Self-Employed Taxation in India: Tips to Maximize Savings
In India, if you are earning any kind of income, then you need to pay income tax. This income can be through salary, my own business, or any other source. So, self-employed individuals also need to pay taxes as per the Income Tax Act of 1961.
Self-employed individuals work for themselves and earn profits in the form of income. They have full freedom to plan out their taxes by controlling expenditures, thereby reducing their tax liability.
Who is Self-Employed?
A self-employed individual is one who sells his or her services to various employers but is not bound by any kind of contract with any of them. They don't have a salary or fixed income from any organization. They earn income from the business of trade, commerce, manufacturing, or related activities.
Self-employed professionals, like lawyers, architects, doctors, painters, authors, astrologers, etc., are considered specialized individuals in their respective fields. As per the Income Tax Act, income of self-employed is categorized under the head of "Profit and gain from Business or Profession". Freelancers providing services are also considered self-employed and are taxed similarly.
Calculation of Taxable Income of Self-Employed
For taxation purposes, the Income Tax Act allows two ways to calculate the taxable income of self-employed individuals:
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Calculate the taxable income on a presumptive basis without claiming any deductions for expenditures.
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Calculate all the costs and derive the real profit. In this case, maintaining proper books of accounts is necessary. If income exceeds ₹50 lakhs, accounts need to be audited by a chartered accountant.
Taxation for Self-Employed in India
Self-employed individuals can claim several tax deductions from their gross taxable income by filing Income Tax Returns (ITR). Various business-related expenses, such as interest on advances, insurance, depreciation of assets, employee salaries, and other daily expenses, are taken into consideration. Expenses like electricity bills, telephone bills, internet bills, travel costs, etc., are also considered while calculating gross income.
Presumptive taxation allows self-employed professionals and small businesses earning less than ₹50 lakhs in a financial year to claim expenses at the rate of 50% of the gross income. Income tax is then calculated on the remaining 50% of gross income without requiring any proof of expenses.
Tax Filing for Self-Employed
Self-employed individuals can use the ITR-4 form or ITR-4S form to file their tax returns. ITR-4 form is for professionals and proprietors, while ITR-4S form is for those who adopt the presumptive taxation method.
Under ITR-4, you can claim all expenses spent to earn income. Valid proof is required to justify these expenses. In ITR-4S, a percentage of receipts is considered as net income, and tax is paid on that without deducting expenses.
If a self-employed individual earns over ₹1 crore through business or over ₹50 lakh through profession in a financial year, their books of accounts need to be maintained and audited.
Surcharge
After calculating income tax, a surcharge is added based on the total income:
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If total income is above ₹50 lakhs but does not exceed ₹1 crore, a surcharge of 10% is levied.
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If total income is above ₹1 crore but does not exceed ₹2 crore, a surcharge of 15% is levied.
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If total income is between ₹2 crore and ₹5 crore, a surcharge of 25% is applied.
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If total income is above ₹5 crore, a 37% surcharge is levied in the old tax regime and 25% in the new tax regime.
Conclusion
Self-employed individuals also need to file tax returns and pay taxes in India. They can calculate their tax as per any of the two methods mentioned in this blog. Proper record-keeping of expenses is essential, as they would be required while filing tax returns. ITR-4 or ITR-4S forms are used to file tax returns for self-employed individuals.