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Every Indian citizen is required to pay an income tax if he earns an income. An income generating entity is called an assessee which, under Section 2 (7) of the Income Tax Act, 1961, 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 –
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 –
While, in 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 –
A self-employed assessee would be an individual who does not have a fixed income or salary from an organisation. 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 specialises, he would be called a self-employed professional like a doctor, lawyer, architect, etc.
The income which is 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 concept of presumptive taxation is relatively new and so many self-employed tax-payers are not very conversant with the concept. So, let’s understand the presumptive tax scheme in detail –
The income tax return for presumptive taxation should be filed before 31st July every year. If self-employed assessees don’t file their returns within 31st July, they face a penalty of up to INR 10,000.
TheITR Form which is supposed to be used by self-employed businessmen or professionals for filing 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 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 done in four instalments at fixed dates and at fixed rates. The Income Tax department has fixed the following four dates for the payment of advance tax –
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 instalments is required. The only set of rules prescribed is making payment of 100% tax amount by 15th 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.
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 returnthrough either a Digital Signature Certificate or an Electronic Verification Code.
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
Taxable income level | Rate of tax |
Up to INR 250,000 | Nil |
INR 250,001 to INR 500,000 | 5% of the income exceeding INR 2.5 lakhs |
INR 500,001 to INR 10,00,000 | 5% of the income exceeding INR 2.5 lakhs + 20% of the income exceeding INR 5 lakhs |
INR 10,00,001 and above | 5% of the income exceeding INR 2.5 lakhs + 20% of the income exceeding INR 5 lakhs + 30% of the income exceeding INR 10 lakhs |
If the individual is aged between 60 years and 80 years and is a senior citizen
Taxable income level | Rate of tax |
Up to INR 300,000 | Nil |
INR 300,001 to INR 500,000 | 5% of the income exceeding INR 2.5 lakhs |
INR 500,001 to INR 10,00,000 | 5% of the income exceeding INR 2.5 lakhs + 20% of the income exceeding INR 5 lakhs |
INR 10,00,001 and above | 5% of the income exceeding INR 2.5 lakhs + 20% of the income exceeding INR 5 lakhs + 30% of the income exceeding INR 10 lakhs |
If the individual is aged 80 years and above and is a super senior citizen
Taxable income level | Rate of tax |
Up to INR 500,000 | Nil |
INR 500,001 to INR 10,00,000 | 20% of the income exceeding INR 5 lakhs |
INR 10,00,001 and above | 20% of the income exceeding INR 5 lakhs + 30% of the income exceeding INR 10 lakhs |
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% on their incomes. However, if the turnover or gross receipts of the company is below INR 250 crores, the tax rate would be 25%.
Besides the tax calculated using the above-mentioned slabs, surcharge and cess is also payable the details of which are as follows –
A Surcharge is calculated on the amount of tax that is payable. The surcharge would be calculated and added to the tax liability and the assessee would then have to pay the total tax including the surcharge.
Self-employed tax payers who do not adopt the scheme of presumptive tax are required to file their returns in ITR–3.
Yes, the income that the professionals receive is paid after deducting TDS @ 10% under the provisions of Section 194J of the Income Tax Act.
Expenses like depreciation on equipment, rent paid for office space, client meeting and entertainment expenses, travelling costs, etc. are allowed as deductions from the income of the business.
Self employment tax is a tax calculated on the earnings of a businessman or self-employed individual. It is calculated at the rates in force on the net earnings from self-employment which are obtained after subtracting your business expenses from your business revenues
You can file ITR 3 or ITR 4 to file a return as an independent contractor. ITR 4 is to be filed by individuals having income up to 50 lakhs and wanting to show presumptive business income. And ITR 4 is to be filed by individuals having non-presumptive business income.
There is no such minimum requirement to be eligible to file a tax return as an independent contractor.
It varies from case to case. Salaried individuals and self-employed both have been given ample ways of saving taxes in the form of exemptions and deductions. And moreover once the income of an individual from all the five heads is aggregated to obtain net total income, it is taxed at uniform rates subject to certain exceptions.
No, tax is not required to be paid on a loss from business. Further losses can be carried forward to be set off against the profits from the business of next year(s).
You can reduce your tax liability by taking maximum advantage of the exemptions and deductions provided in the income tax act.
You can reduce your taxes by estimating investments in tax saving instruments and deducting all the expenses related to that quarter for the income or if any month is your off-season, so it will automatically reduce your quarterly taxes.
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