Income Tax for Self-Employed: Taxable Income & Deductions

Budget 2024 Updates
In the 2024 interim budget, no changes were made to taxation for FY 2024-25. Finance Minister Nirmala Sitharaman retained existing tax rates for direct and indirect taxes, i.e., the changes announced for FY 2023-24 will be continued. A full budget is anticipated in July after the new government is formed after the Lok Sabha elections.

Income Tax for Self-Employed

Every Indian citizen is required to pay an income tax if he earns an income, and the income falls under the taxation of the Income Tax Act. Under Section 2 (7) of the Income Tax Act, 1961, an assessee is defined as a person or entity by whom any tax or any other sum of money is payable under this Act. Assessee includes the following –

• Salaried individual
• Self-employed individual or a proprietor of a sole-proprietorship business
• Hindu Undivided Family
• Partnership firm
• Limited Liability Partnership (LLP)
• A company which has been registered with the Registrar of Companies

The tax filing process for different types of assessees is different because their source of income is different. When filing returns under the Income Tax Act, there are five main heads of income under which the income is calculated. These heads include the following –

• Salary income
• Income from house property
• Capital gains
• Income from business or profession
• Income from other sources

In the case of salaried individuals, the head ‘salary income’ is relevant for self-employed individuals or professionals, most of the income is recorded and calculated under the head ‘income from business or profession’. As such, the tax filing process followed by salaried and self-employed individuals differs. Let’s understand how tax is supposed to be filed by self-employed assessees –

Who is a self-employed assessee?

A self-employed assessee would be an individual who does not have a fixed income or salary from an organization. The individual either sells his services to various businesses without having a long-term contract or is himself engaged in the business of trade, commerce, manufacturing, or related activities. Moreover, if an individual pursues a vocation in which he/she specializes, he would be called a self-employed professional like a doctor, lawyer, architect, etc.

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Tax filing for self-employed

The income earned by self-employed individuals is recorded under ‘income from business or profession.’ Calculation of taxable income under this head can be done in two ways, which are as follows –

• The tax liability can be calculated on the basis of presumptive taxation wherein the income is calculated without claiming any deduction for the expenses incurred by the business or profession on generating its revenue subject to certain conditions.
• The tax liability can be calculated on the real profit, which has been calculated after claiming the actual expenses incurred during the course of business or profession to generate revenue.

Tax filing under presumptive taxation scheme

The Income Tax Act has a special scheme for small taxpayers who want to avoid the hassle of maintaining and auditing their books of account. This scheme is called the Presumptive Taxation Scheme, and it covers sections 44D, 44ADA, and 44AE of the Income Tax Act 1961. Under this scheme, the taxpayer can declare their income at a fixed rate instead of calculating their actual income.

The steps to compute income under the Presumptive Taxation Scheme are as follows:

1. Section 44AD: The income from the eligible business is assumed to be a minimum of 8% of the turnover or gross receipts of the business when receipts are in cash in the financial year. However, if the business accepts digital payment through cheques, bank drafts, or an electronic clearing system, the income is assumed to be 6% instead of 8% for those transactions.
2. Section 44 DA: The income from the profession is assumed to be a minimum of 50% of the total gross receipts from the profession.
3. Section 44AE: The income from the transport business is assumed to be ₹ 1,000 per ton of gross vehicle weight for heavy goods vehicles and ₹7,500 for other vehicles for each month or part of a month.
4. The income computed as per the fixed rate is the final income, and no other deductions or expenses are allowed for the business, profession, or income.
5. The taxpayer can choose to declare a higher income than the fixed rate if they want to.

Important points to know

• The scheme of presumptive taxation is optional for self-employed businessmen or professionals
• If the scheme is not opted for, the books of accounts of the business or profession should be audited by a certified Chartered Accountant. The profit or loss from business or profession should then be calculated based on actual incomes and expenses, and then the tax should be filed.
• The scheme of presumptive taxation is applicable to Indian residents who are individuals, Hindu Undivided Families (HUFs), or partnership firms.
• The tax-saving deductions which are available under Chapter VI A of the Income Tax Act, i.e., under the different sub-sections of Section 80, would be allowed to all assessees under the presumptive taxation scheme. Tax-payers can, therefore, claim a deduction under Section 80C, 80D, 80TTA, etc.
• If the assessee has chosen to file their return under the scheme of presumptive taxation in one financial year, he/she cannot choose to opt out of the scheme in the next five financial years. Similarly, if the assessee opts out of the scheme at any time, the scheme will not be available to him/her for the next five subsequent years. So, for instance, if the assessee has opted out of the presumptive taxation scheme in the financial year 2019-20, the scheme would not be available till the financial year 2024-25. Alternatively, if the assessee has opted for the presumptive taxation scheme in the financial year 2019-20, opting out of the scheme would not be possible till the financial year 2024-25.

Auditing of accounts

• In the case of self-employed professionals, if the gross receipt in a financial year is INR 50 lakhs and above, their accounts should be audited by a certified Chartered Accountant. The tax audit report should then be submitted to the income tax department when filing the tax returns.
• If the business has an income above INR 2 crore, the business's books of accounts would have to be audited by certified chartered accountants. The auditing is required to be done in a specified format so that the taxable income can be easily calculated by a tax officer.
• Moreover, if the business or profession does not opt for the scheme of presumptive taxation, the books of accounts would have to be audited irrespective of the income generated by them.

Tax filing date

The income tax return for presumptive taxation should be filed before 31st July every year. If self-employed assessees don’t file their returns by 31st July, they face a penalty of up to INR 5000

What are the exceptions to TDS deduction under section 194?

The ITR Form, which is supposed to be used by self-employed businessmen or professionals to file their taxes, depends on the type of tax that the assessees are filing. If tax is being filed under the scheme of presumptive taxation, ITR-4 is supposed to be filled in and submitted. However, if the presumptive taxation scheme is not being adopted by the assessee, ITR–3 is required to be used for filing taxes.

Advance tax

If the estimated tax liability of a business or profession in a financial year exceeds INR 10,000, the self-employed assessee is required to pay an advance tax. Payment of advance tax is made in four installments at fixed dates and at fixed rates. The Income Tax department has fixed the following four dates for the payment of advance tax –

• 15% of the estimated tax should be paid by 15th June
• 45% of the estimated tax should be paid by 15th September
• 75% of the estimated tax should be paid by 15th December
• 100% of the estimated tax should be paid by 15th March

However, if the assessee has opted for the presumptive taxation scheme of calculating the income tax liability, the total estimated tax liability should be paid by 15th March, i.e., before the completion of the financial year, and no payment in installments is required. The only set of rules prescribed is making a payment of 100% of the tax amount by the 15th of March of the financial year.

If there is any shortfall in the payment of the advance tax or if the assessee does not pay the specified percentage of the estimated tax at the specified dates, interest would be applicable to the assessee. The rate of interest payable would depend on the provisions contained in Section 234B and Section 234C of the Income Tax Act.

Verification of income tax returns

After the income tax return is filed, the self-employed assessee is also required to verify the return. Such verification of the return can be done through a Digital Signature Certificate, net banking, or Aadhar-based OTP. If the books of accounts have been audited as per the provisions of the Income Tax Act, verification of tax returns should be done through a Digital Signature Certificate if the taxpayer cannot verify the returns through EVC (Electronic Verification Code) or any other mode. If the assessee has opted for the presumption taxation scheme of filing returns or if the books of accounts have not been audited, the assessee can choose to verify the tax return through either a Digital Signature Certificate or an Electronic Verification Code.

Tax Filing for Self-Employed Under the Real Profit Scheme

This method provides a means to calculate your self-employment tax by subtracting legitimate business expenses from your annual income and then paying taxes on the remaining profit. Here's what you need to know.

• Claiming Deductions:
  Reduce your taxable income by claiming various deductions for eligible expenses, including regular business expenses such as rent, utilities, supplies, interest on business loans, insurance premiums, employee salaries, and costs related to internet, telephone, and business travel.
• Proof of Expenses:
  Ensure you are prepared to submit evidence for each deduction claimed, such as bills, receipts, and invoices, to substantiate the legitimacy of your claimed expenses.
• Recordkeeping:
  Maintain a detailed record of your business income and expenses in a proper account book. If your annual income exceeds ₹50 Lakh, it is advisable to get your account book audited by a Chartered Accountant (CA).
• Mandatory for Certain Businesses:This method becomes obligatory if your business's annual turnover exceeds ₹2 crores. It's important to adhere to these regulations to ensure accurate reporting and compliance with tax requirements.

Tax rate applicable for self-employed (Old regime)

The tax liability of self-employed individuals would be calculated based on the following tax brackets

If the individual is aged below 60 years or is a Hindu Undivided Family, Association of Persons, Body of Individual, or an artificial judicial person

If the individual is aged between 60 years and 80 years and is a senior citizen

If the individual is aged 80 years and above and is a super senior citizen

In the Interim Budget of 2019, the Finance Minister waived the tax liability via Rebate u/s 87A for individuals whose taxable income was up to INR 5 lakhs.

Domestic companies are taxed @ 30% of their incomes. However, if the turnover or gross receipts of the company is below INR 250 crores, the tax rate would be 25%.

Tax rate applicable for self-employed (New regime)

For Hindu Undivided Family, Association of persons, Body of Individual, artificial juridical person, or Individual whose age is below 60 years:

For the Senior aged between 60 and 80 years old:

For the Super Senior citizen aged 80 years and older:

Besides the tax calculated using the above-mentioned slabs, surcharge and cess are also payable, the details of which are as follows –

Surcharge

If the total income is more than INR 50 lakhs, a surcharge @ 10% of the taxable liability would be levied over and above the tax payable. So, if the tax liability is INR 10,000, the surcharge would be INR 1000 in addition, making the total taxable liability INR 11,000

If the total income is more than INR 1 crore, the rate of surcharge would be 15% of the calculated tax liability. So, in the above example, the surcharge would become INR 1500, and the total tax liability would become INR 11,500

In the case of firms and limited liability partnerships, the surcharge is calculated @ 30% if the taxable income is up to INR 1 crore. If income is above INR 1 crore, surcharge would be @ 12%

In the case of domestic companies, surcharge is @ 7% if the income is more than INR 1 crore. If the income is more than INR 10 crores, the surcharge would be @ 12%.