Business Income Tax: How to Calculate Taxable Income from Business?

Owning a business comes with its own share of challenges. One of the most important of them being the income tax. While calculating taxes on business income can be as easy as using an online income tax business calculator , it is essential to at least know the basics of how business income is taxed in India.If you already own a business or planning to start one, here are some of the most important things you should know about business income tax-

To start with, you first need to know the taxable income of your business. Normal provision and presumptive taxation are two different ways in which you can calculate the taxable business income. With normal provision, the taxable income is calculated by deducting the cost of sold goods and expenses from the total sales.With presumptive taxation, your taxable income is a fixed percentage of your total sales. However, as per income tax for business rules in India, the presumptive taxation scheme is only available for businesses with a turnover of more than Rs. 2 crores.

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The next step is to check the income tax slab you fall under. There are multiple tax slabs in three categories- for people under 60 years, seniors between 60 to 80 years and super seniors above 80 years. The slab rates vary under these categories.For instance, if you own a business and are below 60 years, your income tax for business in India will be based on these slabs-

• Income up to Rs. 2.5L- NIL
• Income between Rs. 2.5-5L lakh- 5%
• Income between Rs. 5-10L- 20%
• Income above Rs. 10L - 30%

If your annual income is between Rs. 5L to Rs. 1 crore, you will have to pay a surcharge of 10% above the income tax on business . If it is above Rs. 1 crore, the surcharge will be 15%. There is also an additional Health and Education cess of 4%.If you have a Limited Liability Partnership or a Firm, you will be taxed at 30% if your taxable income is up to Rs. 1 crore. For a Company, the tax rate is 30% but if your turnover is less than Rs. 250 crores, the tax rate will be 25%.The details mentioned above are very basic in nature and should be known by every business owner. While you can do the basic business tax calculations with an income tax small business calculator , it is essential to hire professional help for knowing your exact tax liabilities.

Depending on the type of taxpayer there are different options available to earn tax-free income. Individuals and HUFs earning business income pay tax as per the slab rates. These slab rates start from Rs. 2,50,000 (for FY 22-23). The latest budget increased the slab rates, which now start from Rs. 3,00,000 (for FY 23-24). Therefore, the first Rs. 2,50,000 (Rs. 3,00,000 for FY 23-24) is tax-free income for the business. However, for partnership firms and domestic companies, there is a flat rate of 30% tax (25% for some companies) that applies therefore, no part of their income is tax-free. There are deductions that all taxpayers can use to bring down their taxable income.

There are very few businesses in India that are tax-free businesses. Here are some examples:

1. Agriculture income – this is fully exempt only for individuals and HUFs
2. Charitable organisations – those registered under Section 80G of the Income Tax Act are exempt from paying tax.
3. Political parties – registered under Section 29A of the Representation of the People Act are exempt from paying tax.
4. Certain religious institutions may be exempt from paying tax upon fulfilling certain conditions.
5. Mutual funds and portfolio management services may be exempt from paying tax upon fulfilling certain conditions.

Additionally, businesses that earn less than the threshold limit and are individuals or HUFs don’t have to pay taxes. This is Rs. 3,00,000 for FY 23-24 and Rs. 2,50,000 for FY 22-23.

Yes, small businesses may also have to pay income tax depending on the amount of taxable income. Taxable income is calculated by reducing the business expenses from the total revenue in a financial year.Business income in India is taxed on the basis of the type of taxpayer. For individuals and HUFs, the business income is charged on the basis of slab rates. They get tax-free income up to the first slab, which is Rs. 3,00,000 for FY 23-24 and Rs. 2,50,000 for FY 22-23.Partnership firms and companies are taxed at 30% of the taxable income. However, companies that had a turnover of less than Rs. 400 crores in FY 18-19 are taxed at 25%. Certain companies may be allowed to pay lesser taxes if they opt for the new tax regime.The government allowed relief to small businesses with a turnover of up to Rs. 2 crores in the financial year 21-22. Such businesses did not have to file returns.

Small businesses can get a tax refund if they have paid tax in excess of the final total tax liability or if their suppliers have deducted TDS and paid it to the government on their behalf. TDS paid by suppliers get reflected against the PAN of the small business. If the total tax liability of the small business is less than the amount of tax deducted and paid, the excess can be claimed as a refund at the time of filing returns.

Here are some tips that can help businesses save tax that is charged on business income:

1. Limit cash payments to less than Rs. 20,000 per day. Some income tax regulations are strict about allowing deductions of payments made in cash. Therefore, limiting cash payments can help increase deductions and lower tax liability .
2. Buy a business vehicle. A company vehicle can be shown as an asset in the balance sheet of a business. This will help businesses claim depreciation and expense certain vehicle-related expenses against the business if it is being used for business purposes.
3. File your returns on time, even if it is a loss. Losses from business income can be carried forward for up to 8 years and can be set off against subsequent business income, which lowers tax liability. However, this loss can only be claimed if returns are filed on time.
4. Be thorough while deducting TDS. Failure to deduct TDS makes the expense non-admissible, which means it cannot be claimed as a deduction.
5. Record your expenses and depreciation. These areas are often ignored, especially in small businesses but can amount to significant deductions that reduce tax liability.

If a business has made profits in a year, it will have to pay taxes on it. Non-compliance to file annual returns results in a penalty of up to Rs. 5,000. This penalty will be Rs. 1,000 if the taxable income is less than Rs. 5,00,000.Income tax returns cannot be filed without paying income tax.If the business was liable to pay advance tax and failed to do so, the penalties and interests of failure to pay advance tax will apply. As per Section 234C of the Income Tax Act, a monthly penalty of 1% per month is attracted if the taxpayer misses the deadline for making advance tax payments. This 1% is calculated on the outstanding tax amount. If a taxpayer fails to pay at least 90% of the advance tax before the end of the financial year (March 31), the interest of 1% per month will be charged on the outstanding amount.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.