How to File Income Tax Returns for Small Businesses in India

Income tax is a direct tax collected by the Indian government on income earned by individuals and businesses. Filing Income Tax Returns (ITR) is not just a rule, but a smart financial step if you earn above a certain limit or do specific transactions. It helps to analyze your income, claim deductions, and determine if you owe tax or a refund.

Properly filing your ITR is one of the many responsibilities that come with running a small business. To maintain tax compliance and reap the various benefits, you must select the appropriate ITR form according to your income type.

ITR-1 and ITR-4 forms for FY 2024-25 (AY 2025-26) are now available. You can use the Excel software to file them offline or the Income Tax portal to file them online. In this article, we’ll discuss how to file ITR for a small business in India.

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What is a Small Business and Proprietorship?

A small business is an independently owned business. It has a limited size, and revenue includes sole proprietorships, partnerships, or private limited companies with lower turnover. A proprietorship (or sole proprietorship) is held and run by one person. It’s not different from the owner legally, so business revenue is treated as personal income and filed under specific ITR forms.

How to File ITR Online: A Step-by-Step Guide for Small Businesses and ProprietorsE-filing of ITR is designed to be so easy without any tax knowledge. Here we will discuss how small businesses and proprietors can file ITR online quickly, along with the documents.

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Step 1: Prepare Essential Documents

First, collect bank statements, previous ITRs, TDS certificates, profit and loss statements, balance sheets, and investment proofs for tax deductions.

Step 2: Register or Log In

Next, go to incometaxindiaefiling.gov.in.

New users: Click on ‘Register Yourself’
Existing users: Log in using PAN, password, and captcha

Step 3: Download ITR Utility

Next, go to ‘Downloads’ on the dashboard.

And now choose the right Assessment Year and download ITR-3 or ITR-4 utility (Excel or Java-based), according to your business type.

Step 4: Fill in the ITR Form

Now, open the utility and fill in the personal info, income, deductions, and taxes paid. The form auto-calculates your tax.

Step 5: Validate and Generate XML File

Then click on ‘Validate’ to check for errors. If all is good, generate the XML file for upload.

Step 6: Upload XML File

Select Assessment Year, ITR Form, and ‘Upload XML’.

Browse and upload your XML file.

Step 7: Verify the Return

Verify using Aadhaar OTP, EVC (via bank/Demat), or DSC.

If not e-verifying immediately, print, sign, and send ITR-V to CPC, Bangalore, within 120 days.

Step 8: Receive Acknowledgment

If you once verified, you’ll get an acknowledgment from the Income Tax Department, also sent to your registered email.

How to File ITR Through Offline

Filing ITR using the offline method is also another easy method for small businesses and individuals. Here’s a step-by-step guide to help you file your return offline:

Step 1:

First, go to the Income Tax e-Filing Portal and head to the Downloads section.

Step 2:

Next, download the Common Offline Utility on your system.

Step 3:

Now, open the utility and click on the ‘File Return’ option.

Step 4:

And then, on the next page, choose the ‘Download Pre-fill’ option.

Step 5:

Next, enter your PAN and assessment year, then click ‘Proceed’.

Step 6:

And log in to the offline utility using your user credentials.

Step 7:

Here, you will see your name, PAN, assessment year, and download date. Now click ‘File Return’.

Step 8:

Now choose your status like Individual, HUF, or Others. Then select the correct ITR form (like ITR-3 or ITR-4).

Step 9:

Fill in general information like your address and bank details. Make sure your bank info is accurate.

Step 10:

Enter your income details. The utility fetches data from Form 26AS. Add any missing income manually.

Step 11:

Preview your income, TDS, and tax details. Validate and provide a declaration. Then, download the file.

Step 12:

Step 13:

Select:

Assessment Year
Filing Type
ITR Type

Then proceed

Step 14:

Attach the file you downloaded and proceed to confirmation.

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Why is ITR Filing Important?

Legal Requirement – Filing ITR is mandatory and skipping it may lead to penalties.
Financial Proof – It helps when applying for loans and credit.
Tax Planning – It is used for deductions and exemptions to save tax.
Tenders & Contracts – It is needed for applying to government tenders.
Loss Carry Forward – It carries business losses to the next year.
Financial Record – It helps to build trust with banks, investors, and partners.

What is Business Income?

Business income is earnings from trade, commerce, profession, or services, which include:

Profits from a retail shop
Freelance design income
Revenue from a digital marketing agency

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Which ITR Form Should You Use?

ITR-3: It is used for individuals/HUFs with business/profession income, salary, capital gains, etc.
ITR-4 (Sugam): It is for small businesses (turnover up to ₹2 crore) and professionals (receipts up to ₹50 lakh) under the presumptive scheme.
ITR-5: It is for firms, LLPs, and societies.

Documents Required for Filing ITR for Business

PAN Card – It is required for identification.
Aadhaar Card – It is mandatory for most businesses.
Profit and Loss Statement (P&L) – It summarizes income and expenses.
Balance Sheet – It shows financial position including assets, liabilities, and capital.
Bank Statements – They match income and expenses.
GST Number – If your business is registered under GST.
TDS Certificates – It is for tax deducted on payments.
Loan Documents – It is for claiming interest rebates.
Tax Payment Challans – Keep copies of advance or self-assessment tax payments.
Records of Fixed Assets – It is for any additions or sales during the year.

How to File ITR for Business Income?

Collect documents – Like P&L, balance sheet, and GST returns.
Calculate taxable income – Subtract business expenses from total income.
Choose the right form – Based on the nature of your income.
File online or offline – Use the income tax portal or utility.
Verify your return – With Aadhaar OTP or by sending a signed copy to CPC

Benefits of Filing ITR

Stay legally compliant
Claim deductions
Build creditworthiness
Get refunds faster

Taxation Schemes for Business Income

Regular Taxation – Pay tax on actual profits. Suitable for larger businesses.
Presumptive Taxation – Pay tax on a fixed % of turnover:

8% for cash turnover
6% for digital turnover
50% for professionals

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Common Mistakes to Avoid

Avoiding Common Mistakes in ITR Filing:

Incorrect or Incomplete Disclosure of Income – Always report all sources.
Misconceptions about Deductions – Don’t claim wrong ones or miss eligible ones.
Errors in Basic Information – Check PAN, bank details, and contact info.
Computational Errors – Mistakes in income or tax calculation.
Not Maintaining Proper Documents – Keep bills and receipts to support your claims.
Missing Deadlines – Leads to penalties and loss of benefits.
Inappropriate ITR Form – Using the wrong form can cause rejection.

Common Mistakes Summary

Choosing the wrong form
Forgetting deductions
Missing deadlines

Important Deadlines

31st July – For individuals (non-auditable accounts)
30th September – For businesses that require an audit

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Tips to Simplify Filing

How to Avoid These Errors:

Keep a Record of All Income – Track everything throughout the year.
Know Available Deductions – Talk to a tax advisor regularly.
Double Check Information – To match all details and documents.
Use Reliable Tax Services – Avoid errors and get expert support.
Keep Proper Records – Save receipts and tax-related files.
Set Reminders for Deadlines – Stay ahead of time to avoid the rush.
Select the Correct ITR Form – Choose the ITR form according to your income and business type.
Consult Tax Experts – Don’t wait till year-end—be proactive

Also,

Use good accounting software
Hire a tax consultant if you needed
Stay updated on tax laws

Filing the correct ITR is more than a rule because it’s smart business management. You can focus on growing their business with the right knowledge, and small business owners and freelancers can file confidently.

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Common Deductions and Benefits for Small Businesses

List of Deductions and Tax Benefits:

Business Expense Deductions – Rent, utilities, office supplies, repairs, etc.
Depreciation – Claim for capital assets like machinery and furniture.
Benefits to Employees – Deductions for health plans, insurance, retirement benefits.
Professional Fees – Legal, accounting, or consultancy service fees.
Advertising and Marketing – Expenses for ads and website maintenance.
Education and Training – Costs for skill improvement for you or employees.
Home Office Expenses – Interest, utilities, repairs if used for business.
Travel Expenses – Lodging, transport, meals during business trips.
Interest – On business loans or credit used for business.
Bad Debts – Write off amounts you didn’t recover from clients.

Frequently asked questions

1.Which ITR is applicable for business income?

Forms ITR-3, ITR-4 (Sugam), and ITR-5 are used for business income. The ITR-3 form is for individuals or HUFs earning from a business or profession. The ITR-4 form is for people using the presumptive taxation scheme. The ITR-5 form is for firms, LLPs, and cooperative societies.

2. Can I file ITR for my small business online?

Yes, you can easily file ITR for your small business online using the Income Tax Department’s portal or any authorized platform. It’s real, fast, and convenient.

3. What is presumptive taxation under ITR for small businesses?

Presumptive taxation under ITR for small businesses declares income as a fixed percentage of turnover. It makes tax filing easier. Businesses with a turnover up to ₹2 crore can use ITR-4 for this.

4. What is ITR-4 for?

ITR-4 form is for people using the presumptive taxation scheme. It is the best for small businesses with turnover up to ₹2 crore and professionals with receipts up to ₹50 lakh. It makes filing fast and easy.

5. Which ITR form should a small business use?

If you run a proprietorship, use ITR-3 or ITR-4. ITR-3 is for those who keep regular books. ITR-4 is for those using the presumptive taxation scheme.

6. When should I use ITR-3 or ITR-4?

You use ITR-3 if your business income is calculated with regular tax rules. You use ITR-4 if you qualify for presumptive taxation, where income is based on turnover—it’s easier for small businesses and professionals.

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