If you earn through online business and are worried about the taxation part, then this guide will be of great help in computing, paying taxes, and file returns in the simplest possible way.
Govt has a presumptive taxation scheme for small businesses & professionals under which taxable income can be calculated easily.
I have provided all the information regarding taxes and filing returns for online business in India so that you can bookmark and refer when in need.
The ‘Ultimate Guide’ is to help you to compute the taxable income, tax liability, and file income tax return for your small online business in India FY 2020-21.
Income Heads for Small Online Business
All the income that you generate through online business is categorized under the head “Income from Business or Profession” for income tax purposes.
This will include
- The Google Adsense income
- Affiliate commission
- Money from selling e-books
- Getting fees for freelance
- Consulting fees
- Income from paid advertisement or lead generation
While all the online receipts are your business income, you need to know how the income is generated so that you have clarity under which section of presumptive taxation it falls.
Before that, you should know that the Income Tax Act contains a “Presumptive Taxation Scheme” to give relief to small taxpayers from maintaining a regular book of accounts.
Under the presumptive scheme, you are allowed to take a certain percentage of receipts directly as your taxable income.
#1. Section 44ADA of Presumptive Taxation Scheme
The section is applicable for persons carrying business in the specified profession like
- Profession of legal
- Medical profession
- Engineering or architectural profession
- The profession of accountancy
- The profession of technical consultancy
- The profession of interior decoration
If your online business carries any of the above professions then you can use section 44ADA to compute your online business’s taxable profits.
Note– Income Tax Act does not specify the nature of technical consultancy. Please consult your CA to understand whether your online business falls under the head.
Taxable Income
Your 50% of the total gross receipts earned in the previous year will be the taxable income.
For example, if you have received Rs. 20 Lakhs of money from your online business then 50% i.e Rs. 10 Lakh will be your taxable income under section 44ADA.
The slab rates will be applicable on the taxable income.
Restrictions
Your total gross receipts should be less than or equal to Rs. 50 lakhs in the financial year.
#2. Section 44AD of Presumptive Taxation Scheme
If you have an online business that does not
- Carry on a profession as under section 44ADA
- Earn income in the nature of commission or brokerage
- Carry on any agency business
Then you can take a certain amount of receipts as your total income as under.
Taxable Income
A sum equal to 8% of the total receipts in case of non-digital transactions and 6%, if all the transactions are in digital mode.
Restrictions
The total receipts should be less than or equal to Rs. 2 Crore in the previous year.
Note – Income Tax Act does not explain the nature of commission or brokerage. If you are carrying marketing effort and making expenses to earn commissions then probably you can take benefit under the section.
Take the help of a tax professional/CA, to know the exact nature of your business with respect to the applicability of the section.
Scenarios Where Presumptive Taxation Scheme is Not Beneficial
- In case you have losses from your online business
- The profit is lower than the income as calculated under the presumptive scheme
For example, if your online business has gross receipts of Rs. 1 Lakh and your profit is only Rs. 30,000. You fall under section 44ADA and are required to take 50% of receipts as taxable income then you should not opt for a presumptive scheme.
In both the scenarios you can maintain regular books of accounts and then compute income and taxes after considering the expenses.
Maintain Accounting
Maintaining a proper account is necessary to know the exact expenses that you are making and the income that is getting generated from your online business.
The simplest way to maintain accounting is by using online software. The accounting software helps create invoices, bills, categorizes in various income and expenses heads and then create your profit & loss account and balance sheet.
Following are few online software that you can use for maintaining accounts
- Waves App
- Zoho Books
- Quickbooks
Business Expenses
Business expenses are the costs incurred and the monies spent to run the business. This is applicable irrespective of business being an online business, a large company or a small entity.
Business expenses form a part of the profit & loss statement and proper capture and management are necessary.
For your online business expenses can be
- Hosting fees
- Domain purchase
- Tech fees for creating a website or online store
- Cost of running Google or Facebook Ads
- Cost of goods acquired for e-commerce
- Annual portal fees you pay to Shopify
- Cost of goods & shipment for dropshipping
- Rent paid
- Internet expenses
- Electricity & utility bills
- Salaries paid to writers, virtual assistants
- Professional fees for SEO, Social media specialist, developer
- Expenses on tools for keyword research, themes, plugins
- Cost of purchase of laptop, PC, camera and mike
- Depreciation
For all the business expenses you need to keep the invoice and details like amount and date on your accounting software or books and keep the invoices and bills on records.
Calculate Your Taxable Income
For small online business owners, opting for a presumptive taxation scheme is more beneficial because you get relief from the tedious work of maintaining the books of account.
Yet calculate your taxable income in an easy manner by taking a certain percentage of your annual gross receipt.
Presumptive taxation scheme does not help
- In case you have losses from your online business
- The profit is lower than the income as calculated under the presumptive scheme
Only in the conditions mentioned above, you should use the normal route of computing taxable income after deducting expenses.
But remember that once you have opted for the presumptive scheme (under section 44AD), you need to calculate your income continuously for the next 5 years.
If you fail to adopt the presumptive taxation scheme consistently for 5 years then you would not be allowed to avail the presumptive scheme for the next 5 years.
Note – The above condition of 5 years is applicable only for small businesses computing taxable income under section 44AD and not for specified professionals computing income under section 44ADA.
#1. Calculate Taxable Income When Running Online Business as Sole Proprietorship
For online businesses, the income/profits (whether computed in a regular manner or using presumptive methods) will come under the head “income from profession or business”.
Calculating taxable income under the presumptive taxation
Suppose, you received Rs. 15 Lakhs from your blogging website and the nature of your small online business falls under section 44AD.
Assuming that all your online business transactions are digital then the taxable income in such a scenario is as under.
Gross receipts from online business (blogging) = Rs. 15,00,000
Taxable income considering all transactions as digital = Rs. 15,00,000 x 0.06 = Rs. 90,000.
Note – No other deduction of expenses are allowed if you opt for calculating taxable income under the presumptive taxation scheme.
If you are maintaining books of accounts
As a blogger if you have earned an income of Rs. 15 Lakhs a year from blogging but also made some expenses then you can make a profit and loss statement.
| Expenses | Income | ||
| Domain Hosting | Rs. 25,000 | Blogging | Rs. 15,00,000 |
| Writer’s salary | Rs. 50,000 | ||
| Rent | Rs. 1,20,000 | ||
| Electricity bills | Rs. 1,00,000 | ||
| Telephone/ Internet bills | Rs. 70,000 | ||
| Depreciation (40% on Rs. 3 Lakhs) | Rs. 1,20,000 | ||
| Total | Rs. 4,85,000 | Rs. 15,00,000 | |
| Taxable Income (Rs. 15 Lakhs – Rs. 4.85 Lakhs) = | Rs. 10,15,000 |
On this online business income, you can deduct the allowable investments and savings that you have made under section 80C and other sections of Chapter VIA.
Then you need to pay income tax as per the income tax slabs mentioned in the next section.
Note – Your online business income will be clubbed with your salary income (if any), rental income, or any other income that you have and will be filled on your individual name.
#2. Calculate Taxable Income When Running Online Business as Partnership Firm
Partnership firm has an altogether different legal identity from that of the partners. If you are running an online business as a firm then irrespective of whether your partnership firm is registered or not you have to pay income tax.
Presumptive Income for Partnership Firm
Online business income from partnership firms is also allowed to compute taxable income under the presumptive taxation scheme.
The presumptive taxation scheme is not for Limited Liability Partnership (LLP).
The section applicable is either 44ADA (taxable income is 50%) or 44AD where 8%/ 6% of the gross receipts depending on the type of digital or non- digital business transaction your firm is making.
However, your firm’s gross receipt needs to be less than Rs. 2 Crore.
Note – No other deduction of expenses are allowed if you opt for calculating taxable income under the presumptive taxation scheme.
If maintaining the book of accounts
You can calculate net profit and loss as usual after deducting expenses and then need to work on calculating the book profits & taxable income.
For calculation, you need to add
- Remuneration paid to partners (subjects to limits and conditions under section 40b)
- Interest in excess of 12%
For example
| Particulars | Amount |
| Suppose the net profit of the firm as per the profit & loss account | Rs. 5,00,000 |
| You need to add: Interest disallowed in excess of 12% | Rs. 24,000 (for example) |
| Also add: Remuneration disallowed to partners | Rs. 26,000 (for example) |
| Total taxable income of the partnership firm | Rs. 5,50,000 on which income tax payment is calculated |
Note – That you can take a salary from your firm and then show it as income while filing your personal return.
But, if you want to take profit then first, you need to pay income tax at 30% on the firm’s profit and then it will be distributed between the partners. Share of profits is not taxable in the hands of individual partners.
For example, if your partnership firm has paid you Rs. 1 Lakh as salary, then it will be treated as your salary income and will be clubbed with other income and taxed as per the slab rates.
But, if your partnership firm pays 30% tax (suppose income is Rs. 5.5 Lakhs) i.e 5,50,000 x 30 / 100 = Rs. 1,65,000 as taxes, then you are remaining Rs. 3,85,000 can be divided among the partners in agreed proportions as per the deed.
The amount received by each partner will not be taxable in the hands of individual partners.
Income Tax Slab for Online Business in India FY 2020-21
#1. Income Tax Slab For Online Business Done as Sole Proprietorship
Proprietorships are considered to be the same as the individual and the income tax return filing procedure for a sole proprietorship is similar to individual income tax return filing.
The income tax rate for a proprietorship is the same as the income tax rate for individuals. You can either follow the old income tax slab or opt for the slab under the new tax regime for your online business.
Income tax rates for individuals under new tax regime for FY 2020-21
| Income Tax Slab | Tax Rate |
| Up to Rs. 2.5 Lakhs | NIL |
| Rs. 2.5 Lakhs to Rs. 5 Lakhs | 5% |
| Rs. 5 Lakhs to Rs. 7.5 Lakhs | 10% |
| Rs. 7.5 Lakhs to Rs. 10 Lakhs | 15% |
| Rs. 10 Lakhs to Rs. 12.5 Lakhs | 20% |
| Rs. 12.5 Lakhs to Rs. 15 Lakhs | 25% |
| Rs. 15 Lakhs and above | 30% |
If you want to opt for the income tax slabs as per the new tax regime from FY 2020-21 onwards then you will have to give up certain exemptions and deductions.
This includes deduction under section 80C, 80D, 80E, HRA, professional tax, standard deduction and LTA among others.
Income tax rates for individuals as per the old slabs
| Income Tax Slab | Tax Rate |
| Up to Rs. 2.5 Lakhs | NIL |
| Rs. 2.5 Lakhs to Rs. 5 Lakhs | 5% |
| Rs. 5 Lakhs to Rs. 10 Lakhs | 20% |
| Above Rs. 10 Lakhs | 30% |
#2. Income Tax Slab For Online Business Done as Partnership Firm
If you are carrying your online business with someone as a partnership firm then the applicable tax rate for FY 2020-21 is as under.
| Type | Tax Rate |
| Partnership firm | Flat rate of 30% |
| Limited Liability Partnership (LLP) | Flat rate of 30% |
In case, the income from your online partnership business is more than Rs. 1 Crore in any financial year then you would also need to pay the surcharge at the rate of 12%.
Calculate Income Tax Liability for Small Online Business
#1. For Online Business Running as Sole Proprietorship
You arrive at the aggregate gross income after clubbing your online business income with your other income. Then you need to deduct the amount of investments that you have made under 80C and other sections of chapter VIA.
You are supposed to pay income tax on the balance amount as per the above slab rates.
For example,
| Particulars | Amount |
| Income from salary | Rs. 10,00,000 |
| Income from online business (assumed to be calculated as per presumptive scheme) | Rs. 90,000 |
| Other Income | Rs.10,000 |
| Gross Income | Rs. 11,00,000 |
| Deduction under Chapter VI-A | Rs. 1,50,000 |
| Taxable Income | = Rs. 9,50,000 which will be taxed as per the income tax slab rates. |
#2. For Online Business Running as Partnership Firm
After adjusting the remuneration paid and the excess interest paid to the partners as per the law (subjects to limits and conditions under section 40b) you arrive at the taxable income.
The income tax liability of the partnership firm is 30% of the taxable income.
For example,
| Particulars | Amount |
| Suppose the net profit of the firm as per the profit & loss account | Rs. 5,00,000 |
| You need to add: Interest disallowed in excess of 12% | Rs. 24,000 (for example) |
| Add: Remuneration disallowed to partners | Rs. 26,000 (for example) |
| Total taxable income of the partnership firm | Rs. 5,50,000 |
| Income Tax Liability @ 30% | = Rs. 5,50,000 x 0.30 = Rs. 1,65,000 |
Filing Income Tax Return
You need to pick ITR 4S if you are filing tax returns for your online business using the presumptive taxation scheme. Both sole proprietorship and partnership firms can file ITR 4S.
Below are the steps that you need to follow in order to file IT returns for your online business.
#1. Visit Income Tax Website
Visit the Income Tax Department’s official website. Log in with your PAN as ID and your password. You will get the following window.
Select e-file and from the dropdown menu choose the option “Prepare and Submit Online ITR”. You will get the window where you need to fill in the PAN details, assessment year, address and choose the option to digitally sign.
Select the ITR 4S form from the dropdown and click the submit tab.
#2. Check the Personal Information Page
The page opens up in the dashboard with personal information. A few of the information will be already taken from the earlier IT return filings and the PAN database.
Check the personal information for inaccuracies, if any.
Scroll down and in the section “Filing Status” select the option “ON or before the Due Date” option for return filing.
#3. Filing Income Details
The “Income Details” page will be blank because the boxes pick values when you fill in the numbers on the adjacent “NOB BP” page. NOB BP stands for the nature of business or profession.
Click on the NOB BP page and open the dropdown menu to select the nature of your online business.
Select from the list the appropriate nature of your online business that closely resembles your business activities.
Scroll down to find the section on filing the presumptive income details.
Provide your income amount as calculated under the presumptive taxation scheme.
When you do that, the income details page automatically fetches the income numbers and the tax liability is calculated.
#4. Check the Tax Paid and Verification Page
The rest of the tax calculation and the status (tax payable or refund) gets automatically populated under the “Taxes Paid and Verification” page.
Check for the correctness of the figure.
Provide your bank account details in the below section and fill in the declaration form at the last. Click on the “Preview & Submit” button to file IT returns.
You have the option to e-verify your online business IT return using the digital signature certificate, net banking, or your Aadhar card.
Income Tax Return Filing Dates
The due date for filing income tax returns is under.
| Particulars | IT Return Filing Date |
| Filing Tax Returns under the Presumptive Taxation Scheme | Latest by 31st July |
Due to COVID-19, the Government has extended the last date for tax return filing for FY 2019-20 till 30th November 2020.
Tips for Online Business
- Get all your business statements, bank statements and other investment proof ready before you start to file income tax returns.
- Choose the correct Income Tax Returns (ITR) form with respect to your online business. You need to pick ITR 4S if you are going with the presumptive taxation scheme.
- The partnership firm and the partners are separate for income tax purposes. Your share of profits from the partnership firm is exempted from income tax.
- If you have income only from the online business running as a partnership firm then also you need to file returns.
- Keep in mind the gross receipt limits when computing taxable income under the presumptive taxation scheme.
- File income tax returns before the last due date to avoid the last-minute rush. Online businesses that do not require to be audited need to file returns before 31 July every year.
Final Words
The tax return for an online business is simple to fill and easy to prepare under the presumptive taxation scheme and can be completed online, sitting from home.
You just need to maintain an excel sheet or use accounting software so that you know the total amount of gross receipts.
Disclaimer – Please note that the income tax laws have not clearly defined online business and individual online activities. The information in the article is based on the existing income tax act for small businesses and professionals.
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