Income tax is a direct tax levied by the Indian government on the income earned by individuals, businesses, and other entities. Filing Income Tax Returns (ITR) is not just a legal obligation but also an important financial practice for those meeting certain income thresholds or engaging in specific financial transactions.
ITRs are used to report income, claim deductions, and determine tax liabilities or refunds for the financial year (April 1 to March 31). Taxpayers must provide details of their income from various sources, such as salary, business, property, or investments, along with applicable deductions and exemptions.
The Income Tax Department offers various ITR forms, like ITR-1 (Sahaj), ITR-2, and ITR-4, tailored to different taxpayer categories, including salaried individuals, self-employed professionals, and businesses.
Income Tax Rates
| Old Tax Regime | New Tax Regime | ||
| Income Tax Slab | Income Tax Rate | Income Tax Slab | Income Tax Rate |
| Up to INR 2,50,000 | NIL | Up to INR 3,00,000 | NIL |
| INR 2,50,001 – INR 5,00,000 | 5% | INR 3,00,001 to Rs 7,00,000 | 5% |
| INR 5,00,001 – INR 10,00,000 | 20% | INR 7,00,001 to Rs 10,00,000 | 10% |
| Above INR 10,00,000 | 30% | INR 10,00,001 to Rs12,00,000 | 15% |
| INR 12,00,001 to Rs 15,00,000 | 20% | ||
| INR 12,50,001 – INR 15,00,000 | 25% | ||
| Above INR 15,00,001 and above | 30% | ||
What is a Presumptive Taxation Scheme?
To simplify tax filing for small business owners and professionals, the presumptive taxation scheme was introduced. This scheme eliminates the need for taxpayers to maintain detailed books of accounts. Instead, their income is estimated based on a presumptive method, provided their turnover stays within a specified limit.
Presumptive Taxation Scheme
According to the Income Tax Act of 1961, businesses and professionals are generally required to maintain detailed books of accounts, undergo account audits, and file income tax returns (ITRs). However, to ease the burden on small taxpayers and reduce the complexity of maintaining regular accounts and conducting audits, the presumptive taxation scheme was introduced under income tax laws.
Filing Income Tax Returns
ITR filing is the process of submitting an individual’s annual income tax return to the Income Tax Department of India. It is a legal requirement for all citizens and residents of India who earn a taxable income. Filing an ITR is an important and extensive process as it requires clear knowledge of the tax brackets and various rules. ITR filing refers to the documentation of an individual’s or their business’s income tax paid in that particular financial year. Varying on the category or the type of business one is involved in, salaried or self-employed, there are various forms one has to file accordingly.
All companies must file their IT returns, irrespective of whether or not they had business operations within that fiscal year. Companies must file income tax returns whether they make a profit or a loss. Prior to the deadline for filing returns, partnership firms must submit a NIL income tax return. The requirement to file returns applies even to defunct businesses that haven’t made any business decisions in a year.
How to Choose the Right ITR for Small Businesses?
When it comes to choosing the right ITR form for small businesses, there are several factors to consider. The selection depends on the nature and type of business, the income generated, and other relevant criteria. Here are some guidelines to help a small business owner to choose the appropriate ITR form:
1. Identify the Small Business Structure
Determine the legal structure of the small business. Common structures include sole proprietorship, partnership, limited liability partnership (LLP), and company. The ITR forms differ based on the type of business entity.
2. Understand the ITR Forms
Get familiar with the various ITR forms available. The Income Tax Department has a list of ITR forms specific to different types of taxpayers. Each form is designed to capture specific information related to income, deductions, and exemptions. Here are the various types of ITR forms available in India:
| ITR FORM | Eligibility |
| ITR – 3 | To be filed by a person who earns a living via a business or occupation. |
| ITR – 4 (SUGAM) | Businesses other than LLPs that are subject to presumptive tax schemes and have annual gross revenues up to Rs. 50 lakhs are required to file this. Sections 44AD, 44ADA, and 44AE govern the calculation of their income. |
| ITR – 5 | For LLPs and partnerships that do not file an ITR 7. |
| ITR – 6 | For those businesses who do not assert exemption under Section 11. |
| ITR – 7 | Solely for businesses that must file returns under Sections 139(4A), 139(4B), 139(4C), and 139(4D). |
3. Consider Income Sources
Evaluate the sources of income generated by the small business. For example, if one receives income from salary, house property, and small business, they need to choose a form that accommodates all these sources.
4. Assess Turnover and Presumptive Taxation
If a person is eligible for presumptive taxation under the tax laws, their turnover may be a determining factor in selecting the appropriate ITR form. Certain forms are specifically designed for small businesses with a turnover below a specified threshold.
5. Check for Mandatory Tax Audit
If a small business is subject to a mandatory tax audit as per the tax laws, the owner needs to choose the corresponding ITR form. The tax audit threshold may vary depending on the type of small business entity and turnover.
6. Review Eligibility Criteria
A person should ensure that they meet the eligibility criteria specified for each ITR form. Some forms may have specific conditions related to income, profession, or residency status.
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Documents Required to File ITR
To file ITR, an individual will typically need the following documents and information:
Personal Information:
- PAN (Permanent Account Number) card
- Aadhaar card
- Bank account details (account number, IFSC code)
Income Details:
- Income from house property: Documents related to rental income, home loan interest, and principal repayment.
- Income from business or profession: Books of accounts, profit and loss statements, balance sheets, and other relevant financial statements.
- Income from investments: Statements of interest earned from fixed deposits, savings accounts, and other investments.
- Income from capital gains: Details of gains or losses from the sale of assets such as property, shares, mutual funds, etc.
- Income from other sources: Documentation of income earned from sources like interest, dividends, lottery winnings, etc.
Bank Statements and Financial Documents:
- Bank statements: Copies of bank statements for all bank accounts, including savings, current, and fixed deposit accounts.
- TDS certificates: Form 16A, which includes details of tax deducted at source (TDS) on income other than salary (e.g., interest income).
- Form 26AS: This document shows a consolidated statement of all taxes deposited against the PAN, including TDS deducted by employers, banks, etc.
Other Relevant Documents:
- Previous years’ ITR filings: Copies of previous years’ tax returns.
- Aadhaar linking details: Record of Aadhaar card linked with PAN
Other Things to Consider when filing ITR:
Exemption from Income Tax
Businesses can avail various exemptions and deductions to reduce their tax liability. These exemptions are provided under the Income Tax Act 1961 and are subject to specific conditions and limits. Here are some common exemptions available to businesses:
1. Deduction for Business Expenses
Businesses can claim deductions for various expenses incurred in the course of their operations, such as employee salaries, rent, utilities, travel expenses, advertising costs, etc. These deductions help in reducing the taxable income of the business.
2. Depreciation
Businesses can claim depreciation on assets used in their operations, such as machinery, equipment, buildings, etc. Depreciation allows for the gradual reduction in the value of these assets over time and provides a deduction from taxable income.
3. Research and Development (R&D) Expenses
Companies engaged in scientific research and development activities can avail of tax deductions for R&D expenses incurred. This deduction encourages innovation and technological advancement in businesses.
4. Startup Tax Benefits
Startups registered under the Startup India initiative may enjoy tax benefits and exemptions for a specified period. These include a three-year tax holiday in the first seven years of existence, exemption from capital gains tax on the sale of specified assets, and tax benefits for investments made by eligible investors.
5. Incentives for Specific Industries
The government provides sector-specific incentives to promote certain industries. For example, deductions or exemptions may be available for businesses engaged in infrastructure development, renewable energy, agriculture, healthcare, etc.
Apart from these, there are several other exemptions which are applicable to all the taxpayers:
What can be Classified as Investment Proofs?
Receipts and documents related to investments made under various tax-saving schemes like Provident Fund (PF), Public Provident Fund (PPF), National Savings Certificates (NSC), etc.
Medical Insurance
Premium payment receipts for health insurance policies eligible for tax deductions.
Donations
Receipts or certificates for donations made to eligible charitable institutions.
The Process to File ITR
Companies and self-employed people can submit income taxes in two different ways for their operations. The first approach is an online one, whereas the second is an offline one. Filing ITR is typically done online through the Income Tax Department’s official website or authorized e-filing portals, here’s the process:
Penalties for late ITR Filing
The implications of late filing of ITR can vary depending on the specific circumstances and the regulations of the country in question. However, here are some general implications of late ITR filing:
- Loss of Interest on Refunds
If a person is entitled to a tax refund, filing their ITR late may result in a delay in receiving the refund. This means they lose out on any interest that could have accrued on that refund amount.
- Inability to Revise Returns
Filing ITR late may restrict a person’s ability to revise their tax returns in case they make any errors or omissions. In some jurisdictions, there may be a time limit within which revisions can be made, and late filers might miss this opportunity.
- Increased Scrutiny
Late filers may attract additional scrutiny from tax authorities, increasing the chances of being selected for a tax audit or investigation. This can be time-consuming and stressful, requiring additional documentation and explanations to the tax authorities.
- Limited Access to Financial Services
In certain situations, late ITR filing can affect an individual’s ability to obtain loans or financial services. Financial institutions often require tax returns as proof of income and financial stability. Late filers may face challenges in obtaining such services or may be subject to higher interest rates or less favourable terms.
- Legal Consequences
In extreme cases or repeated late filings, there may be legal consequences such as fines, penalties, or even criminal charges depending on the jurisdiction. It is important to comply with tax regulations and fulfil obligations within the specified deadlines.
The taxpayer is subject to steep fines if the returns are not filed by the deadline. If the returns are not filed, in addition to penalties, the person may also experience various hassles and repercussions. Individuals may be subject to fines between Rs. 1,000 and Rs. 10,000 depending on how late their returns are filed.
| Date of Filing | Penalty for Income below INR 5 lakhs | Penalty for Income AboveINR 5 lakhs |
| Before July 31st | NIL | NIL |
| 1st August to 31st December | INR 1,000 | INR 5,000 |
| 1st January to 31st March | INR 1,000 | INR 10,000 |
Impact of ITR Filing on Availing Small Business Loans
Filing ITR plays a significant role in obtaining business loans in India. Lenders, such as banks and financial institutions, often require tax returns as crucial documents during the loan application process. Here’s how ITR is connected to business loans:
- Proof of Income
ITR serves as concrete proof of an individual or entity’s income. Lenders assess the financial stability and repayment capacity of a borrower before approving a business loan. By analyzing the income details provided in the ITR, lenders can evaluate the applicant’s ability to repay the loan.
- Assessment of Creditworthiness and Loan Eligibility
Lenders use a borrower’s Income Tax Return (ITR) to assess creditworthiness. The ITR provides insights into income, expenses, and profit, helping lenders evaluate loan eligibility, repayment ability, and terms. Consistent tax filings and higher income improve chances of securing larger loans with better terms.
- Document Verification
Lenders verify the authenticity of the income declared by cross-checking it with the ITR filed. Inaccurate or false information in the tax returns can raise concerns about the borrower’s credibility and may lead to business loan rejection.
- Business Expansion and Growth
Business loans are used for expansion, asset purchases, or new ventures. Lenders assess business plans, potential returns, and the ITR, which highlights financial performance and profitability, to decide loan approval.
Support for Small Businesses
According to a recent poll by Kinara Capital, a top Fintech, small businesses often have trouble filing their GST and income tax returns on time. MSMEs need expert advice when it comes to accounting, GST registration, and tax preparation for their businesses. As per the findings of the research, a significant proportion (30%) of MSMEs highlight their requirement for non-financial services, with the primary focus being on business accounting and GST filing. GST filing constitutes a share of 17%, whereas tax calculations account for 13%.
Conclusion
Income tax and timely filing of ITR are essential for financial planning and compliance. Filing within due dates helps avoid penalties and ensures a transparent record of income, contributing to the nation’s revenue collection.
Taxpayers can simplify the process using e-filing platforms or professional assistance. Staying proactive about tax regulations and deadlines promotes smooth compliance while supporting national development.
At Kinara Capital, we recognize that small business owners often face challenges in managing their tax responsibilities. Our quick and hassle-free business loans are designed to ease financial pressures, enabling MSMEs to meet their tax obligations promptly and focus on achieving long-term growth.
FAQs
1. Which ITR form should a small business use?
Small businesses with income from proprietorship should use ITR-3 or ITR-4. ITR-3 is for those maintaining books of accounts, while ITR-4 is for businesses opting for the presumptive taxation scheme.
2. What is presumptive taxation under ITR for small businesses?
Presumptive taxation allows small businesses to declare income at a fixed percentage of their turnover, simplifying tax filing. Businesses with turnover up to ₹2 crore can use ITR-4 under this scheme.
3. Do I need to file ITR if my small business has no income?
Yes, filing ITR is recommended even if your small business has no income, especially to claim losses, maintain compliance, or meet legal requirements for carrying forward losses or availing benefits in the future.
4. Can I file ITR for my small business online?
Yes, you can file ITR for your small business online through the Income Tax Department’s official portal or authorized intermediaries. Online filing ensures accuracy, convenience, and faster processing of your returns.
5. Can I revise my ITR for my small business?
Yes, you can revise your ITR for your small business if you made an error or missed information. You can file a revised return within 12 months from the end of the assessment year.
