ITR or Income Tax Return is a form in which individuals file tax information to the Income Tax Department at the end of the financial year. Various forms are used to file income tax returns like ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7. The ITR forms vary from person to person and the category of the individual. Filing the income tax return is more complex for self-employed people as compared to salaried people.
A self-employed person is an individual who doesn’t have a fixed salary every month from a company and doesn’t work for any organisation or business, such as property dealers. The correct ITR forms for self-employed people are ITR 3 and ITR 4. Choosing the right ITR for self-employed is an important step in filing the income tax return.
How to file ITR for self-employed individuals?
The steps for filing an ITR for self-employed individuals are as follows:
1. Books of Account
The income of self-employed individuals is categorised under the 'Profits and Gains of any Business' category and taxed under it. Two options are provided by the government under this option, one is to calculate income tax without claiming for deductions and the other is to compute real profit after claiming the deductions. The second option requires an individual to maintain proper books of accounts.
2. Presumptive Taxation Scheme
The Presumptive Taxation Scheme allows individuals to compute their income on a presumptive basis and eliminates the requirement of maintaining a book of accounts.
3. Audit of books of accounts
The audit of accounting books is important if an individual doesn't fall under the category of a Presumptive taxation scheme and the turnover of business exceeds Rs 1 crore during the financial year.
4. Applicable ITR Form
A taxable person who maintains a regular book of accounts is required to file a return in ITR Form 3. ITR Form 4 is required for individuals who opt for the Presumptive Taxation Scheme. The filing of ITR can be done through the online facility or Java Utility.
5. Payment of Advance Tax
If the income tax liability of an individual is more than Rs 10,000, he/she is required to pay the tax in advance in 4 instalments. If the amount is not paid or paid less, then he/she will be liable to pay the interest on the amount under Section 234B and 234C.
6. Digital Signature
The last step in the process is the verification of the authorised person and this is done through Digital Signature Certificate, Aadhar based OTP, or Netbanking facility.
Some of the major deductions or exemptions for self-employed individuals include the following:
- Self-employment Tax
- Home office deduction – If you are working from home, you can show the home expenses for deductions
- Internet and phone bills – The internet and mobile bill charges used for business purposes are exempt up to some extent
- Health Insurance premiums – Health insurance costs are exempted from the income tax return
- Meal benefits – You can note down the mean costs every day for business purposes and can avail the deductions from ITR filing
- Travel allowance – If you are travelling for business purposes, you can avail of the deduction benefits
- Transportation Cost – Transportation cost for the business is exempted
- Interest on loans, etc. – If you are paying an interest amount on property or office, the amount can be exempted from income tax
- Subscriptions – Subscription amount is exempted from income tax up to some extent
- Education charges – Education charges like MBA charges or doctorate degrees, etc. are exempted
- Business Insurance – The insurance charges of the business are exempted
- Rent charges – The rent allowance is provided in income tax and is exempted
- Startup Costs
- Retirement plan contributions
Types of ITR
There are seven different types of Income Tax Return for different types of taxpayers based on their source of income, total income, and category. The types of ITR are categorised as follows:
1. ITR 1
ITR 1 is also known as Sahaj and is used by the following categories of Indian residents:
- Salary income
- Pension income
- Payment received for a single house property
- Income earned from other sources like property, lottery, horse race, etc.
2. ITR 2
ITR 2 applies to individuals and HUF that falls under the following criteria:
- Income more than Rs 50 lakh
- Director of the company
- Agricultural income greater than Rs 5000
- Income received from property, lottery, capital gains, foreign assets, foreign income, pension, salary, etc.
3. ITR 3
ITR is also for the individuals and HUF who falls under the following criteria:
- A business or profession
- Income received as a partner of a company
- Unlisted Equity shares investment
- Income from salary, pension, house property, and other sources
- Individual director of a company
4. ITR 4
ITR 4 is for individuals, HUFs, and partnership firms earning an income from business or profession. It also includes individuals who chose the presumptive income scheme under Section 44AD, Section 44ADA, and Section 44AE of the Income-tax. If the turnover of the business is less than Rs 2 crore, one must file an ITR in ITR Form 4 and if the turnover is more than Rs 2 crore, opt for ITR Form 3.
5. ITR 5
ITR 5 form applies to firms, co-operative societies, Limited Liability Partnerships, Local Authorities, Body of Individuals, Estate of Deceased, Investment Fund, Artificial Judicial Persons, Business Trust, etc.
6. ITR 6
ITR 6 is filed electronically by the companies who have an income from the charitable or religious property. The companies claiming an exemption under Section 11 are excluded from this category.
7. ITR 7
The following companies can file an income tax return using ITR 7 form:
- Section 139 (4A) – Applicable to individuals who hold a property for charitable and religious purposes
- Section 139 (4B) – This section is used by political parties
- Section 139 (4C) – Educational institutions, scientific research agencies and institution, medical institutions, and associations mentioned under section 10(23A) and 10(23B)
- Section 139 (4D) – Under this section, colleges and universities are covered where losses and revenues are not required to be reported
Thus, to conclude we can say that ITR is mandatory for everyone, from self-employed individuals to salaried class people. The ITR forms for self-employed individuals include ITR 3 and ITR 4 forms. You can check the specifications above. It is essential to understand the tax treatment of ITR and avail the most advantages and exemptions from the scheme as much as you can. The various types of ITR forms and information about how to file an ITR are all mentioned above in the article.
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Q. How to verify the Income Tax Return?
Ans. The validation of income tax returns can be done through Electronic Verification Code (EVC). Some of the verification options are:
- OTP Aadhar number can be used to verify the Income-tax return
- Generation of EVC – Electronic verification code helps to identify and verify the income tax return. The EVC can be generated through Net banking, email or phone number, DE-mat account number, or by pre validating the bank account number.
Q. While filing an income tax return, Is the Aadhar card number necessary to link?
Ans. Yes, the Aadhar number is necessary to link while filing an income tax return as per the government rules and regulations. It is also important while applying for PAN (Permanent Account Number).
Q. How can I save tax?
Ans. The tax can be saved by availing of the deductions given by the government. If you fall under the category of the exemption, you can check the maximum amount of the deduction and can deduct the amount as per your expense amount. Some of the exemptions that you can avail to save tax are as follows:
- Medical insurance under Section 80 D, Up to Rs 25,000 is exempted for individuals and Rs 50000 for senior citizens
- Rent paid exemption under Section 80 GG, maximum Rs 24000 is exempted
- Donation under Section 80 G, the limit depends on the conditions specified by Income tax rules
- Deduction under Section 80 DD and 80 U of Rs 75000 to Rs 125000 based on disability.