Which ITR Form Should YOU Use? A Simple Guide for Freelancers (ITR-3 vs. ITR-4)

Navigating income tax returns can feel like cracking a secret code, especially for freelancers and consultants with various income sources. If you're in this group, you've likely encountered ITR-3 and ITR-4 and wondered which one you should choose. Don’t worry; this is a common challenge, and we’re here to clarify it simply.

Understanding Your ITR Forms: ITR-3 vs. ITR-4

The Income Tax Department has different forms for various types of taxpayers and income. For freelancers and consultants, who usually earn "Income from Business or Profession," ITR-3 and ITR-4 are the two main options.

1. What is ITR-4 (Sugam)? The Simple Option for Small Professionals

ITR-4, also called "Sugam" (which means 'easy' in Hindi), is meant for individuals, Hindu Undivided Families (HUFs), and Partnership Firms (not LLPs) who choose the Presumptive Taxation Scheme. This scheme simplifies income declaration without the need to maintain detailed records.

For Freelancers & Consultants (Professionals): Section 44ADA

If you’re a professional (like a consultant, lawyer, doctor, architect, accountant, technical consultant, etc.) and your gross receipts (total earnings) from your profession do not exceed ₹50 Lakhs in a financial year, you can use Section 44ADA.

• The Rule: You declare 50% of your gross receipts as your taxable income (profit). For example, if you earn ₹40 Lakhs, you declare ₹20 Lakhs as profit.
• The Benefit: You don’t have to keep detailed accounting records, making tax filing much easier.

For Small Businesses (if you also have one): Section 44AD

If you run a small business (gross turnover up to ₹3 Crores for FY 2023-24) and want to declare income presumptively, you’d use Section 44AD, usually declaring 6% (for digital receipts) or 8% (for cash receipts) as profit. While most consultants fall under 44ADA, some may have side businesses where this applies.

Who ITR-4 is for:

• Individuals, HUFs, and Partnership Firms (not LLPs).
• Total income up to ₹50 Lakhs (including presumptive professional/business income).
• Income sources: Salary/Pension (up to ₹50 Lakhs), One House Property (no brought forward losses), Presumptive Business/Professional Income (under 44AD/44ADA), and Other Sources (like interest income).

2. What is ITR-3? The Detailed Form for More Complex Cases

ITR-3 is a more detailed form for individuals and HUFs who earn from a business or profession and do not choose the presumptive taxation scheme or aren’t eligible for it.

Who ITR-3 is for (and why freelancers might need it):

• Individuals/HUFs with income from a proprietary business or profession.
• This includes those whose professional gross receipts exceed ₹50 Lakhs (ineligible for 44ADA).
• If your professional gross receipts are below ₹50 Lakhs but you want to declare a profit less than 50% of those receipts, you have to use ITR-3 and get an audit of your books. This means you’re saying your expenses were higher than 50% of your income.
• If you have income from capital gains (like selling property or shares).
• If you have income from more than one house property.
• If you have foreign income or assets.
• If you are a Director in a company or hold unlisted equity shares.

Key Difference: ITR-3 requires detailed financial statements, including a Balance Sheet, Profit & Loss Account, and other specific schedules. This means you need to keep accurate books of accounts.

ITR-3 vs. ITR-4: The Key Differences for Freelancers & Consultants

Here’s a simple table to highlight the main points:

How to Choose: Your Scenario, Your Form

Here are some typical scenarios to help you decide:

Choose ITR-4 (Sugam) if:

• Your gross professional receipts are ₹50 Lakhs or less.
• You are comfortable declaring 50% or more of your gross receipts as profit.
• You do not have income from capital gains, more than one house property, foreign income/assets, or directorship/unlisted shares.
• You want the simplest way to file your taxes without detailed bookkeeping.

You MUST use ITR-3 if:

• Your gross professional receipts exceed ₹50 Lakhs.
• Your gross professional receipts are ₹50 Lakhs or less, but you want to declare a profit less than 50% of those receipts. In this case, an audit of your books is mandatory.
• You have income from capital gains (such as selling shares, mutual funds, or property).
• You own more than one house property that you earn income from (or have losses to carry forward).
• You have foreign income or assets (even if they don’t generate income in India).
• You are a Director in a company or own unlisted equity shares.
• You prefer to keep detailed books of accounts and declare your actual profit/loss.

Why This Choice Matters

Choosing the correct ITR form is important for several reasons:

• Compliance: Filing the wrong form can lead to complications, requiring you to refile and possibly incur penalties.
• Accuracy: The right form ensures all your income and deductions are reported correctly.
• Simplicity vs. Detail: Choosing ITR-4 when eligible can save you time and effort. However, using ITR-3 when necessary prevents errors and notices.
• Avoiding Audits: Understanding the 44ADA rules in ITR-4 is essential to avoid mandatory audits if you want to declare lower profits.

Final Thoughts

Most freelancers and consultants whose professional income stays within the ₹50 Lakh limit and who are okay with declaring a 50% presumptive profit should find ITR-4 (Sugam) a great, easy choice. It greatly simplifies the tax-filing process.

However, if your income goes over the limit, your expenses genuinely reduce your profit below 50%, or your finances include varied income sources, ITR-3 is necessary.

When in doubt, especially with complex financial situations, it’s always best to talk to a tax professional. They can offer personalized advice and ensure your tax filing is accurate and compliant.

Leave a reply