ITR-3 vs ITR-4: Which Tax Return Form Should Freelancers File?
Complete decision tree to choose between ITR-3 (regular accounting) and ITR-4 (presumptive taxation under 44ADA)
Written by
CA Ashama Rajawat
The Core Difference
For business/profession with regular accounting (actual income minus actual expenses)
- Maintain books of accounts
- Claim actual expenses
- More complex, flexible
- For ALL business income scenarios
For presumptive taxation under Section 44ADA (50% deemed profit)
- No books required
- 50% of income = profit (automatic)
- Simple, fast filing
- Only if you opt for 44ADA
Quick Decision Flowchart
Question 1: Is your gross receipt above ₹50 lakh?
→ YES:
→ NO: Continue to Q2
Question 2: Do you have high business expenses (>50% of income)?
→ YES:
→ NO: Continue to Q3
Question 3: Do you want to claim specific deductions (depreciation, business loans)?
→ YES:
→ NO: Continue to Q4
Question 4: You qualify for 44ADA!
→
Detailed Comparison Table
| Feature | ITR-3 | ITR-4 |
|---|---|---|
| Who can file | All freelancers/professionals | Only if 44ADA eligible |
| Income limit | No limit | Max ₹50 lakh |
| Profit calculation | Actual (Income - Expenses) | Deemed 50% of gross receipt |
| Books of accounts | Required | Not required |
| Tax audit | If turnover > ₹1 crore | No audit required |
| Expense claims | Actual with proof | Not applicable (50% automatic) |
| Depreciation | Can claim | Cannot claim |
| Advance tax | 4 installments (15-45-75-100%) | 1 payment by March 15 (100%) |
| Filing complexity | High | Low (Sugam = simple) |
| Best for | High expenses, large income | Low expenses, simplicity |
When to Choose ITR-3
1. High Business Expenses
Your actual expenses exceed 50% of income:
Income: ₹20 lakh
Expenses: ₹12 lakh (60%)
ITR-3 profit: ₹8 lakh
ITR-4 profit: ₹10 lakh (50% deemed)
ITR-3 saves tax on ₹2 lakh!
2. Income Above ₹50 Lakh
44ADA not available. ITR-3 is mandatory.
3. Equipment-Heavy Business
You buy expensive equipment and want depreciation benefits:
- • Camera: ₹2 lakh → Depreciation ₹30,000/year
- • Laptop: ₹1.5 lakh → Depreciation ₹24,000/year
- • Total: ₹54,000 extra deduction with ITR-3
4. Business Loan Interest
Paying EMI for business loan? Claim interest as expense in ITR-3.
When to Choose ITR-4
1. Low Business Expenses
Your actual expenses are less than 50%:
Income: ₹15 lakh
Expenses: ₹3 lakh (20%)
ITR-3 profit: ₹12 lakh
ITR-4 profit: ₹7.5 lakh (50% deemed)
ITR-4 saves tax on ₹4.5 lakh!
2. Service-Only Business
Consulting, design, coding - minimal overhead. 44ADA perfect fit.
3. Simplicity Priority
Don't want to maintain detailed books, track every expense, or hire CA for complex filing? ITR-4 is hassle-free.
4. First-Time Filers
New freelancer with income below ₹50L? Start with ITR-4 (Sugam) - it's beginner-friendly.
Real-World Example Comparison
Freelance Developer: ₹25 lakh annual income
Scenario A: File ITR-3
Income: ₹25,00,000
Actual expenses tracked:
- • Software: ₹1,00,000
- • Internet/phone: ₹24,000
- • Laptop depreciation: ₹30,000
- • Home office: ₹1,20,000
- • Travel: ₹50,000
- • Marketing: ₹30,000
Total expenses: ₹3,54,000
Taxable profit: ₹21,46,000
Tax (30%): ₹6,43,800
Scenario B: File ITR-4 (44ADA)
Income: ₹25,00,000
Deemed profit: 50%
Taxable profit: ₹12,50,000
(No need to track/prove expenses)
Tax (30%): ₹3,75,000
Saves ₹2,68,800!
Conclusion: This developer has low expenses (14%), so ITR-4 is clearly better. If expenses were ₹15 lakh (60%), ITR-3 would be smarter.
Can You Switch Between ITR-3 and ITR-4?
ITR-4 to ITR-3
Yes, you can switch anytime. If you opt out of 44ADA, file ITR-3 instead. No restrictions.
ITR-3 to ITR-4
Yes, but with a condition:
If you opt out of 44ADA (file ITR-3), you cannot return to 44ADA (ITR-4) for the next 5 years. Choose carefully!
Common Mistakes
Wrong Form for High Expenses
Filing ITR-4 when actual expenses exceed 50% (paying unnecessary tax)
No Books Maintenance
Filing ITR-3 without maintaining proper books (audit issues)
5-Year Lock-in Ignored
Opting out of 44ADA without calculating 5-year impact
Income Limit Exceeded
Filing ITR-4 with income > ₹50 lakh (invalid return)
Conclusion
Choose ITR-4 if you have low expenses (under 50%) and want simplicity—it's a massive tax saver for service-based freelancers. Choose ITR-3 if you have high expenses, equipment depreciation, or income above ₹50 lakh. Calculate both scenarios before deciding, and remember: opting out of 44ADA locks you out for 5 years. When in doubt, consult a CA to maximize savings.