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Viraaj Vashishth

July 4, 2024

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ITR 3 VS ITR 4: What are these and How do they Differ?

Get ready to file your income tax returns, Indian individuals and company owners as we approach the season of paying taxes. Getting the revenue right entails for those who live on wages or business a sophisticated understanding of the taxation laws. The Income Tax Return forms have been created by the Revenue Tax Department regarding separate sources of income in order to help with compliance reporting.

Many independent contractors and sole proprietors prefer to go for either ITR 3 or ITR 4 in order to simplify their tax liabilities. This article explains the main differences between ITR-3 and ITR-4 that will enable you to make an informed decision on what form is most suitable for you so as to make a smooth submission process regardless of how complicated your financial situation may be.

Who Should File ITR 3?

ITR 3 is used by various taxpayers, although it mostly serves sole proprietors and Hindu Undivided Families with commercial or professional income. This form is used for income from capital market transactions, wages, pensions, property rents, limited liability partnership businesses, single proprietorships, and other sources.

Proprietary businesses, partner shares in traditional partnerships, compensation, home ownership, asset sales profit, and residual income are all included in the categories. ITR 3 accepts returns from several sources, regardless of whether they are simple or sophisticated. You are obligated to file this form if you come under any of the above given categories and you need to know how to track your filed returns on e-Filing Portal for a streamlined business experience.

If you earn from multiple sources, including a business or profession, and do not fit the criteria for ITR 1 or ITR 2, then ITR 3 is the appropriate form. It is crucial for accurate tax reporting, legal compliance, and potential tax refunds. Always check the due dates and consider consulting a tax professional for your specific situation.

Form	Business Income	Professional Income	Capital Gains	House Property Income	Presumptive Taxation	Income Limits
ITR 3	Yes	Yes	Yes	Yes	No	No specific limits
Due Date to file	For non-audit taxpayers, the deadline for filing ITR-3 is July 31. The audit cases have a deadline of October 31.

Who Should File ITR 4?

Filing ITR-4 is mandatory for the individuals and HUFs who have opted for presumptive taxation scheme under Section 44AD, 44ADA or 44AE for small businesses or professions having turnover up to Rs.2 crore for businesses or Rs.50 lakh for professions. It also applies to freelancers, small business owners and professionals provided their gross receipts do not exceed these limits and they have salary, house property or capital gain income.

When filing ITR-4 returns, it will help taxpayers simplify tax compliance, make available deductions/exemptions and provide an acceptable report on computation of taxes in India. Nevertheless, even though “Sugam” form is specific to individuals, HUFs and other than LLP (Limited Liability Partnership) businesses opting presumptive taxation under Section 44AD; it may not be obligatory for all eligible taxpayers.

Form	Business Income	Professional Income	Capital Gains	House Property Income	Presumptive Taxation	Income Limits
ITR 4	Yes	Yes	No	No	Yes	Rs.2 crore for business, Rs. 50 lakh for profession
Due Date to file	July 31st is the deadline for filing ITR-4. Since presumptive taxation systems are not covered by the audit.

Section 44ADA, or Section 44AE of the Income Tax Act.

In case of residents who are in business and are covered under the presumptive tax scheme as provided for by Section 44AD of the Act, they can file ITR-4 so long as their total annual turnover does not exceed two crore rupees.

Furthermore, professionals who work for themselves like doctors, lawyers and architects may choose to compute their income using the presumptive method given in Section 44ADA by filing an ITR-4. Finally under section 44AE of The Income Tax Act such individuals may file ITR-4 using presumptive income as a basis for this claim where taxpayer hires or leases goods carriages.

ITR 3 VS ITR 4:

Criteria	ITR 3	ITR 4
Who Should File?	Individuals and HUFs with income from business or profession, capital gains, or house property.	Individuals and HUFs opting for presumptive taxation under Section 44AD, 44ADA, or 44AE for small businesses or professions.
Income Types Covered	Business or professional income, capital gains, house property, and other sources.	Presumptive business income, professional income, and other sources.
Business or Profession	Yes, for actual income reporting.	Yes, under presumptive taxation schemes for simplified reporting.
Capital Gains Reporting	Yes, for reporting both short-term and long-term capital gains.	No, capital gains must be reported separately in other forms.
House Property Income	Yes, for rental income and deductions related to house property.	No, this income is not reported on ITR 4.
Presumptive Taxation	Not available.	Available for small businesses (turnover up to Rs.2 crore) and professions (gross receipts up to Rs.50 lakh).
Income Limits	No specific turnover limits; applicable for a wide range of income types.	Yes, must fall under the presumptive taxation limits: turnover up to Rs.2 crore for business, Rs.50 lakh for profession.
Exclusions	Not meant for those solely earning from salary, pension, or other simpler income sources.	Not suitable for those with complex business structures, significant capital gains, or who do not opt for presumptive taxation.
Tax Filing Complexity	More complex due to detailed reporting requirements.	Simplified reporting due to presumptive taxation schemes.
Eligibility for Deductions	Yes, you can claim various deductions under sections like 80C, 80D, etc.	Limited deductions under presumptive taxation schemes.
Deadline for Filing	Usually July 31st of the assessment year; check for extensions.	Usually July 31st of the assessment year; check for extensions.

Example of Applicability(ITR 3 vs ITR 4)

ITR 3 in Income Tax

Scenario: Ravi is a freelance graphic designer who also runs a small e-commerce store selling digital products. In the financial year, Ravi earned Rs.5 lakh from freelance projects, Rs.3 lakh from his e-commerce business, and Rs.1 lakh from renting out a part of his house. Ravi also had Rs.50,000 in short-term capital gains from the sale of shares.

ITR Form to Use:

Ravi should file ITR 3. This form is suitable for individuals with income from multiple sources including business or profession, house property, and capital gains.

Why ITR 3?

1. Business Income: Ravi’s online store income is business income.

2. Professional Income: His earnings from self-employment graphic design are professional income.

3. House Property Income: Let your tenants pay rents and file returns

4. Capital Gains: They have not yet disclosed short-term capital gains on the sale of shares.

ITR 4 in Income Tax

Scenario: Anita is a small business owner who runs a bakery with total annual turnover of Rs.1.5 crore. Additionally, she works as a consultant for some clients earning Rs.40 lakh per year.Consequently, Anita chooses to be treated under presumptive taxation scheme per Section 44AD for her bakery and Section 44ADA for her consultancy.

ITR Form to Use:

Anita should file ITR 4. This form is appropriate for individuals who opt for presumptive taxation under the relevant sections and have additional income from other sources.

Why ITR 4?

1. Presumptive Taxation: Anita’s bakery income is covered under the presumptive taxation scheme under Section 44AD.

2. Professional Income: Her consulting income falls under the presumptive scheme under Section 44ADA..

Conclusion:

This article focused on explaining the differences in ITR 3 vs ITR 4, majorly focusing on their process and applicability. Making the right income tax return selection is essential to correctly reporting taxes and guaranteeing a seamless filing procedure. If one does not want to pay presumed taxes on income derived from employment or other sources, ITR 3 is the appropriate form.

As an alternative, ITR 4 is eligible if presumptive taxation meets turnover restrictions. Tax laws and regulations are subject to change, so it's always a good idea to stay up to speed on the newest instructions from the Income Tax Department or speak with an expert advisor. In addition to saving time and effort, submitting the correct ITR form avoids tax penalties.

FAQs

1. Who are the individuals that can file ITR 3?

They are any individual or Hindu Undivided Family (HUF) who is earning through a business or profession where the books of accounts are maintained on a regular basis.

2. What is the main difference between ITR 3 vs ITR 4?

ITR 3 encompasses multiple income sources while ITR 4 eases reporting for small businesses or professions focused on presumptive taxation under Sections 44AD, 44ADA, or Section 44AE.

3. What is a Presumptive Income Scheme?

This means that instead of maintaining voluminous books of account for your business, you use percentage turnover to estimate your income.

4. Can gains on selling properties be reported on ITR 4?

No, it does not cover capital gains; either ITR-2 or even this case being referred to as the ITR-3 (Income Tax Return) can be used.

5. From where can we get more information about those forms for IT returns?

You can log in at the Indian Income Tax Department official website for the return form’s details.

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