Filing your income tax returns (ITR) is the final step in taxation. This can be done with ITR forms. Below is a quick explanation of ITR and what you should know as a trader/investor.
From my interactions with many people, I noticed that they confuse the actions of 'filing income taxes' and paying income taxes'. Many people believe that filing income tax is unnecessary if they have already paid income tax.Why it's not true, let me tell you.
As an example, suppose that you earned a salary and also made a profit trading equity-based delivery trading for the year. This activity is considered "Non-speculative business income". This activity may not be known to the employer. It is your responsibility to report the source of income to the Income Tax department. .
Filing income tax returns- Filing income taxes returns is a compulsory way to inform the IT department about all sources of income, including your salary. A Income tax return form (ITR)form simply allows you to declare your income sources. Different ITR forms can be used for different income sources. It may seem strange that I would need to file my income tax returns if I do not have other sources of income than salary. In such cases, by filing your income tax returns via the appropriate ITR form, you are communicating to the income department that you don't have any other source.
In essence, filing your returns is an official communication to the IT department regarding all sources of income and tax paid. This is done via the ITR forms.
An ITR, or Income Tax Return, is a form that specifies the details of income earned and the taxes paid. There are many types of ITR forms. One must choose the right ITR form based on their income sources. These forms can be downloaded from here https://incometaxindiaefiling.gov.in/
This module is for individuals who have investments as capital gains, trading as a business income or trading as an investment. The important ITR forms you need to be aware of are:
ITR 1 - If you have a salary, an interest income or rental income from one property, you can file ITR 1 forms for your income tax returns. Total income is up to Rs 50ks. This is the most popular type. However, if you have capital gains, trading as a business income or other types of income, this ITR form will not be applicable to you.
ITR 2 – for individuals and HUF who are not engaged in any kind of business/profession. ITR 2 can be used when you have a salary or interest income and income from capital gain. ITR2 is required for individuals who invest in the market only (remember, investor, thus capital gains).
ITR 3 - ITR 3 was renamed ITR 4 in 2017. ITR 3 can be used when you have income from a salary or interest, income from property, income via capital gains, income derived from business/profession, or income from any other source.
If you're a trader who declares trading as a business income, ITR 3 is required. You can also show capital gains if you are a trader and investor on the same ITR 3 form.
ITR 4 (ITR 4S Earlier) - This is similar to ITR3, but has a presumptive system if section 44AD or 44AE are used for computing business income. ITR 4 cannot be used to report capital gains or to carry forward losses. You can only use ITR 4 if you have income from business (speculative and non-speculative), but you should avoid it if you want to reduce your tax liability.
ITR 4 has the advantage that taxpayers don't need to keep a book of accounts or want it audited (refer to chapter 2), provided your annual turnover is less than Rs 5 Crores.
If you calculate your turnover using section 44AD ( ), then declare 6%* as your presumptive income. Then, you will have to pay taxes by adding 6%* to your income and paying tax according to the slabs.
If you trade less than Rs 5 Crores in turnover for the year (was Rs 2.35 crore up to FY 19/20) or if your profit is less than 6%* of turnover with only business income (not feasible if capital gains are involved), you can declare presumptive earnings of 6%* and avoid the need to have your books audited. If you use ITR4 (4S or earlier), you don't need to pay any advance taxes. However, you cannot deduct business expenses from your income.
As an example, let's say my salary was Rs.500,000/year for the last fiscal year. I also had incurred F&O losses of Rs.25,000/year on a turnover of Rs.400,000/year. ITR4 will be required to maintain my books and audit them. My profit is below 6%* (25,000/400,000). ITR4S could be used to declare 6%* of my business turnover of Rs.400,000/or Rs.24,000/- as presumptive trading income, even though I have suffered a loss.
: % has been reduced from 8% - 6% in AY 2017/18 or FY2016/17
My annual income is Rs.500,000 (salary + R 24,000 business income = Rs.524,000/+. My tax liability would then be the following:
Maximum Rs. 250,000 - No Tax
Between Rs.250,000 and Rs.500,000 - 5% to Rs.12,500/
Between Rs.500,000 and Rs.524,000 – 20% - Rs.4,800/
Total tax = Rs.12,500 + R.4,800 = Rs.17,000.
This is because I have declared a presumptive income of Rs.24,000/= and am now subject to an additional tax of Rs.4,800/=. This is a better alternative to getting an audit done, for which the CA fees could be Rs.15,000/+ and more. ITR4 is only useful if you have a low turnover. Therefore, declaring 6% as income to the CA would be cheaper than paying an audit fee.
How do I file my return of income electronically?
An independent portal has been established by the income-tax department for e-filing income tax returns. Log in to www.incometaxindiaefiling.gov.in for e-filing the return. This video explains e-filing and is provided by the IT department.
Do I need to attach documents with the return?
The ITR forms do not require attachments. You don't need to attach any documents (such as proof of investment or TDS certificates) along with your ITR return form, whether it is filed manually or electronically unless you fall within the audit case.
These documents should be kept by you, and they should be presented to the tax authorities when requested in situations such as assessment, inquiry, scrutiny, or other similar. However, in audit cases, you will need to attach a soft copy the balance sheet, P&L and any notes together with the audit report.
What's the difference between e-filing and e-payment?
E-payment refers to the electronic payment of taxes (e.g., via net banking or SBI’s debit/credit cards)
E-filing refers to the electronic filing (or furnishing) of income tax returns.
The e-payment / e-filing system makes it quick and easy to pay tax and furnish a return.
Do I need to file a return of income if I don't have any income?
You must file your return within the deadline if you suffered a loss during the financial year.
When is the deadline for filing income/loss returns?
If no audit: July 31st
Audit: September 30th
What should be called the "nature and character of business" in ITR 3 (ITR 4 to 2017)?
You can mention the nature of your business as Trading-Others (Code 0204 - up to 2017).
For FY 2017/18, Code: 13010 -
Financial Investment/intermediation activities. This appears to be the closest category of investment/trading-related activity.
I will be penalized or fined if I do not return my returns by the deadline.
Yes. If you fail to submit the return by the due date, interest will be charged on the tax owed. A penalty of Rs. 500 will be levied if the return is not submitted by the due date. Section 271F shall apply to a penalty of Rs. 5,000
How can you show profit and loss in the balance sheet?
All positive turnover can be shown as gross receipts and all negative turnover as sales.
Can a return be filed after the due date?
Yes, you can. A late return is one that was filed after the due date. If the income return was not filed on the due date, a belated return can be filed. A belated return can be filed within one year of the close of the financial calendar, or completion of the assessment. A late return, as discussed in the FAQ can result in penalties and interest.
For example, the belated returns for income earned in FY 2013-14 can be filed until 31 March 2016. If the return is not filed by 31 st February 2016, the penalty under Section 271F may be applied.
Do I have the right to file a new return if I make a mistake on my original return?
Yes, provided that the original return was filed by the due date and that the IT Department has not completed the assessment. It is possible that the error in the original returns is genuine and correct and not a rectification. A belated return, which is a return that was filed after the due date, cannot be resubmitted.
You can revise your return within one year of the end of the relevant assessment or before the assessment is complete, whichever comes first.
For income earned in FY 2013-14 (assuming no audit), the due date for filing a return of income would be 31 July 2014. The return of income must be filed before 31 July 2014. If it is not, the return can be modified up until 31_ March 2016. (subjects to assessment not being completed before that date), the return will be considered late. A late return cannot have its details changed.
The ITR forms are usually Microsoft Excel sheets that allow you to fill in all relevant information and then the calculations will be done automatically.
Attached is an ITR 4 form that lists all income types, including salary, capital gains, and trading as a company. If you need to fill it yourself, this should serve as a reference. ITR4 Form from AY 2021/22 (FY 2020/2021).
Phew! That brings us to the end of the taxation module. It is difficult to keep it simple, especially when there is so much jargon. I hope you find it useful. This module provides a quick reference for all things tax-related to trading and investing. Financial discipline is key to long-term wealth creation. It starts with compliance filing your income tax returns. It is important to not delay or avoid filing your income tax returns, especially given the advances in technology and reach of our Income Tax Department.
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