Income Tax for Self-Employed: Taxable Income & Deductions

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.

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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/she 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 –

Presumptive Taxation Scheme

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. This method is applicable only if the assessee has opted for the presumptive taxation scheme.

Profits under Business and Profession Head

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. Calculating taxes is made simple and hassle-free with Tax2win's Income Tax Calculator, including a self-employed tax calculator in India. This user-friendly tool helps you quickly and accurately determine your tax liability, making the process of managing your finances more efficient and stress-free.

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Applicable ITR Forms for Self-employed Individuals

ITR-3 vs ITR-4 for Self-Employed Individuals in India

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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 44AD, 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 ADA: 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 that 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. Taxpayers 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 75 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 3 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

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.

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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. This method is applicable for those who have not opted for the presumptive income scheme. 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 ₹75 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 ₹3 crores. It's important to adhere to these regulations to ensure accurate reporting and compliance with tax requirements.

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Expenses that can be Claimed as Deduction Against Income

• Rent of the Property
  If you rent a property for work purposes, you can claim the rent paid as a deduction.
• Repair Costs
  You can claim repair expenses for a rented property if you have agreed to bear them. If you own the business property and carry out repairs, those expenses are also deductible. Additionally, repairs to work-related equipment like laptops or printers can be claimed.
• Depreciation on Capital Assets
  When you buy an asset that lasts more than a year, such as a laptop, you can't deduct the full cost in the year of purchase. Instead, you deduct a fixed portion of its cost every year—this is called depreciation.
  For example, if you buy a laptop for ₹60,000 and use straight-line depreciation of 33.33% per year, you can deduct ₹20,000 each year for three years. The Income Tax Act specifies the method and rate of depreciation, which must be followed.
• Office Expenses
  You can claim costs related to your work, such as buying office supplies, a printer, paying for your phone or internet bills, and conveyance expenses.
• Travel Expenses
  Travel costs incurred for meeting clients, whether in India or abroad, are allowed as deductions.
• Meal, Entertainment, or Hospitality Expenses
  You can claim expenses for client meetings, business meals, or outings—provided the purpose is to get new business or maintain existing relationships.
• Local Taxes and Insurance on Business Property
  You can deduct local taxes and insurance paid for your business property.
• Digital Tools and Subscriptions
  Expenses for domain registration and tools or apps used for testing your product are also allowed as deductions.

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Tax Rate Applicable for Self-employed (Old regime)

The tax rates applicable to self-employed persons under the old regime depend on the individual’s age. The tax liability of self-employed individuals is calculated based on the following tax brackets

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Tax Rate Applicable for Self-employed (New regime)

The tax rates under the new regime are the same for all types of assesses irrespective of age or nature. Given below are the slab rates applicable for self-employed persons under the new regime -

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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 tax is calculated @ 30% if the taxable income is up to INR 1 crore. If income is above INR 1 crore, the 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%.

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Income Tax Deductions for Self-employed

• Section 80C Deductions - It allows a deduction of Rs. 1.5 lakhs investments made in tax-saving instruments. Some common investments include PPF, NSC, NPS, FDs, life insurance premiums, ELSS, and ULIPs.
• Claimable Expenses - As a businessperson or self-employed individual, you can claim deductions on various business expenses under the Income Tax Act, 1961, helping reduce your taxable income. However, you must maintain valid proof of these expenses to claim them.
• Deduction for Health Insurance - If you have purchased health insurance for yourself or your family, you can claim tax deductions under Section 80D. You can avail a deduction of up to ₹25,000 for medical insurance premiums paid for yourself, your spouse, or dependent children, and an additional ₹25,000 for a policy covering your parents. If any insured person is a senior citizen, the deduction limit increases to ₹50,000 per category. Thus, the total deduction can go up to ₹1 lakh if both self/family and parents are senior citizens.
• Deduction for Education Loan - If you have taken an education loan for higher studies for yourself, your spouse, or your children, you can claim a tax deduction under Section 80E of the Income Tax Act. This deduction applies only to the interest component of the EMI paid on the loan. There is no upper limit on the amount that can be claimed as a deduction under this section.
• Interest on a Business Loan - If you have taken a business loan for expansion or growth, the interest paid on the loan can be claimed as a tax deduction since it is considered a business expense. There is no upper limit on the amount you can claim as a deduction for business loan interest.
• Deduction Under Section 87A - If you have chosen the new income tax regime, you can claim an additional deduction of ₹12,500, but only if your annual taxable income (after other deductions) is less than ₹7 lakh.

Note: The rebate under section 87A has been increased to Rs.60,000, which means, income upto Rs.12 lakhs will be tax-free. However, this increased limit will be applicable for ITR filing in FY 2025-26.

ITR filing for FY 2024-25 is about to begin, and this is your chance to file your ITR accurately and avoid income tax notices and penalties. Therefore, it is advisable to seek help from experts. From tax planning to tax filing and notice resolution, Tax2win’s experts can help you with everything related to taxes. Book an online CA now!

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