  Refer #1 – since FMV as of 31st Jan 2018 is more than the sale price of (Rs 611.94), there is no question of capital gain, and since the gain is already accrued – it is exempt, and you can see in column 14, it is ZERO.

In #2, the grandfathering clause shall not apply, and the capital gain of Rs 9949/- (Rs 30597 minus Rs 20648) is calculated accordingly and taxed @ 10%/12.5% as applicable, exceeding Rs 1.25 Lacs.

The highest Price quoted on 31st Jan 2018 shall be considered as FMV on 31st Jan 2018.

Refer to this link – you will get the FMV details of all the shares as of 31st Jan 2018. 

In ITR 2, you need to declare the capital gains in the schedules CG and 112A, as discussed above.

7.5 – Quick FAQ and notes

How to file the return of income electronically?
The income-tax department has established an independent portal for e-filing of return of income. You can log on to www.incometaxindiaefiling.gov.in for e-filing the return of income. Check this very nice video on e-filing put by the IT department.

Is it necessary to attach documents along with the return of income?
ITR return forms are attachment-less forms. Hence along with the ITR form (whether filed manually or filed electronically), you are not required to attach any document (like proof of investment, TDS certificates, etc) unless if you fall under the audit case.

However, these documents should be retained by you and should be produced before the tax authorities when demanded in situations like assessment, inquiry, scrutiny, etc. But in audit cases, a soft copy of the balance sheet, P&L, and any notes along with the audit report needs to be attached.

What is the difference between e-payment and e-filing?
E-payment is the process of electronic payment of tax (i.e., by net banking or SBI’s debit/credit card)

E-filing is the process of electronically furnishing (filing) of return of income.

Using the e-payment and e-filing facility, payment of tax and furnishing of return is quick, easy, and hassle-free.

Is it necessary to file the return of income when I do not have any positive income?
If you have sustained a loss in the financial year, which you propose to carry forward to the subsequent year for adjustment against subsequent year(s) positive income, you must make a claim of loss by filing your return before the due date.

What are the due dates for filing returns of income/loss?
If no audit: July 31^st

If audit: September 30^th

What is to be mentioned as the “nature of business” on ITR 3 (ITR 4 until 2017)? 

Nature of business can be mentioned as Trading-Others (Code: 0204) – until 2017

For FY 2017/18, Code: 13010 – Financial intermediation/Investment activities. This seems to be the closest category to investment/trading related activity.

If I fail to furnish my return within the due date, will I be fined or penalized?
Yes, if you have not furnished the return within the due date, you will have to pay interest on tax due. Also penalty under Section 234F of Rs 1,000/- if income is less than or equal to Rs 5 Lacs and Rs 5,000/- for taxable income above Rs 5 Lacs.

How to show profit and loss on the balance sheet?  

You can show all positive turnover as gross receipts, and negative turnover as gross sales.

Can a return be filed after the due date?
Yes, you can. Return filed after the prescribed due date is called a belated return. If one could not file the return of income on or before the prescribed due date, then he can file a belated return. A belated return can be filed within a period of one year from the end of the financial year or before completion of the assessment, whichever is earlier. A belated return attracts interest and penalty as discussed in the previous FAQ.

For Example – In the case of income earned during FY 2022-23, the belated return can be filed up to 31st Dec 2023. However, one can file an updated return under Section 139(8A) after 31st Dec 2023, with additional penalty of 25% of additional tax(tax plus interest) within 12 months from the end of the relevant Assessment Year.

Penalty will be 50% of additional tax(tax plus interest) if updated return is filed within 24 months from the end of the relevant Assessment Year.

 

Sample ITR3 Form (2022-23)

Sample ITR4 Form (2022-23)

Sample Computation

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Key takeaways from this chapter

1. The act of paying your taxes is called “Tax Payment”, which can be done via e-payment
2. The act of communicating different sources of income and tax paid against that is called “Income Tax Return filing”
3. Filing income tax returns is mandatory, even though you have paid taxes
4. An ITR form should be used to file taxes
5. Use different ITRs for different sources of income
6. ITR 4S for presumptive business income. Use this to lower your cash outflow (paying taxes versus audit fees)

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Phew! That brings us to the end of the taxation module. Keeping it simple is most challenging, especially a topic like this where almost every other word is a jargon. Hopefully, I have done a decent job with it, and this module acts as your ready reckoner for everything on taxation when trading and investing.

Financial discipline is the key to long term wealth creation, and it starts with the compliant filing of your income tax returns. It is best not to avoid or postpone especially with the advancement of technology and reach of our income tax department.

Do help spread the word,

Happy Trading,

Nithin Kamath
Zerodha

Special thanks to  Tax IQ for providing valuable inputs throughout this module.

Disclaimer – Do consult a chartered accountant (CA) before filing your returns. The content above is in the context of taxation for retail individual investors/traders only.