Income Tax on Business Income: Complete Guide to ITR-3 & ITR-4 Filing for FY 2025-26
- shubhamtulsian05
- 12 minutes ago
- 4 min read
Business owners, freelancers, traders, and self-employed professionals file a more complex income tax return than salaried employees — involving computation of 'Profits and Gains from Business or Profession' (PGBP) under Sections 28 to 44, multiple sub-schedules, and potentially a tax audit. This guide walks through everything you need to know for FY 2025-26.
ITR-3 vs ITR-4 — Which Form Should You Use?
ITR-4 (Sugam) — For Presumptive Taxation
Who files ITR-4: Individuals, HUFs, and partnership firms (not LLPs) who have opted for presumptive taxation under Section 44AD (business), 44ADA (professionals), or 44AE (transporters), AND whose total income does not exceed ₹50 lakh.
Key advantage: Simpler form — no balance sheet, no P&L account, no detailed deduction schedules. Just declare the presumptive income (8%/6% of turnover for 44AD, 50% of receipts for 44ADA, or per-vehicle for 44AE) and pay tax.
When you CANNOT use ITR-4: If you have capital gains, foreign income, more than one house property, income from speculative business, or if your turnover exceeds the presumptive threshold — you must use ITR-3.
ITR-3 — For Regular Business/Professional Income
Who files ITR-3: Individuals and HUFs with income from business or profession who do not or cannot opt for presumptive taxation — including those with turnover above the presumptive thresholds, those who have opted out of presumptive taxation, professionals with receipts above ₹75 lakh, and those with complex income structures.
What it requires: Full P&L account, balance sheet as at 31st March, capital account, details of partners/members if applicable, and multiple income schedules.
Computing Business Income Under PGBP — What's Taxable, What's Deductible
Income Included Under PGBP
Business profits: Net profit as per books, adjusted for income tax purposes.
Perquisites from business: Non-monetary benefits received in the course of business — goods received free, services at subsidised rates.
Profits on sale of business assets: Gains on sale of depreciable assets are specifically brought to tax under Section 41(2) (balancing charge).
Waiver or remission of business liabilities: When a creditor waives a debt, the waived amount is taxable under Section 41(1) as a deemed business receipt.
Deductions Expressly Allowed
Rent, rates, taxes, and insurance: Expenses for business premises.
Repairs and maintenance: For plant, machinery, and buildings used for business.
Depreciation (Section 32): On tangible and intangible assets at prescribed rates. Key update — additional depreciation of 20% on new plant and machinery in the year of acquisition is available under Section 32(1)(iia) for certain categories.
Scientific research expenditure (Section 35): 100% deduction for in-house research and development expenditure.
Employee salaries and PF contributions: Fully deductible, subject to timely deposit — PF contributions deposited after the due date (even if paid before ITR filing) are disallowed under Section 43B.
Interest on borrowed capital: Interest on business loans — deductible as business expenditure.
Bad debts (Section 36(1)(vii)): Debts that have become bad and are written off — deductible in the year of write-off, subject to conditions.
Deductions Expressly Disallowed — Section 40 & 40A
TDS default (Section 40(a)): Expenses on which TDS was required but not deducted — disallowed for that year. If TDS is deducted in a later year, the deduction is available in that later year.
Payments to related parties at above market rate (Section 40A(2)): Payments to associated persons in excess of fair market value are disallowed.
Cash expenditure above ₹10,000 (Section 40A(3)): Any single payment above ₹10,000 made in cash — disallowed in full.
Contingent liabilities: Provisions for liabilities that are not yet certain are not deductible under income tax (unlike under accounting standards).
The Critical Section 43B — Actual Payment Basis for Specific Expenses
Section 43B requires certain expenses to be actually paid before the end of the financial year (or before the due date of ITR filing in some cases) to be deductible in that year, regardless of the accounting method used. Key items covered:
PF, ESI, and other employee welfare contributions: Must be deposited within the statutory due date — not just accrued.
Taxes, duties, cess, or fees: Like GST, custom duty, etc.
Interest on loans from public financial institutions/banks: Deductible only on actual payment.
Section 43B was recently amended to include MSME payments — where the payer (buyer of goods/services from an MSME) fails to pay within the MSMED Act's 45-day timeline, the unpaid amount is disallowed in the payer's hands until actually paid. This is a significant compliance change for businesses dealing with MSME vendors.
Depreciation — Key Points for FY 2025-26
Written Down Value (WDV) method: Standard depreciation is charged on the WDV of assets at prescribed rates — 15% for most plant and machinery, 40% for computers and software, 5% for residential buildings, 10% for commercial buildings, etc.
New vs old regime and depreciation: Under the new tax regime, enhanced/additional depreciation provisions are generally not available — businesses opting for the new concessional tax rate (Section 115BAA for companies) give up certain deductions including additional depreciation.
Goodwill — no depreciation: Following a Finance Act amendment, goodwill is no longer eligible for depreciation under income tax from AY 2021-22 onwards.
Tax Audit Threshold for FY 2025-26
Business turnover above ₹1 crore: Mandatory tax audit under Section 44AB, except if 95% or more of transactions are digital/non-cash, the threshold is raised to ₹3 crore.
Professional gross receipts above ₹50 lakh: Mandatory tax audit.
Declaring income below presumptive rate: Even if turnover is below the presumptive threshold, if a taxpayer declares income lower than 6%/8% under Section 44AD (or lower than 50% under Section 44ADA), tax audit is mandatory.
How PGT & Associates Can Help
PGT & Associates handles complete business income tax compliance — including books of accounts maintenance guidance, depreciation schedules, P&L and balance sheet preparation, tax audit under Section 44AB (Form 3CD certification), ITR-3 and ITR-4 filing, and advance tax computation. Contact us at +91-87994-99189 for end-to-end business tax support.
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