My query is regarding income tax forms ITR-3 and ITR-4. I am a freelance software developer with a US-based firm. I also do stock trading and I have some earnings from that as well. Can I get the benefits of presumptive income (50% gross receipt)? Also, do I have to audit and maintain a book for the stock options? If my turnover exceeds ₹50 lakh per annum, will I still get presumptive income benefits? Let’s say my freelancing income is ₹45 lakh and I earn ₹7 lakh from stock options, how should I fill up my income tax returns?
We assume that you are a tax resident of India, under the Income-tax Act, 1961. As per the provisions of Section 44ADA, a resident taxpayer who is engaged in a prescribed profession (including engineering, and technical consultancy) and whose total gross receipts do not exceed ₹50 lakh in a financial year (FY) can offer the income from such professions to tax on a presumptive basis. The taxable income shall be presumed to be 50% of the total gross receipts during the FY from such profession or as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the taxpayer. In case your profession qualifies as a prescribed profession, the gross receipts of ₹45 lakh can be offered to tax as above under the provisions of Section 44ADA, under the head “income from business or profession".
Further, it is presumed that income from trading, is on account of trading in derivatives. Income from such transactions may be considered as business income, (subject to detailed examination) separate from the above professional income. In your case you can offer the income from options of ₹7 lakh separately, under the head “income from business or profession".
As per the provisions of Section 44AA, every person carrying on prescribed profession is required to maintain books of accounts. Also, where the income from business (other than prescribed profession) exceeds ₹1.20 lakh, he is required to maintain books of accounts. Accordingly, in your case you would be required to maintain books of accounts for both your business and profession.
Further, as per the provisions of Section 44AB, tax audit for business income is required to be done if the turnover or gross receipts of the business exceeds ₹1 crore. Accordingly, if the turnover of your option trading business exceeds ₹1 crore, tax audit shall be applicable in your case.
Considering your income sources, the tax return form applicable for you for FY20 would be ITR-3. Further, with respect to disclosure of income in ITR form, the details of both income from profession under Section 44ADA and options trading would be required to be mentioned under schedule part A—profit and loss (P&L)—and schedule BP.
Specifically, for income under Section 44ADA, details are required to be mentioned in line item No. 62 of Schedule P&L and item No. 4a and 36(ii) of Schedule BP. Schedule balance sheet (Part A-BS) also needs to be completed. Furthermore, the nature of business and profession should be updated in the ITR form under Schedule “Nature of Business/Profession" for your option trading business and item no. 62 of Schedule P&L for your freelancing profession.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at firstname.lastname@example.org