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ITR 3 vs. ITR 4: Understanding the Difference Between Income Tax Returns


ITR 3 vs. ITR 4: Understanding the Difference Between Income Tax Returns

Within the time frame given by the income tax regulations, all Indian taxpayers are required to file income tax returns (ITRs). The process of filing an income tax return can be stressful for taxpayers since there are many moving parts, such as selecting the appropriate ITR form, declaring income under the appropriate heading, claiming exemptions to reduce taxes, etc. Several forms have been notified by the income tax department depending on the source of income. Currently, seven ITR forms are offered for different taxpayer classifications. The differences between the ITR-3 and ITR-4 forms will be covered in this article.

 

Table of content

 

All About ITR 3

Eligibility

If an individual or Hindu Undivided Family (HUF) makes money from a business or profession, they are qualified to file an ITR-3. Suitability for filing an ITR-3: 

  • Income from a career or business (including cases involving tax audits and non-tax audits)

  • Payroll earnings

  • Capital gains, either short-term or long-term

  • Rental revenue from real estate

  • Income from a partnership in a company (interest and compensation)

  • Interest, dividends, lottery winnings, and any other revenue


Due Date for AY 2024-25

The deadline for filing ITR-3 forms is July 31, 2024. On the other hand, taxpayers with company income who are audited for income taxes must file ITR-3 by October 31, 2024.


All About ITR 4

Eligibility

ITR-4 may be used by resident individuals, HUFs, and partnership firms provided certain requirements are met. The requirements listed below are applicable to ITR-4 filings: 

  • Income totaling up to Rs. 50 lakhs

  • Section 44AD, 44ADA, or 44AE computes income from a business or profession on an assumed basis

  • Revenue from pensions and salaries 

  • Income from rentals in a single home, 

  • Revenue from agriculture (up to Rs. 5,000) 

  • Additional revenue from sources including dividends, interest, and family pensions, among others


Exceptions

The following are the exceptions to ITR 4:

  • Non-residents or residents who are normally not residents (RNOR) 

  • Income surpassing Rs. 50 lakhs

  • Director of any business

  • A person who has ever held unlisted equity shares in the year

  • Should not be a lottery winner or own and care for race horses

  • Individuals who have delayed income tax on their ESOPs

  • A person earning over ₹5,000 from multiple house properties or from agriculture is subject to income tax under Section 115BBDA (dividend from domestic firm over Rs. 10 lakhs) or Section 115BBE (tax on concealed income and investments)

ITR-4 forms can also be filed by freelancers, including bloggers, content writers, digital marketers, and others. 


Due Date for AY 2024-25

The deadline for filing ITR-4 forms is July 31, 2024.


Section 44AD

This clause exempts taxpayers with up to Rs 2 crore in revenue from keeping books of accounts and from declaring gains on their revenue, which must be limited to 8% (or 6% in the case of online transactions) of revenue. Small taxpayers gain from this plan since it relieves them of the burden of keeping the books of accounts and having them audited. 

The finance minister recommended raising the section 44AD limit for enterprises to Rs 3 crore in the Budget 2023, and the section 44AE limit for professionals to Rs 75 lakh, provided that your cash transactions must account for no more than 5% of your sales.  Additionally, money received by bank draft or cheque that is not made payable to the account payee will be considered cash.


Section 44ADA

Profits from specific professions are assumed to be 50% of gross receipts under this provision. The following professions are exempt from Section 44ADA if their gross annual receipts do not exceed Rs 50 lakh. The Budget 2023 made revisions to this cap. Thus, the new cap is 75 lakhs rupees. These professions include interior design, technical consultancy, architecture, engineering, accounting, law, and medicine. Additional experts include movie artists such as editors, actors, directors, choreographers, musicians, dance directors, camera operators, singers, lyricists, screenplay or dialogue writers, and costume designers. An authorised representative is someone who, in front of a tribunal or other authority established by law, represents another person on their behalf in exchange for a fee. It excludes any individual who works for the person thus represented, anyone practicing accounting, and any other professionals who have been informed.


Section 44AE

This provision pertains to taxpayers who own no more than ten goods vehicles at any point during the fiscal year and who operate a business that involves the plying, hiring, or leasing of goods carriages (they must declare their income under the plan at Rs 7500 per vehicle per month).


Difference Between ITR 3 and ITR 4

The following table explains the differences between ITR 3 and ITR 4:


Difference Between ITR 3 and ITR 4 - Taxbuddy


Examples of Applicability

Example 1: For FY 2016–17, A chose presumptive income. Her wholesale company made Rs 2.20 crores in revenue during the 2017–18 FY.

Given that A's revenue above Rs 2 crore, she must file an ITR-3 for the 2017–18 fiscal year, as ITR-4 is not applicable in situations where revenue surpasses Rs 2 crore.


Example 2: B has chosen to use the presumptive income plan and owns a retail textile store. 

As long as his gross turnover is less than Rs. 2 crore, B may opt to submit an ITR-3 or an ITR-4. 


Example 3: C, an interior decorator, is unsure of the appropriate ITR form to submit. 

As a professional, she can submit her return using the ITR-4 Form and choose the presumptive scheme of taxation, provided that her gross receipts from the profession do not exceed Rs. 50 lakh. 


Example 4: D is an insurance agent who filed an ITR-4 after earning Rs 18 lakhs during the 2017–18 FY.

It is not possible to submit an ITR-4  for an insurance commission business. D must so submit an ITR-3 for the 2017–18 FY.


Example 5: E is a plying, hiring, or leasing goods carriage business owner. During the 2017–18 FY, he possessed 13 trucks.

Section 44AE's presumptive method of taxes is only applicable when there are no more than ten trucks owned. E must submit an ITR-3 because he owns more than ten trucks.


Example 6: F is a practicing cardiologist with a turnover of Rs 55 lakhs for the 2017–18 FY. Shashank desires to submit an ITR-4.

F continues the profession because he runs his own practice. Therefore, he can only submit an ITR 4 if his yearly income is less than Rs. 50 lakhs. Shashank is required to file an ITR-3 because his income exceeds Rs. 50 lakhs.


Example 7: G runs two companies. He has two businesses: a manufacturing company with a Rs 2.4 crore annual revenue and a vehicle leasing and rental company that qualifies for section 44 AD presumptive income. G is unsure about which ITR to submit. 

G must submit an ITR-3 even though his firm is eligible under section 44AD. Given that G's first business is an enterprise, his consolidated income information must be filed on ITR-3, and his return of income must contain revenue from all sources.


Conclusion 

You should have determined which ITR Form to file now that you are aware of the distinctions between ITR 3 and ITR 4. You shouldn't worry if you are still unsure about which ITR form to select. To make your ITR filing process easier, you can seek help from knowledgeable and experienced CAs.


FAQs:

Q1. Who can file ITR 3?

For people and Hindu Undivided Families (HUFs) with income from business or professional profits and gains, the ITR 3 form is required. It also applies to people who work as partners in a company.


Q2. Who can file ITR 4?

Individuals, HUFs, and businesses that have chosen to participate in the presumptive income scheme under Sections 44AD, 44ADA, or 44AE of the Income Tax Act are required to file Form ITR 4. It is also available to people who meet the requirements of Section 44ADA's presumptive income plan and have professional income. Additionally, the income can reach Rs. 50 lakhs. 


Q3. What distinguishes ITR 3 from ITR 4? 

The group of taxpayers who can submit Forms ITR 3 and Form ITR 4 is the primary distinction between them. ITR 4 is for people who have chosen to participate in the presumptive income system under Sections 44AD, 44ADA, or 44AE of the Income Tax Act. ITR 3 is for individuals and HUFs with income from profits and gains from business or profession.


Q4. How does the selection of ITR 3 or ITR 4 impact tax liabilities and potential deductions?

The choice between ITR 3 and ITR 4 significantly influences tax liabilities and deductions. ITR 3 is designed for individuals and HUFs with income from business or profession, allowing a broader range of deductions. In contrast, ITR 4 is for presumptive income taxpayers, providing a simplified method with fewer deductions.


Q5. Are there specific business or income criteria that determine the choice between ITR 3 and ITR 4?

Yes, the nature and scale of income play a crucial role. ITR 3 suits those with income from a profession or business, maintaining regular books of accounts. ITR 4 is for small businesses opting for presumptive taxation, making it suitable for professionals and businesses with a turnover below a specified limit.


Q6. Can you highlight the complexities or advantages associated with each form in detail?

ITR 3's advantage lies in its comprehensive deduction options, requiring meticulous bookkeeping. On the other hand, ITR 4 offers a presumptive taxation scheme, simplifying calculations but limiting deductions. Choosing between them depends on the taxpayer's preference for detailed record-keeping and the nature of their business or profession.


Q7. What paperwork is needed to file forms ITR 3 and ITR 4? 

Similar supporting documentation is needed to file ITRs 3 and 4, and it includes Aadhaar cards, PAN cards, bank statements, TDS certificates, AIS, TIS, and other pertinent financial records.


Q8. Can I file IFTR 4 instead of ITR 3?

It is mandatory for taxpayers who have chosen to be subject to presumptive taxes under Sections 44AD, 44ADA, or 44AE to submit an ITR 4. You must file an ITR 4 since ITR 3 is only for people who earn money from their business or profession.


Q9. Is ITR 3 for salaried employees?

Employees who receive a salary can submit an ITR 3 if they also get revenue from their business or profession. On the other hand, an employee may submit an ITR 1 if he simply receives a salary (Sahaj).


Q10. Can I submit my own ITR 3?

Yes, the taxpayer may file the ITR 3 on their own since no official or chartered accountant authentication is needed. The taxpayer only needs to confirm and authenticate it at the time of filing.


Q11. Is there a capital gain option on the ITR 4?

No, there is no capital gains option on the ITR-4. If an individual or HUF has capital gains, they can submit an ITR 2 or ITR 3.


Q12. Who cannot utilise ITR 3? 

The following are the exceptions to ITR 3:

  • Charitable and religious trusts

  • Limited liability partnerships (LLPs), businesses, local governments, associations of people, and bodies of individuals 

  • Individuals choosing to be presumed to be taxable

  • Individuals earning more than Rs. 50 lakhs



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