ITR-3 And ITR-4: Which One Should You Actually File?

Every year when the time for filing income tax arrives many people in India sit at their computers go to the income tax website and look at a list of ITR forms trying to figure out which one they should use. If you own a business work as a freelancer or have money from a profession you have probably come across ITR-3 and ITR-4.. You might not be clear on what makes them different.

Do not be worried. After reading this you will know what each form is for, who needs to use which one and how to make a good choice without getting confused.

Start With the Basics

Before looking at ITR-3 and ITR-4 it helps to understand why there are many ITR forms in the first place.

The Income Tax Department has created forms for different types of people. A person who gets a salary has a situation than someone who runs a business or earns from freelancing. So the forms are made to collect the kind of financial details from the right kind of people.

ITR-3 and ITR-4 are both for people who have money from a business or profession.. That is where the similarity ends. How complicated your income. Whether you want to go through a full audit or use a simpler method is what decides which form you need.

What Is ITR-3?

ITR-3 is for individuals and Hindu Undivided Families who have money from a business or profession and are not using the taxation method. In terms if you are running your own business or you are a doctor, lawyer, architect or any other professional with your own practice and you keep detailed records of your finances then ITR-3 is the form for you.

This form asks for a lot of information. You will need to report your profits and losses from the business your balance sheet, your assets and liabilities details of all your purchases and sales and more. It is a form and it is made to give the Income Tax Department a complete view of your financial position for the year.

ITR-3 is also used when you have money from capital gains income from a house salary income in addition to business income or other types of income. So if your financial life is a bit more complicated ITR-3 handles all of it in one place.

The one thing to remember is that ITR-3 comes with responsibility. Since you are keeping records your information needs to be correct and complete. If your business income is over a level you might also need an audit, which means a chartered accountant has to check your financial reports before you file.

What Is ITR-4 Also Known as Sugam?

ITR-4 called the Sugam form is made to make things easier for small business owners and professionals. It is for individuals, HUFs and firms other than LLPs who choose the taxation method under sections 44AD 44ADA or 44AE of the Income Tax Act.

What is presumptive taxation? Think of it as a shortcut that the government has given to taxpayers. Of keeping detailed records and calculating your actual profits you can say that a set percentage of your turnover is your income and pay tax on that. The government assumes that this percentage is your profit and you go with it.

Here is how the three sections work in terms.

Section 44AD is for businesses. If you are a trader, shopkeeper or run any kind of business and your turnover is up to Rs 3 crore (with least 95 percent of payments being digital) you can say that 8 percent of your cash turnover or 6 percent of your digital turnover is your profit and pay tax on that. You do not have to prove what your real profit was.

Section 44ADA is for professionals like doctors, lawyers, engineers, architects, accountants and similar jobs. If your total income is up to Rs 75 lakh (or Rs 1.5 crore if 95 percent or more of your income is digital or non-cash) you can say that 50 percent of your income is your profit and pay tax on that half.

Section 44AE is for people who run a business with goods vehicles. It applies to people who own up to ten vehicles and allows them to say that a certain amount per vehicle is their income.

The good part about ITR-4 is that it is easier. You do not need to give a balance sheet or profit and loss statement. The form is shorter and less complicated. That is why the government calls it Sugam, which means easy or convenient in Hindi.

Who Should File ITR-3 and Who Should File ITR-4?

Let us look at some examples to make it clearer.

Imagine you are a freelance designer. You made Rs 18 lakh from clients this year. You want to keep things and do not want to deal with detailed record-keeping. In this case since graphic design is a profession under section 44ADA and your income is within the limit you can use the method and file ITR-4. You would say that Rs 9 lakh (which is 50 percent of Rs 18 lakh) is your income and pay tax on that.

Now imagine you are an accountant running your own practice with income of Rs 2 crore. Since this is more than the Rs 1.5 crore limit for professionals under section 44ADA ( with digital income) you cannot use the presumptive method. You will need to keep records and file ITR-3 instead.

Think of a small shop owner with a store in your neighborhood. Your income is Rs 80 lakh. You mostly take cash. Under section 44AD you can say that 8 percent of Rs 80 lakh, which's Rs 6.4 lakh is your profit and file ITR-4.. Done.

If that same shop owner had an income of Rs 4 crore the presumptive method would no longer be available and ITR-3 would be the right choice.

The Main Differences

The main difference is this: ITR-4 is for those who use the method while ITR-3 is for everyone else with business or professional income.

ITR-4 does not require you to send a balance sheet or detailed profit and loss statement. ITR-3 does. ITR-4 is shorter and easier. ITR-3 is detailed and more complete.

ITR-3 also covers types of income. So if you have business income along with gains from selling shares or mutual funds you would use ITR-3 because ITR-4 does not handle capital gains the way.

Another important point is that once you stop using the method you cannot come back to it for five years. So if you file ITR-3 by keeping records this year you are committed to that for least five years. This makes the choice important and worth thinking about carefully.

Common Mistakes

One common mistake is filing ITR-1 or ITR-2 when you should actually use ITR-3 or ITR-4. Many freelancers and consultants think their income is like a salary. It is not. Business or professional income needs the form even if you are not running a big business.

Another mistake is filing ITR-4 when you actually have losses from your business. The presumptive method under ITR-4 does not let you report losses. If your real profit is less than the rate or if you are losing money you need to keep records and file ITR-3. That way you can carry forward the loss to the years, which can really help in reducing your tax later.

Some people also file ITR-4 thinking it is always easier without checking if their income is within the allowed limits. Going over those limits means you are no longer eligible and using the form can lead to notices from the tax department.

A Word on Deadlines and Penalties

For people with business income who do not need an audit the deadline to file is usually July 31 of the tax year. For those who need an audit the deadline is usually October 31. These dates can change based on government announcements so it is always best to check the information from the Income Tax Department each year.

Filing after the deadline brings a fee and also stops you from carrying forward some losses. So filing on time even if you need help is always a choice.

Should You Get Help?

If your income is simple and you clearly fit the method filing ITR-4 online is something many people manage by themselves through the tax website. The system has improved a lot in years and there are enough guides to help you through it.

If you are not sure whether you qualify for ITR-4 if you have income from many sources if you are going through an audit or if your business had a big change in the year getting a chartered accountant is definitely worth the cost. A small fee can save you from making a mistake that costs you a lot more in penalties, interest or a notice from the tax department later.

Final Thoughts

The Indian tax system can feel complicated. Once you understand what ITR-3 and ITR-4 are really for the picture becomes much clearer. ITR-4 is the government’s way of saying that small business owners and professionals have enough to worry about. Here is an easier way. ITR-3 is the detailed form for those whose financial situation needs a complete picture.

Know your income know your job. Know whether you want to go the easy way or the full record way. Once you are clear, on those three things choosing between ITR-3 and ITR-4 becomes much easier than it might seem now.

If you are still not sure after reading this that is totally fine. Take the phone. Speak to a tax expert. Getting it right the first time is always better, than getting it wrong. Then having to fix the problems that come after.