UNIT IV
Income from Business and Profession
Q1) What is Business?
A1) Income from a business or occupation can only be taxed if the business or occupation is carried by the taxpayer at any time during the previous year. Let's first understand what business is.:
Business, in simple words, means a profession carried by a person with a view to profit. Business does not include profits from the profession or affiliated companies. In this business、 –
• Trade,
• Commerce,
• Manufacturing,
Think of things as rendering services and other businesses
For example: owning a store, running a hotel, transportation, travel agency, share broking, etc. a profession may be defined as a profession, or a job that requires thought, skill and special knowledge. Thus, the profession refers to those activities whose livelihood is obtained by persons through their intellectual or manual skills such as:
• Legal
• Medical
• Engineer
• Certified Public Accountant
• Architecture, etc.
Q2) What are the allowable expenses from business and occupational income?
A2) All expenses incurred in full and exclusively with respect to business and profession shall be allowed for income from such business and profession. Here's some of the spending:
- Building rent and insurance.
- Payment for legal and professional services.
- Salaries, bonuses, commissions, etc. to employees.
- Salary, interest and compensation for partners who work under certain conditions.
- Cost of travel and transmission.
- Admission fee and annual membership fee
- Payment of know-how, patents, copyrights, trademarks and licenses.
- Depreciation of fixed assets.
- Expenditure on scientific research for business purposes.
- Preliminary expenses in the case of the company.
- Communication costs
- Discounts are allowed to customers.
- Advertising costs for the promotion of business products.
- Financial expenses (eg. Interest on the loan).
- Bank fees/bank fees.
- Entertainment/business promotion costs.
- Staff benefits costs.
- Cost of printing and stationery.
- Cost of shipping cost.
- All other expenses related to business/occupation.
All these costs are allowed on the basis of actual payments and on the basis of accrual on the last day of the account. For example: an employee will receive a salary for the month of May 2020 in April 2020. However, since the salary is related to the 2019-20 financial year (ending on 31st March 2020), it is not necessary to charge for income from business/professional income for the 2019-20 financial year.
Q3) How do we calculate of taxable income from business and profession?
A3) Taxable income from business and occupation is profit after deducting costs associated with business activities. Taxpayers can find profits from the books maintained during the year. Income obtained from business and occupation is taxable at the slab rate that applies to taxpayers. Slab charges applicable in 2019-20 / 2020-21 are as follows:
Total Income | Tax Rate |
Up to INR 2,50,000 | NIL |
INR 2,50,000 to 5,00,000 | 5% |
INR 5,00,000 to INR 10,00,000 | 20% |
Above INR 10,00,000 | 30% |
An additional 4% Health and Educational Cess will be applicable to the tax amount calculated.
Q4) How to set of losses from business and profession and carryover?
A4) The following are the ways:
- Non-speculative business losses can be set off against any income other than salary in the current year. Taxpayers can carry forward the remaining losses for 8 years and set off against business income in future years.
- Speculative business losses can be offset against speculative business income only. The taxpayer can carry forward the remaining loss for 4 years and offset it only for future speculative business income.
- Specify the business loss can be set against any income other than salary in the current year. Taxpayers can carry forward the remaining losses for 9 years and set off against business income in future years.
TDs / advance tax on income from business and occupation
The taxpayer is required to pay taxes on the income obtained from business or professional activities. Direct tax on income can be paid in 2 ways:
- TDS (withholding tax): TDS to pay while you earn the concept is deducted on payments made to taxpayers for goods and services sold. Hence business owners need to keep in mind the TDS that are deducted by their customers. You can claim deductible TDs while submitting an ITR for a business or occupation. And if there is any loss from B&P it will become your refund, and if you get any profit from B&P it will reduce your tax liability.
- Advance tax: if the tax liability is expected to exceed Rs. 10,000, the taxpayer must calculate and pay the advance tax. This is to avoid interest under sections 234B and 234C:
Due date of installment | Advance Tax payable by Individual and Corporate Taxpayers |
On or before 15th June | 15% of the tax liability |
On or before 15th September | 45% of the tax liability |
On or before 15th December | 75% of the tax liability |
On or before 15th March | 100% of the tax liability |
Q5) Explain Taxes for freelancers.
A5) Freelancers are people who are self-employed. They have the freedom to choose their own projects and assignments. They do not earn salary income. The nature of their income is more professional income. Therefore, it is covered under the head" income from business and occupation "under the Income Tax Act.
The sum of all receipts received from different projects will be income. And all costs associated with freelancers will be deducted. Below are the taxable incomes of freelancers:
Net taxable income=gross receipts–freelance expenses
Q6) What is speculative business income filing your tax return?
A6) First of all, to understand speculative business income, you need to understand what speculative trading is.
When a contract for the purchase and sale of goods (including stocks and shares) is regularly or eventually settled without the actual delivery or transfer of the goods, it is called a speculative transaction, and if it is to receive income from such transactions, it will be income from speculative transactions.
One example of a speculative business is a stock brokerage, where a broker earns money by buying and selling goods without taking delivery of the same. Income from ordinary business and speculative business is calculated and maintained separately.
Q7) What are the basis of income charges under business and profession under Section 28?
A7) The income imposed under" profit and profit of a business or profession" is as follows:
- Profits and profits from any business/profession carried by the assessor at any time during the previous year
- Any compensation/other payment received by or by,—any person, by any name, to cover the whole or significant whole of the affairs of the Indian company.
- Profit from the acquisition of trade from the Association of certain services performed by its members
- Value of any perk/profit from business or profession, whether it is converted into money
- Interest, fees, salaries, rewards, or bonuses received by or from company partners
- All sums received under the key man insurance policy, including the sum given as a bonus
- Income from any speculative transactions
- Any sum, whether received/Accounts Receivable, Cash/for type:
- To not perform any acts related to any business, or
- To not share know-how, patents, copyrights, trademarks, licenses, franchises or other business/commercial rights
- Profit incurred by transfer of Duty-Free replenishment certificate
- Any profits made by the transfer of Duty qualified passbook scheme
- Profits made from the sale of licenses made under the import (control) instruction, 1955, import and Export (Control) Act, 1947 (18 of 1947))
- Tax-free income under business and occupation.
Q8) Mention the deduction [Section 57].
A8) The following expenditures are allowed as deductions from taxable income under the top of “other sources income:
S.N. | Section | Nature of income | Deductible |
| 57(i) | Dividends or interest on securities | A reasonable amount paid to a bank or other person through a commission or reward to understand dividends or interest on securities |
2. | 57(ia)
| Contribution of employees to the set-up of provident fund, old-age pension , ESI fund or other funds for the welfare of such employees | If the employee's contribution is credited to the account of the relevant Fund on or before the maturity |
3. | 57(ii)
| You can get income for a plant, machine, furniture or building
| Rent, fees, taxes, repairs, insurance and depreciation etc. |
4. | 57(iia) | Family pension
| 1/3 of the topic of family pension to a maximum of Rs. 15,000. |
5. | 57(iii)
| Other income | Other expenditures (not capital expenditures) are spent entirely and exclusively to get such income |
6. | 57(iv)
| Interest on compensation or enhanced compensation | 50% of such interest (depending on specific conditions) |
7. | 58 (4)
| Income from racehorse ownership and maintenance activities. | All expenditures associated with such activities. Non-deductible expenses[Article 58] |
Q9) What expenses are not deductible under section 58?
A9) Expenses not deductible [Section 58]:
S.No | Section | Nature of income |
58(1)(a)(i) | Personal expenses | |
2. | 58(1)(a)(ii) | Interest levied on taxes paid outside India that aren't paid or withheld |
3. |
| Wealth and taxes |
4. | 58(1A) | Expenditure of nature laid out in Section 40A |
5. | 58(2)
| Spending in reference to winnings from lotteries, crossword puzzles, races, games, gambling and betting
|
Q10) How do we calculate Taxes?
A10) Calculation of Taxes:
1. First, find income under various heads;
2. In accordance with the provisions of Section 70-78 of the Income Tax Act, 1961, the current losses as well as adjustments for previous years. We find the total income;
3. From gross income to deduct the deductions specified under via chapter, we find net income;
4. Net income application @ 30%
5. Added: surcharges@10% if net profit increases Rs. 1.0 crore;
6. Additional: education cess and special education cess;
7. Deduct rebates if under sections 86, 90,90A and 91;
8. Additional: if there is interest expense;
9. Deductible: deductible if there are taxes/TDs paid in advance;
10. The balance will be the amount of tax to be paid
