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 5 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.
So if you are a trader with turnover less than Rs 5 Crores for the year (was Rs 2 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. There is no need to pay advance taxes if you are using ITR4 (4S earlier), but you are not allowed to deduct any business expenses against your income.
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 – 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 31st
If audit: September 30th
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. If the return is not filed up to the end of the assessment year, in addition to interest, a penalty of Rs. 5,000 shall be levied under section 271F.
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 2013-14, the belated return can be filed up to 31st March 2016. However, if the return is filed after 31st March 2016, the penalty under section 271F can be levied.
If I have committed any mistake in my original return, am I permitted to file a revised return to correct the mistake?
Yes, provided the original return has been filed before the due date and the IT Department has not completed the assessment. It is expected that the mistake in the original return is of a genuine and bonafide nature and not rectification of any deliberate mistake. However, a belated return (being a return filed after the due date) cannot be revised.
Return can be revised within a period of one year from the end of the relevant assessment year or before completion of the assessment whichever is earlier.
For example, in case of income earned during FY 2013-14, the due date of filing the return of income (considering no audit) is 31st July 2014. If the return of income is filed on or before 31st July 2014 then the return can be revised up to 31st March 2016 (assuming assessment is not completed by that date). However, if the return is filed after 31st July 2014, then it will be a belated return and a belated return cannot be revised.
ITR forms are typically Microsoft Excel sheets where you can fill all the relevant details, and the calculations happen automatically.
Find attached an ITR 4 form with all types of income, salary, capital gains, trading as a business, and rental income. This should act as an easy reference if you are trying to fill this on your own. This is the ITR4 form from AY 14/15(FY 13/14).
Key takeaways from this chapter
- The act of paying your taxes is called “Tax Payment”, which can be done via e-payment
- The act of communicating different sources of income and tax paid against that is called “Income Tax Return filing”
- Filing income tax returns is mandatory, even though you have paid taxes
- An ITR form should be used to file taxes
- Use different ITRs for different sources of income
- ITR 4S for presumptive business income. Use this to lower your cash outflow (paying taxes versus audit fees)
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.
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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.