Income Tax for the Self-Employed, Business Person and Freelancers
Income tax for the self-employed, business person and freelancers in India is a complex process. There are many deductions and exemptions that you can claim which will reduce your tax liability. This article will help to demystify the process and provide some tips on how to minimise your tax burden.
How Your Income Is Treated
As a self-employed person, your income is not coming from one employer's account. Instead, you are getting it from different customers or clients. In the eyes of the Income Tax Department, your income will be considered as ‘Business Income.’
This type of income is taxed differently than the salary that you earn from a single employer. The first thing to understand is how this type of income is taxed in India.
Income from the business is taxed under the head of ‘Profits and Gains from Business or Profession and taxes are calculated accordingly.
However, certain deductions are allowed before taxes are calculated. These deductions help to reduce your taxable income and, ultimately, your tax liability. Let’s look at some of the most common deductions that you can claim.
Common Deductions for Business Income
There are many deductions that you can claim as a self-employed person or business owner. Some of the most common ones include:
1. Expenses incurred to earn an income: This includes all the expenses that are necessary to run your business. For example, office rent, business travel expenses, cost of raw materials, meeting with clients, etc.
2. Depreciation: This is a deduction that is available for the wear and tear of machinery, equipment, and other assets used in the business. The percentage of depreciation allowed for different things is mentioned in the Income Tax Act itself.
3. Home office expenses: If you have a dedicated space in your home that is used solely for work, you can claim a deduction for a portion of your rent or mortgage interest, property taxes, and utility bills.
4. Interest on capital borrowed: If you have taken a loan to finance your business, the interest payments on that loan are tax deductible.
5. Bad debts: If you have extended credit to customers who have not paid you, you can claim this amount as a deduction.
6. Provision for doubtful debts: This allowance is made for customer debts that may not be collected.
7. Taxes and cesses: Any taxes you are paying related to your business, such as professional tax or property tax, can be deducted from your business income.
8. Insurance: The premiums paid for business insurance policies are also deductible.
9. Other deductions: There are many other deductions that may be available, depending on the type of business you are running. For example, research and development expenses, donations made to approved charities, etc.
How to Calculate Your Tax Liability
Once you have taken all the eligible deductions into account, you will need to calculate your tax liability. This can be done using the following formula:
- Taxable Income = Total Income – Deductions
- Total Tax Payable = Taxable Income x Tax Rate
The following income tax rates apply for the financial year 2021-22 (the assessment year 2022-23).
- Income up to Rs 2.5 lakh: NIL
- Rs 2.5 lakh to Rs 5 lakh: 5%
- Rs 5 lakh to Rs 10 lakh: 20%
- Above Rs 10 lakh: 30%
New Regime - section 115BAC
- Income up to Rs 5 lakh: NIL
- Rs 5 lakh to Rs 7.5 lakh: 10%
- Rs 7.5 lakh to Rs 10 lakh: 15%
- Rs 10 lakh to Rs 12.5 lakh: 20%
- Rs 12.5 lakh to Rs 15 lakh: 25%
- Above Rs 15 lakh: 30%
However, if you are a resident of India but not a citizen, or you operate as a different type of entity such as a firm or a company, then you may be subject to different tax rates.
Two Types of Accounting Methods Available
There are two types of accounting methods available for businesses in India – cash method and the accrual method.
Cash method is where you only record transactions when money exchanges are involved. This means that you will only declare income when you have received payment from the customer, and expenses when you have actually paid them.
The accrual method is where you record transactions when they occur, regardless of when the money changes hands. This means that you will declare income when the work is done, and expenses when they are incurred, even if you have not yet received or paid the money.
Which accounting method you use will depend on the type of business you are running and your preference. Many small businesses find the cash method to be simpler and easier to keep track of.
This will also influence your e-filing of income tax return and paying income tax. If you are using the cash method, then you will only need to pay tax on the income that you have actually received. If you are using the accrual method, then you will need to pay tax on the income that you have earned, even if you have not yet received payment.
Tips to Minimise Your Tax Liability
There are a few things that you can do to minimise your tax liability as a self-employed person or business owner in India. Some of the most effective tips include:
1. Make sure that you are taking all the eligible deductions. This will help to reduce your taxable income and your tax liability.
2. Pay your taxes on time. If you delay your tax payments, you may be subject to interest and penalties.
3. Invest in tax-saving instruments. There are several investment options available that offer tax benefits. For example, you can invest in equity-linked saving schemes (ELSS) or life insurance policies.
4. File your tax return early. If you file your tax return before the due date, you may be eligible for certain benefits, such as carry forward of certain losses, availability of certain deductions and exemptions etc.
We highly recommend that you avail of our online income tax return filing service if you are self-employed. We will simplify the entire process for you and ensure you pay the lowest amount possible!
Author : Nivetha
Date : 12-Jul-2022