The Income Tax Department of India has notified 7 ITR Forms in total. These are – ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7. Individuals and HUFs earning income from business and profession should file ITR 3. Let’s deep dive!
What is ITR 3?
An Individual or HUF (Hindu Undivided Family) can file ITR 3 when there is:
- Income from Business/Profession
- Presumptive Income
- Income from partnership firm
In simple words, ITR 3 needs to be filed when income is earned under the head “Profit or gain from business or profession“. It is also filed when Tax Audit is applicable.
Note: Any separate legal entity other than individual and HUF can not file ITR 3 i.e, Partnership Firm, LLP, Company, Charitable Trust, etc.
ITR 3 Form for Income from Business or Profession
1. What is ITR 3 Parts and Schedules
1. A general list of things to know before you start filing your return-
- All items must be filled in the manner indicated therein; otherwise, the return may be liable to be held defective or even invalid.
- If any schedule is not applicable, score across as “NA“.
- If any item is inapplicable, write “NA” against that item.
- Write “Nil” to denote nil figures.
- All figures should be rounded off to the nearest one rupee. However, the figures for total income/ loss and tax payable be finally rounded off to the nearest multiple of ten rupees.
2. Following is the sequence for filling out parts and schedules-
- Part A- General on page 1.
- Schedules
- Part BTI and Part BTTI
- Verification
- Details relating to TRP and countersignature of TRP if the return is prepared by him.
2. Documents Needed for ITR 3 for 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.
3. Due Dates:
It’s one extension after another for the Income Tax Department. The Income TAX due date for F.Y. 2019-20 (A.Y. 2020-21) has been extended once more as a Covid 19 relief.
📢It’s one extension after another by @IncomeTaxIndia!
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🗓️The Income Tax Due Dates for FY 2019-20 (AY 2020-21) have been extended once more as a #COVID19India relief.
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👉Check out the extended due dates for #TaxSeason2020 pic.twitter.com/dI1qSfGR1P
4. Set-off and Carry Forward Loss
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 losses can be set off against future incomes. The Income Tax Act has, however, specified rules to set off and carry forward 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.
Carry Forward 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 carryforward 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).
A table with rules to carry forward loss and set off against future incomes.
5. Business and Profession Codes
The Central Board of Direct Taxes (CBDT) has changed the business and professional codes for the Income Tax Return (ITR) from Assessment Year 2019-2020. Hence, you must select the correct codes for the nature of the business or the nature of the profession to report the correct information in the ITR. The nature of the business code should be selected on the Income Tax Website
Any Taxpayer having income from business/profession who does not opt for the Presumptive Taxation Scheme should prepare financial statements and file ITR-3. The taxpayer should select the correct codes and categories under which the business or profession can be classified from the drop-down list. Description of business/profession activity and Trade Name of the business/profession can also be added.
6. What is Tax Audit
Are you confused about calculating your Trading Income Turnover and determining the Tax Audit Applicability? We’ve got you covered.
First, trading income turnover calculation should be done only when your income is considered as business income and not capital gains income. Second, you need to calculate the trading turnover of such income to determine your tax audit applicability.
Note 1: Tax liability does not depend on turnover
Note 2: Trade-wise vs Scrip-wise: The taxpayers should report the trade-wise turnover and not scrip-wise turnover in ITR. However, if the broker report provides scrip-wise data, turnover is reported on a scrip-wise basis.
Tax Audit Applicability
Trading turnover is a major condition to determine tax-audit applicability.
There have been some major changes to the tax-audit rules in Budget 2020. The limit for turnover as per Section 44AB is increased from INR 1 cr. to INR 5 cr if – at least 95% of total payments and 95% of total receipts are digital in nature. For traders, all transactions are digital. Hence the limit of Tax Audit Applicability U/S 44AB will be INR 5 cr. And for taxpayers who do not satisfy the above condition, the limit of INR 1 cr remains unchanged.
This table might help you understand the applicability rules in a jiffy.
7. Who Should Maintain Books of Accounts?
The income tax act specifies the books of accounts that need to be maintained for the purpose of the Income Tax. These are mentioned under section 44AA of the income tax act and rule 6F. Every person who has the following professions is required to maintain the books of accounts:
- Legal
- Medical
- Engineering
- Architectural profession
- Profession of accountancy
- Technical Consultancy
- Interior Decoration
- Authorized Representative
- Film Artist
- Or Any other profession as is notified by the Board in the Official Gazette shall keep and maintain the books of accounts and other documents if his total gross receipt in the profession exceeds INR 1,50,000 in any one of the 3 years immediately preceding the previous year, or where the profession has been newly set up in the previous year than in that case if his total gross receipts in the profession for that year are likely to exceed INR 1,50,000.
Do I Need to Get My Books of Account audited?
Yes! The following are the conditions-
- If you are running a business with total sales exceeding INR 1 crore
- If you are a professional earning income above INR 25 lakh
- From FY 2016-17, the limit has been increased from INR 1 crore to INR 2 crores and from INR 25 lakh to INR 50 lakh.
8. General List of Expenses Included While Filing ITR 3
- Employee Benefits Expense (salaries and wages, contribution to provident and other funds, staff welfare expenses).
- Depreciation and amortization,
- Interest expense,
- Net loss on the sale of investments,
- Net loss on foreign currency transaction (other than considered as finance cost),
- Payments to the auditor as Audit Fee, for taxation matters, Certification fee, or for other services.
- Power and Fuel, Rent, Repairs to buildings, Repairs to machinery, Insurance, Rates, and taxes, excluding taxes on income
- Other Miscellaneous expenses are included as expenses.
9. Income From Partnership Firm
If you are a partner in a partnership firm, you must report the following details of your ITR:
- Name & PAN of firm
- Whether a firm is liable for Tax Audit
- Share of profit in the firm (in both % and amount)
- Capital of the firm as of 31st March
Note: The share of profit in the firm is exempt in the hands of the partner since the partnership firm pays tax on such income.
10. Financial Statements – Balance Sheet and P&L for ITR 3
If there is an income from a business or profession and the taxpayer does not opt for Presumptive Taxation, it is mandatory to report financial statements in the Income Tax Return. Financial Statements comprises of Balance Sheet and P&L Statement.
Balance Sheet
Balance Sheet is the statement that reflects financial details of a business in form of Assets & Liabilities. Assets comprise of the following:
- Fixed Assets – car, furniture, land, laptop, mobile, etc.
- Current Assets – cash & bank balance, debtors, loans given, TDS / TCS Credits, etc
- Investments – equity shares, mutual funds, bonds, debentures, etc
Liabilities comprise of the following:
- Capital of the business as of 31st March
- Loans taken i.e. secured and unsecured loans
- Current liabilities – bank OD, creditors, provision for income tax, etc
P&L a/c
P&l a/c is the statement that reflects the profit earned or loss incurred for the business during the financial year. It comprises of the following:
- Sales include the value of goods or services sold during the financial year.
- Purchases include the value of goods or services bought during the financial year.
- Income includes other revenues such as profit from the sale of assets, commissions, interest, etc.
- Expenses include salary, advertisement, rent, repairs & maintenance, electricity, printing & stationery, staff welfare expense, depreciation, etc.
11. Miscellaneous
GST Details for ITR 3
If you are registered under GST, you must report the following details in the ITR:
- GSTIN i.e. GST Identification Number
- Total Sales as per the GST Return
Note: If there is a mismatch in the sales as per ITR and sales as per GST Return, the tax department may issue a notice to the taxpayer.
Taxes Paid
The taxpayer must report details of the taxes paid such as self-assessment tax or advance tax in the Income Tax Return. Such taxes would be reduced from the total tax liability calculated.
TCS/TDS Credits
TDS i.e. Tax Deducted at Source or TCS i.e. Tax Collected at Source are the taxes deducted on incomes. All the TDS / TCS Credits are reflected in Form 26AS available in your login on the Income Tax Website. You can claim credit of such TDS / TCS against the tax liability.
Foreign Assets
If you have earned any income outside India or hold any assets outside India, you must report such details in the Income Tax Return. If you hold the status of a Resident as per the Income Tax Act, income earned outside India is also taxable. To ensure that the same income is not taxed in 2 countries, refer to the DTAA Agreement entered into between the countries and claim credit for taxes paid outside India.
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