How Are Individuals with Business Income Taxed in India?

Everyone must pay income tax if they earn money that is taxable under the Income Tax Act. According to Section 2 (7) of the Income Tax Act of 1961, an “assessee” is anyone who has to pay tax or any other amount under this law. This includes:

• Salaried individuals
• Self-employed individuals or owners of a sole proprietorship
• Hindu Undivided Families (HUFs)
• Partnership firms
• Limited Liability Partnerships (LLPs)
• OPC, private limited and other types of companies registered with the ROCs.

The tax filing process is different for various types of earners because they have different sources of income.

What do we mean by an Individual who earns business income?

An individual with business income is someone who is self-employed, owns a proprietorship, and may or may not have a regular salary or income from capital gains, rental properties, and other sources.

In other words, this individual’s total income includes earnings categorized as profits and gains from businesses and professions.

This individual either offers services to different businesses or runs their own trade, commerce, manufacturing, or similar activities.

If the individual works in a specialized field, like a doctor, lawyer, IT professional, website developer, SEO consultant, digital marketer, accountant or architect, they are known as a self-employed professional.

In India, an individual can have business income when they engage in any trade, commerce, or manufacturing activities. To qualify as business income, the activities must be conducted with a profit motive and should be systematic and regular. 

The business income is subject to taxation under the Income Tax Act,1961, and the individual must maintain proper records and file tax returns accordingly.

In this article, we will discuss how business income of an individual is taxed in India, what are the income tax return forms applicable and other compliance.

Is professional income charged to tax as business income?

Yes, income from a profession is considered business income in India. 

This includes income from a range of professional services, such as those provided by doctors, lawyers, consultants, IT professionals, web developers, SEO specialists, digital marketers, accountants, engineers, and architects.

Income from such professions is taxed under the heading “Profits and Gains of Business or Profession”. 

Professionals are required to maintain proper accounts and file tax returns accordingly.

Computation of Income

When filing taxes under the Income Tax Act, there are five main categories to consider:

1. Salary income
2. Income from house property
3. Capital gains
4. Income from business or profession
5. Income from other sources

For salaried people, the category “salary income” is used. 

For self-employed individuals or professionals, most income falls under “income from business or profession.” 

This means that salaried and self-employed people follow different steps when filing their taxes. 

Let’s look at how an individual with business income should file their taxes.

Business income is computed as the total revenue generated from business activities minus the allowable business expenses.

Allowable expenses can include costs such as salaries, rent, utilities, depreciation, and other operational costs.

Self-employed people report their income as “income from business or profession.” 

There are two ways to calculate how much tax they owe:

1. Presumptive taxation: This method estimates income without deducting any business expenses. There are specific rules for this method.
2. Actual profit: This method calculates income after subtracting the real expenses that were spent to earn that income.

Presumptive Taxation for small business owners

The presumptive taxation scheme for individuals is a simplified tax framework designed to ease compliance for small taxpayers.

Under the presumptive taxation scheme, income is presumed based on a certain percentage of gross receipts, eliminating the need for detailed accounting and documentation.

Small businesses can opt for the presumptive taxation scheme under sections 44AD, 44ADA, and 44AE, where income is deemed to be a certain percentage of total sales, gross receipts, or turnover.

Section 44AD

Under section 44AD, 8% of the turnover is considered business income for businesses that do not maintain books of accounts. 

A lower rate of 6% will be applicable in case of non-cash transactions (like bank transfers). 

Section 44AD is applicable to a resident individual having business income and the gross turnover from businesses is not exceeding 2 crore rupees in a financial year. 

Section 44AD is not applicable to professionals as specified under Section 44AA(1).

Section 44ADA

Section 44ADA applies to individuals engaged in professions specified under section 44AA(1) and whose gross receipts do not exceed 50 lakh rupees in a financial year. 

As per provisions of section 44ADA, 50% of the gross receipts are deemed as income, and the remaining 50% is considered as expenses, thus relieving the taxpayer from maintaining detailed books of accounts. 

Professionals practicing in Accountancy, Interior decoration, Technical consultancy, Legal services, Medical services, Engineering, and Architecture can take benefits of Section 44ADA.

Section 44AE

Section 44AE is applicable to individuals engaged in the business of transporting goods by a goods carriage and owns up to 10 goods carriages at any time during the financial year. 

If a goods transporter decides to go for section 44AE, 7,500 rupees per month for each goods carriage (or 1,000 rupees per ton of goods transported) will be considered as presumptive income for the number of months the vehicle is used for business.

Important Points About the Presumptive Taxation Scheme

Fixed Income Calculation

Under the presumptive taxation scheme, the income calculated at the fixed rate is considered final. Taxpayers cannot claim additional deductions or expenses related to their business or profession.

Higher Income Reporting

Taxpayers have the option to report an income higher than the fixed rate if they choose to do so.

For instance, if a professional has total receipts of ₹10 lakh, they could report ₹5 lakh (50% of receipts) as income under the presumptive scheme (Section 44ADA). However, if they believe their actual income is higher, they can choose to report, say, ₹6 lakh or more.

Optional Scheme for Self-Employed Individuals

This scheme is optional for self-employed business people and professionals. If they decide not to utilize this scheme, they are required to have their business accounts audited by a certified Chartered Accountant. 

In this case, they must calculate their profit or loss based on actual income and expenses and file their taxes accordingly.

Eligibility Criteria

The presumptive taxation scheme is applicable exclusively to Indian residents engaged in certain business activities or professions. 

It is available to small business owners and self-employed individuals whose gross receipts fall within specified limits.

Tax-Saving Deductions

Taxpayers under the presumptive taxation scheme can still claim tax-saving deductions from Chapter VI A of the Income Tax Act. 

Notable sections include 80C, which offers deductions up to ₹1.5 lakh for specified investments like life insurance and public provident funds, and 80D, allowing up to ₹25,000 for health insurance premiums, with higher limits for senior citizens. Section 80TTA also provides deductions of up to ₹10,000 on interest earned from savings accounts.

These deductions help reduce taxable income while encouraging savings and investments.

Five-Year Lock-In Period

Once a taxpayer opts to use the presumptive taxation scheme in a financial year, they cannot revert to regular taxation for the next five years. Similarly, if they decide to opt out, they cannot re-enroll in the scheme for five years. 

For instance, if a taxpayer opts out in the financial year 2019-20, they won’t be able to use the scheme again until the financial year 2024-25. Conversely, if they choose the scheme in 2019-20, they must continue with it until 2024-25.

Tax Filing for Self-Employed Using the Real Profit Method

This method helps you calculate your self-employment tax by subtracting valid business expenses from your total income and then paying taxes on the profit left. Here’s what you should know:

Claiming deductions for business expenses

You can lower your taxable income by claiming deductions for eligible expenses. This includes regular business costs like rent, utilities, supplies, interest on loans, insurance, employee salaries, and expenses for internet, phone, and business travel.

Proof of Expenses

Be ready to provide evidence for each deduction you claim, such as bills, receipts, and invoices to show that your expenses are valid.

Record keeping

Keep a detailed record of your business income and expenses in an organized account book. If your annual income is over ₹50 lakh, it’s a good idea to have your accounts audited by a Chartered Accountant (CA).

Mandatory for Certain Businesses

This method is required if your business’s annual turnover exceeds ₹2 crores. Following these rules is important for accurate reporting and meeting tax requirements.

In both presumptive or real-profit methods, you calculate your business income. Other incomes get added to it for the financial year to calculate your gross total income.

Tax rates applicable to an individual on its total income

In India, individuals with business income can choose between the old and new tax regimes for the financial year 2024-25 (Assessment Year 2025-26).

If you have opted for the old tax regime, benefits of all deductions and exemptions are available based on terms and conditions applicable.

In case you have opted for a new tax regime, deductions and exemptions are not allowed except a few.

After applying the allowable tax deductions, you arrive at your total income, which is then used to determine your tax liability for the year based on the applicable tax rates.

Income tax slab and rates under Old Tax Regime

The tax slabs applicable to an individual below 60 years with business income are:

Individuals above 60 years have slightly different limits, with some provisions applicable. In India, individuals can choose between the old and new tax regimes for the financial year 2024-25. 

Income tax slab and rates under New Tax Regime for FY 2024-25 (AY 2025-26)

The new regime offers lower tax rates but fewer deductions and exemptions. The income tax slabs and rates under new tax regime are:

It’s essential to evaluate both regimes based on your financial situation to determine which is more beneficial.

For a detailed discussion you can refer to our article on income tax slab and rates applicable to an individual for the financial year 2024-25 ( AY 2025-26).

Surcharge

A surcharge is an additional charge applied if your net taxable income exceeds a certain amount. 

This surcharge is calculated on the income tax owed, before any additional taxes (like cess). 

Specifically, a surcharge applies if your taxable income is over ₹50 lakh.

Surcharge Rates Under New Tax Regime (Effective April 1, 2023)

If you choose the old tax regime for the 2024-25 financial year, the surcharge rates remain the same as in previous years.

Surcharge Rates Under Old Tax Regime

Note: For income from capital gains (like equity shares and dividends), the surcharge is capped at 15%, regardless of total income.

Marginal Relief

It’s also important to understand “marginal relief.” This applies when the surcharge you owe is greater than the increase in your income over the limit.

For example, if someone has a taxable income of ₹51 lakh, they would face a 10% surcharge because they exceed ₹50 lakh. The tax on ₹51 lakh (without surcharge) would be ₹13,42,500, making the surcharge ₹1,34,250.

Here’s where marginal relief comes in: if this surcharge is more than the extra ₹1 lakh earned above ₹50 lakh, relief is calculated.

1. Calculate the tax on ₹50 lakh, which is ₹13,12,500.
2. Add the extra income of ₹1 lakh, giving a total of ₹14,12,500.
3. The normal tax without surcharge is ₹13,42,500, so after calculating marginal relief, the surcharge becomes ₹70,000.

Final Tax Payable

The final amount payable would be:

• Base tax: ₹13,42,500
• Surcharge: ₹70,000
• Cess (4% on ₹14,12,500): ₹56,500

Total tax payable: ₹14,69,000.

Marginal Relief Example

Final Tax Payable Calculation

Health and Education Cess

For the financial year 2024-25, individuals in India are subject to a Health and Education Cess of 4% on their total income tax liability (including any surcharge).

Health and Education Cess applies to all individual taxpayers under both the old and new tax regimes. Cess is calculated on the total tax (including any surcharge) before arriving at the final tax payable amount.

If an individual’s total tax liability (including any surcharge) is ₹1,00,000, the cess would be:

Cess = 4% × Total Tax = 0.04 × 1,00,000 = ₹4,000

If surcharge is applicable, then cess should be calculated after surcharge.

Tax rebate U/s 87A for a self-employed person

Amount of tax rebate depends on the tax regime selected.

Under the old tax regime, Rs. 12,500 is allowed as tax rebate from an individual’s tax liability when total income does not exceed Rs. 5,00,000.

In case of the new tax regime, an individual can claim up to Rs. 25,000 if total income does not exceed Rs. 7,00,000.

For a detailed discussion, you are suggested to read our article “income tax rebate under section 87A”.

Advance Tax applicable to an individual with business income

If the tax liability exceeds 10,000 rupees in a financial year, individuals are required to pay advance tax in four installments. This applies to salaried individuals, freelancers, and business owners.

Here’s the complete Advance Tax Payment Schedule:

Failing to pay advance tax can result in interest penalties under Section 234B and 234C.

If someone chooses the presumptive taxation scheme to calculate their tax, they must pay the total advance tax amount by March 15, before the financial year ends. They do not have to pay in installments; they just need to pay 100% of the tax by that date.

If they pay less than the required amount or miss the payment deadlines, they will have to pay interest on the shortfall. The interest rate will be based on rules in Sections 234B and 234C of the Income Tax Act.

When TDS provisions applicable: Tax deductions at source 

As per the tax provisions, tax is required to be deducted from certain payments, like salaries or professional fees, before the money is given to the recipient.

If an individual is not required to do a tax audit under section 44AB (because their income is below the limit), they may also not need to deduct TDS on certain payments.

However, individuals must deduct a 5% tax (TDS) on monthly rent payments exceeding Rs 50,000, even if they are not subject to a tax audit.

Filing income tax return: For individuals with business income

Business income must be reported in the individual’s income tax return (ITR).  An individual with business income in India typically needs to file Income Tax Return (ITR) Form 3 or ITR Form 4, depending on their situation.

ITR Form 4 (Sugam) is for individuals who have a presumptive income from business or profession. They are required to calculate their income under the presumptive taxation scheme.

You have a simpler tax situation and do not maintain detailed accounts. However, there are certain cases where an individual can not file ITR-4. For instance if that individual is already a director or holding equity shares in unlisted companies, then ITR-4 can not be filed, instead they should go with ITR-3.

Form ITR-3 is for individuals who have income from business or profession and other sources. They maintain regular books of accounts and report detailed business income and expenses.

ITR-3 vs. ITR-4 (Sugam): What is the difference?

Note: ITR-1 and ITR-2 cannot be filed if an individual has business income.

Tax Audit Requirements

In India, Section 44AB of the Income Tax Act, 1961 mandates tax audit requirements for certain categories of taxpayers, including self-employed individuals.

Every self-employed person running a business must get their accounts audited if their total sales, turnover, or gross receipts exceed ₹1 crore in a financial year.

However, there are exceptions:

1. If a person’s total cash received during the year is 5% or less of their total sales.
2. If the total cash payments they made during the year are also 5% or less of their total expenses.

In these cases, instead of ₹1 crore, the limit is raised to ₹10 crore.

Also, any payments or receipts made by a cheque that isn’t marked “account payee” will still be considered as cash.

Anyone who is self-employed and earning from their profession must get their accounts audited if their total earnings exceed ₹50 lakh in a financial year.

The audit must be conducted by a Chartered Accountant (CA). The CA will issue a tax audit report, which needs to be filed along with the income tax return.

The due date for filing the tax audit report is usually September 30 of the assessment year. The income tax return must be filed on or before the due date of October 31, along with the audit report.

Failure to get a tax audit done can lead to penalties and the potential denial of expenses claimed, which can adversely affect taxable income.

Tax audit in case of presumptive taxation scheme

Anyone working as a professional must have their accounts audited under section 44AB if they acknowledge their earnings under section 44ADA, claim their income is lower than the specified profit threshold, and their total income exceeds the basic exemption limit for that previous year.

A person opting for section 44AD must get a tax audit under section 44AB in India if their gross receipts in a financial year exceed ₹2 crore. 

They are also required to get their accounts audited under section 44AB, if they are opting for the presumptive taxation scheme but claim their income is lower than the prescribed limit (i.e., less than 8% or 6% of gross receipts), and their total income exceeds the basic exemption limit for that year.

Income tax return and audit report filing deadline for an individual with business income

When accounts of an individual are subjected to tax audit under section 44AB, they should make sure that tax audit report is filed and accepted on or before 30th September of the relevant assessment year.

Income tax return filing deadline is 31st October of the relevant assessment year. Before filing an income tax return, the taxpayer must make sure that the audit report is submitted and accepted.

If the due date of filing is missed, the last date to file income tax return with late fee is 31st December of the relevant assessment year. However, late fee and penal interest will be levied for filing a belated return.

Revised return and updated return provisions are also applicable to an individual with business income.

As tax regulations continue to evolve, individuals should consider consulting tax professionals. Their insights can help navigate compliance requirements and identify effective strategies for minimizing tax liabilities.