Income tax can be complicated enough even for the most seasoned taxpayers, but for small business owners and self-employed professionals, it can be a nightmare to sort through.
Considering this burden, the Indian Income Tax Department has come up with a way to simplify the filing of taxes.
One such is Income Tax Return Form 4 (ITR 4) known as Sugam. This form is created specifically for ease of tax compliance of small taxpayers with Presumptive Taxation Scheme.
Let us go through the depths of ITR 4, its applicability, features and what presumptive taxation scheme it supports in this guide.
Who Should File ITR 4?
ITR 4 is designed particularly for specific kinds of taxpayers to make it easier for tax filing. It applies to:
- Individuals and HUFs Engaged in Business:
Individuals and HUFs running a small business with gross receipts/turnover of up to ₹2 crore can file ITR 4 if they opt for the presumptive taxation scheme under Section 44AD.
However, if cash receipts do not exceed 5% of total turnover, the turnover limit for ITR 4 eligibility is extended to ₹3 crore.
Example: Ramesh, a shop owner with an annual turnover of ₹2.8 crore, where only 2% of transactions are in cash, is eligible to file ITR 4 under Section 44AD instead of maintaining detailed books of accounts.
2. Specified Professionals under Section 44ADA:
Self-employed professionals such as doctors, lawyers, architects, and consultants can file ITR 4 if their gross receipts do not exceed ₹50 lakh per year. Under the presumptive taxation scheme (Section 44ADA), they can declare 50% of their gross receipts as taxable income.
Example: Priya, a freelance consultant earning ₹30 lakh annually, opts for Section 44ADA and declares ₹15 lakh (50%) as taxable income, simplifying her tax calculations.
3. Taxpayers under the Presumptive Taxation Scheme:
Taxpayers opting for presumptive taxation under Sections 44AD, 44ADA, or 44AE can file ITR 4. This includes goods transport businesses with up to 10 vehicles (under Section 44AE), allowing them to avoid maintaining detailed books of accounts.
4. Small Businesses with Turnover Less Than ₹3 Crore (If Cash Transactions ≤ 5%)
Businesses with an annual turnover of up to ₹2 crore can opt for the presumptive taxation scheme under Section 44AD and file ITR 4. However, if cash transactions do not exceed 5% of the total turnover, the limit extends to ₹3 crore.
Also Learn: How to File ITR 4 Online: A Step-by-Step Guide
Understanding the Presumptive Taxation Scheme
The Presumptive Taxation Scheme was introduced to simplify tax compliance for small taxpayers.
Instead of maintaining detailed books of accounts, eligible taxpayers can declare income at a fixed rate based on their gross receipts or turnover under Sections 44AD, 44ADA, and 44AE of the Income Tax Act.
Key Provisions:
- Section 44AD (For Small Businesses):
- Applies to individuals, HUFs, and partnerships (except LLPs) engaged in business (except businesses earning through commission, brokerage, or plying goods carriages).
- Taxpayers must declare at least 8% of their total turnover as income (if received in cash) or 6% if received via digital transactions.
- Eligibility: Turnover must be ≤ ₹2 crore, but if cash receipts do not exceed 5% of total receipts, the limit extends to ₹3 crore.
- Section 44ADA (For Professionals):
- Designed for self-employed professionals like doctors, lawyers, architects, consultants, and accountants.
- Taxpayers must declare at least 50% of their gross receipts as taxable income.
- Eligibility: Gross receipts must be ≤ ₹50 lakh.
- Example: Priya, a freelance consultant, earned ₹30 lakh in a financial year. Under Section 44ADA, she declares ₹15 lakh (50% of gross receipts) as taxable income. This approach simplifies her tax filing and removes the need for detailed bookkeeping.
- Section 44AE (For Goods Carriage Business):
- This applies to taxpayers engaged in plying, hiring, or leasing goods carriages.
- Presumptive income is a fixed amount per vehicle per month, determined by vehicle type and capacity.
- Eligibility: The taxpayer must own no more than 10 vehicles at any time during the year.
Also Learn: How to File ITR 3: A Step By Step Guide
Special Features of ITR 4
ITR 4 offers several benefits to small business owners and professionals under the presumptive taxation scheme, making tax filing simpler:
- Simplified Paperwork:
- Unlike other ITR forms, detailed profit & loss accounts and balance sheets are not required.
- Only basic financial details like turnover, gross receipts, and presumptive income must be reported.
- Reduced Record-Keeping Requirements:
- Taxpayers are not required to maintain detailed accounting records.
- However, basic income records should be retained in case of any tax scrutiny.
- Self-Assessment Made Easier:
- Income is declared at fixed presumptive rates (6%, 8%, or 50%) under Sections 44AD, 44ADA, or 44AE.
- This reduces complexity in computing income tax.
- Convenient Online Filing:
- ITR 4 can be e-filed through the Income Tax Department’s official portal using the JSON utility or direct online entry.
- Lower Audit Requirements:
- Taxpayers under presumptive taxation are exempt from mandatory tax audits, provided they comply with the scheme's conditions.
- However, scrutiny may still occur if discrepancies arise.
Also Learn: ITR 1 vs ITR 2: Which Form Should You Choose?
Who Should Not File ITR 4?
Although, many taxpayers would benefit from ITR 4 given the ease of the process of filing tax, it is not right for all. The following persons should consider the other forms of ITR which include:
1. Income from Capital Gains: Any person who has earned income from the sale of securities and stocks, or any income earned from the sale of property, among other things, should not use ITR 4.
2. Income from International Business: ITR 4 cannot be used by individuals who have foreign income, foreign assets, or have signing authority in a foreign bank account.
3. Other cases of income: For those individuals who have any other income apart from business or profession such as rental income from various properties, then they should use ITR 4 form.
4. Business Structures: Companies, LLPs, and other forms of complicated business structures are not eligible to opt for ITR 4.
5. Pension recipients with other sources of income:
Pensioners can file ITR 4 if their only additional income is from interest, dividends, or rent from a single-house property.
However, if a pensioner has capital gains, multiple rental properties, or foreign income, they must file ITR 2 or ITR 3.
Also Learn: Who Can File ITR1? Understanding the Basics
Conclusion:
ITR 4 further simplifies the tax filing process for small businesses and professionals in India. Through the use of the Presumptive Taxation Scheme, it minimizes the burden of compliance, enabling taxpayers to focus more on their primary business instead of intricate tax-related details.
Nevertheless, taxpayers need to examine their eligibility and confirm that this form is suitable for their specific financial conditions.
If you are just getting started or earning income independently, it is highly advisable to consult a tax professional who can help you avoid noncompliance with tax laws while also providing guidance on reducing your tax liability.
FAQs
1. What Is Special in ITR 4 Income Tax?
The computation of income under the Presumptive Taxation Scheme as adopted under ITR 4 is relatively easy and it minimizes the necessity of preparing account books and compliances for small taxpayers.
2. Is ITR 4 a Suitable Form for Capital Gains from Stocks and Mutual Funds?
ITR 4 is not used for the reporting of capital gains. Such individuals can use the ITR 2 or ITR 3 forms that provide for capital gains reporting.
3. Is ITR 4 Suitable for Pensioners?
In most cases, no. Pensioners with other sources of income should seek advice from a tax advisor like FileAbhi regarding which ITR form to use for reporting taxes.
4. How Much Time Does It Take to Process ITR 4?
In general, the execution of ITR 4 may take approximately 1-2 months, depending on the data provided.