Important Keyword: Business and Profession, Income from Business & Profession, Income Source, Speculative Income.

What is Business and Profession?

Exactly! Income from business or profession falls under the category of “Income from Business and Profession” for tax purposes. Here’s a breakdown of what constitutes business and profession:

1. Business: Business involves any activity carried out by a person with the intention of earning a profit. It encompasses a wide range of activities such as trade, commerce, manufacturing, and providing services to others. Examples of businesses include owning a shop, running a hotel, transportation services, operating a travel agency, and share broking.
2. Profession: Profession refers to vocations or occupations that require specialized knowledge, skills, and expertise. Professionals typically earn their livelihood through the application of their intellectual or manual abilities. Examples of professions include legal services, medical practice, engineering, chartered accountancy, architecture, and various other specialized fields.

Income generated from both business and profession activities is considered taxable under the head “Income from Business and Profession” in the Income Tax Act. This classification helps tax authorities and taxpayers differentiate between various sources of income and apply the relevant tax rules and provisions accordingly.

Maintaining Books of Accounts

Let’s summarize the key points:

Business Income:

1. Books of Accounts Maintenance: Businesses need to maintain books of accounts if income exceeds INR 1,20,000 or total sales, turnover, or gross receipts exceed INR 10,00,000 in any of the three immediately preceding previous years.
   • For individuals and HUF, the thresholds are income exceeding INR 2.5 Lakhs or total sales, turnover, or gross receipts exceeding INR 25 Lakhs in any of the three immediately preceding previous years.
2. Types of Incomes:
   • Non-Speculative Businesses/Professions
   • Speculative Businesses
   • Specified Businesses
3. Expenses Allowed: All expenses incurred wholly and exclusively in relation to the business and profession are allowed as deductions.

Profession Income:

1. Books of Accounts Maintenance: Professionals need to maintain books of accounts if gross receipts exceed INR 1.5 Lakhs in any of the three immediately preceding years.
2. Types of Incomes: Similar to Business Income, but for professions.
3. Expenses Allowed: Same as for business income.

Tax Computation:

• Taxable income from business and profession is profits after deducting allowable expenses.
• Tax is calculated at slab rates applicable to the taxpayer for the relevant financial year.

Examples of Allowable Expenses:

• Rent and insurance of the building
• Payments for Legal and Professional services
• Remuneration, Bonus, Commission, etc. to employees
• Interest and remuneration to working partners
• Traveling and conveyance expenses
• Membership fees
• Depreciation on fixed assets
• Advertisement expenses
• Financial Charges (e.g., Interest on loans)
• Entertainment/Business Promotion expenses
• Staff Welfare expenses
• Printing and stationery expenses
• Postage expenses
• All other expenses relating to business/profession

It’s crucial for taxpayers to maintain accurate records and understand the tax implications of their business or profession income to ensure compliance with tax laws.

Additional Cess:

• An additional 4% Health and Educational Cess is applicable to the tax amount calculated.

Set off and Carry Forward of Losses:

• Non-Speculative Business Loss: Can be set off against any income except Salary in the current year. Remaining loss can be carried forward for 8 years and set off against Business Income in future years.
• Speculative Business Loss: Can be set off against Speculative Business Income only. Remaining loss can be carried forward for 4 years and set off against future Speculative Business Income only.
• Specified Business Loss: Can be set off against any income except Salary in the current year. Remaining loss can be carried forward for 9 years and set off against Business Income in future years.

TDS/Advance Tax on Income from Business and Profession:

• TDS (Tax Deducted at Source): TDS gets deducted on payments made to taxpayers for any goods or services sold. Any TDS deducted can be claimed while filing ITR for business and profession.
• Advance Tax: If the tax liability is expected to exceed Rs. 10,000, the taxpayer must calculate and pay Advance Tax in quarterly installments to avoid Interest under Section 234B and 234C.

In the realm of self-employment lies the domain of freelancers, individuals who have the autonomy to select their projects and tasks. Their income, which lacks steadiness, is predominantly professional in nature, falling under the category of “Income from Business and Profession” as per the Income Tax Act.

For freelancers, taxable income is the sum of all receipts received from various projects, minus the expenses incurred in their freelance endeavors. This net taxable income formula allows freelancers to deduct expenses related to their work, optimizing their tax liabilities.

What is Speculative Business Income?

Understanding Speculative Business Income is pivotal in comprehending the nuanced aspects of freelance taxation. Speculative transactions involve contracts for the purchase or sale of commodities, like stocks and shares, settled periodically without actual delivery or transfer. Income derived from such transactions constitutes Speculative Business Income, distinct from regular business income.

Presumptive Taxation Scheme

The Presumptive Taxation Scheme provides relief to small taxpayers from the burdensome task of maintaining books of accounts and undergoing audits. Professionals with gross revenue up to INR 50 lakhs can opt for this scheme, declaring 50% of their gross revenue as taxable income. However, opting for this scheme precludes the ability to claim profession-related expenses as deductions.

Tax Audit Applicability

Tax audit becomes applicable to businesses with a gross turnover exceeding INR 1 crore in a financial year. Similarly, professionals are subject to tax audit if their gross receipts under the profession exceed INR 50 lakhs in any given financial year. Failure to undergo a tax audit incurs a penalty of up to 0.5% of gross revenue or INR 1.5 lakhs, whichever is lower.

ITR Form and Document Checklist

When it comes to filing income tax returns, freelancers must use the appropriate form, such as ITR 3 for individuals or HUFs earning from business or profession, or ITR 4 for those opting for the presumptive taxation scheme. Additionally, GST becomes applicable if the turnover exceeds Rs. 40 lakhs for businesses or Rs. 20 lakhs for professions, necessitating registration and return filing.

Navigating the intricacies of taxation as a freelancer requires a thorough understanding of these concepts, ensuring compliance with regulatory requirements while optimizing tax liabilities.

Read More: Income Tax for Freelancers, Consultants and Professionals.

Web Stories: Income Tax for Freelancers, Consultants and Professionals.

Official Income Tax Return filing website: https://incometaxindia.gov.in/