The new income tax return form, ITR-4, for professionals can be intimidating. The 30-page form, also meant for Hindu Undivided Families and those owning proprietary business, mostly tries to capture business information and goods-related information such as cess, taxes, freight on goods, cost of raw material and finished goods, and so on.
If you are a professional with a small turnover or gross receipts such as artist, photographer, interior decorator, fashion designer or a tutor, there are only a few areas you need to focus on. Here's a brief guide to calculating your tax liability and filing returns.
Salaried & professional If you are salaried and also work as a professional for extra income, you might also need to file ITR-4. "If a person regularly works through the year as a freelancer, along with a job, he or she would be called a professional," says Tapati Ghose, partner at Deloitte Haskins & Sells. For example, a person employed with a software firm also regularly develops software for others. Such a taxpayer would be classified as a professional.
Amarpal Chadha, tax partner at Ernst & Young says even if a person takes up one assignment but makes significant money, say, equivalent to his salary or more, it is better to file tax as a professional to avoid later questioning by the income tax (I-T) department.
HOW TO FILE Calculate turnover: Take a printout of your bank accounts. Check the money you have received and tally it with the receipts. Add payment received in cash. This will be your gross receipts or turnover. From this, deduct all the eligible expenses incurred to generate the income such as travelling expenses, remuneration paid to employees, consultants, freelancers, and utility and internet bills. If you travel to meet clients, have meeting, and pay for meal and entertainment expenses, these are also deductible. "The taxpayer should be able to substantiate the expenses and be able to prove their genuineness to the I-T department in case they raise a query," warns Ghose.
Depreciation: As a professional, the department allows you to claim depreciation. But, the person needs assets in their or the business' name. Some of these include car, office furniture, office camera, and office computer. Depending on the nature of your work, the rules specify the method of calculating depreciation on different assets.
Books of account: If the taxpayer is not organised, tax experts say before filing taxes, he or she should get the books of account in order. "Every businessperson or professional needs to maintain books of account where the income is more than Rs 1.2 lakh or the total sales/receipts are over Rs 10 lakh in any of the past three years," says Suresh Surana, founder, RSM Astute Consulting Group.
The I-T Act specifies the various documents that professionals need to maintain. For example, people in a general profession should have a cash book, a journal, a ledger, carbon copies of bills and original bills wherever these are issued to persons.
TDS: Once the person has calculated gross receipts, deducted expenses, and claimed depreciation, he should look at the tax that his or her clients have already deducted while releasing payments. For this, you need to log into the I-T e-filing account and click on the option that takes you to Form 26AS. In case some of the TDS (tax deducted at source) is not reflecting, you will need to approach the client and ask them to update their accounts. Ernst & Young's Chadha says at the end of the financial year, the professional should also approach the clients and ask them for a copy of Form 16A.
When you need to deduct taxes: There are times when you would also need to deduct TDS on the payment you make. If you have employees and the salary paid to them is taxable, meaning, more than Rs 2.5 lakh, then you also need to deduct taxes. If you also hire freelancers for your work and your gross receipts are more than Rs 25 lakh, you need to opt for TDS while making payments of more than Rs 20,000.
Borrowed money? If your bank account statement shows money borrowed from a friend or a family member, the money is not taxable. However, if it is waived off later, you will need to pay tax on it. Surana of RSM Astute Consulting Group says a person should maintain a document that specifies the terms and conditions of the loan, identity proofs and PAN details of both the parties. This will come handy if the I-T department raises any question on it. However, the transaction has to be via a banking channel. If you borrow by way of cash, then that amount will be questionable and if it is over Rs 20,000, there will be a penalty for having borrowed in cash.
When audit is necessary: A professional is subjected to tax audit if the total gross receipts are more than Rs 25 lakh in a financial year.
From gross receipts, deduct the expenses and depreciation. You will get the amount on which tax needs to be paid. Calculate the tax already paid via TDS, and accordingly arrive at your tax liability for the year.
Accounting method Deloitte's Ghose suggests that if the business is small, it's better the person follow a cash accounting methodology rather than the mercantile/accrued system of accounts. In a cash account, the person pays tax only when he receives payments. In the accrued system, the person needs to include the money for which the bill is raised, despite not receiving the payment. If the client does not pay, he will need to write it off in the next financial year. This can be cumbersome.