Income Tax for Self Employed

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 –

  • 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

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 –


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 organisation. The individual either sells his services to various businesses without having a long term contract or is himself engaged in 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.

Tax filing for self employed

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 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
  • 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 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 details –


How the scheme works
  • The scheme of presumptive tax is applicable for self-employed assessees.
  • If the assessee is a self-employed professional, the presumptive taxation scheme would apply to him/her under Section 44DA of the Income Tax Act, if the gross receipts are below INR 50 lakhs in a financial year.
  • In case of businesses, if the turnover of the business is INR 2 crore or below in a financial year, the scheme of presumptive taxation would be applicable under Section 44AD of the Income Tax Act.
  • Under the presumptive taxation scheme, the minimum income from business is deemed to be 8% of gross receipts. In case of profession, the lowest profit is deemed to be 50% of the gross receipts.
  • If the business maintains its receipts in digital mode, i.e., in the form of cheque, credit cards, net banking proofs, etc., the minimum income for tax purposes would be calculated @ 6% of the digital receipts.
  • These percentages are applied on the income generated and the taxable income from business or profession is calculated.

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 any time, the scheme would 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 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 which is above INR 2 crore, the books of accounts of the business 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 within 31st July, they face a penalty of up to INR 10,000.


What are the exceptions to TDS deduction under section 194?

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.


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 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 –

  • 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 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 on 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 tax payer 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.


Tax rate applicable for self employed

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 –

Surcharge

  • If the total income is more than INR 50 lakhs, surcharge @ 10% of the taxable liability would be levied over and above the tax payable. So, if the tax liability is INR 10,000, 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 case of firms and limited liability partnerships, 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 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, surcharge would be @ 12%

Frequently Asked Questions

Q- How is surcharge calculated?

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 surcharge.


Q- Who are required to file their returns in ITR-3?

Self-employed tax payers who do not adopt the scheme of presumptive tax are required to file their returns in ITR–3.


Q- Is TDS deducted from the income of professionals?

Yes, the income that the professionals receive is paid after deducting TDS @ 10% under the provisions of Section 194J of the Income Tax Act.


Q- What expenses are allowed as deduction from business income?

Expenses like depreciation on equipment, rent paid for office space, client meeting and entertainment expenses, traveling costs, etc. are allowed as deduction from the income of the business.


Q- How do I calculate my self employment tax?

Ans: 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


Q- How do I file taxes as an independent contractor?

Ans: 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 upto 50 lakhs and wanting to show presumptive business income. And ITR 4 is to be filed by individuals having non presumptive business income.


Q- How much money do you need to make to file taxes as an independent contractor ?

Ans: There is no such minimum requirement to be eligible to file a tax return as an independent contractor.


Q- Is it true that self employed people pay more taxes?

Ans: 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.


Q- Do you pay self employment tax if you have a net loss for that year?

Ans: 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 business of next year(s).


Q- How do I avoid paying taxes as a Self-Employed Individual?

Ans: You can reduce your tax liability by taking maximum advantage of the exemptions and deductions provided in the income tax act.


Q- How can I reduce my quarterly taxes as a self-employed tutor?

Ans: 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.


CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.