Income Tax for the self-employed, BusinessPerson and Freelancers


As per the Income Tax Act, 1961, income tax of Self-employed persons is levied under the head “Profit and gain from Business or Profession”. A self-employed earner has to file his taxes in Income Tax Return– 4 (ITR-4). He is allowed to claim the expenses incurred to earn revenue from the profession. These expenses are deductible subject to submission of valid proofs.

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Introduction

Indian taxation law levies direct taxes on every citizen who has a source of earning. Based on the source of earning and kind of profession one is involved in, the income tax department has categorized its provisions accordingly.

A businessperson or a freelancer is a self-employed person. They provide their services to different persons or organizations for short periods or subject to a contract. In computing income tax for the self-employed, one has to follow the provisions of ITR-4S or ITR-4 based on previously specified requirements.

Basic Matters

For the computation of taxes, one needs clarity on certain basic aspects of the exercise – for example, income and the tax treatment on that, handling Tax Deducted at Source (TDS), and, most importantly, choosing the right form of ITR.

Understand how to tax treat your income

Income tax filing for the self-employed is quite different when compared to the procedure for filing taxes when one is a salaried employee. The self-employed do not have a fixed account from where their income is credited. Rather it is incumbent upon a self-employed person to compile all their incomes together.

The tallied income of a self-employed person is known as the combined income. From the perspective of filing taxes, the experts at Vakilsearch can help with computation.

Here, all the gains and earnings from other sources, no matter how small, have to be included in the gross income for the year.

Tax deducted At Source

TDS is applicable for both the salaried and the self-employed. Sec. 194J of the Income Tax Act of 1961 mandates the deduction of 10% of payments made to the self-employed.

For example, if you are a freelance writer and you take up a project worth Rs. 10,000, you will receive Rs. 9000 after Rs. 1000 (10% of Rs. 10,000) is deducted from the total amount.

Tax Audit

Profit is to be computed after the deduction of all loss and expenses incurred in the process of earning the gross income. In other words, the net income is considered profit.

Self-employed persons are generally not entitled to submit an audit report. In case the gross receipt is Rs. 50 lakhs or more in the concerned financial year, then the income has to be audited.

Presumptive Taxation Scheme

The presumptive taxation scheme has been introduced for professionals whose gross total receipt is less than Rs. 50 lakhs while the total income of the business is less than Rs. 2 crores in a financial year.

Here, the profit is calculated on an assumption of 8% of the gross receipt for businesses and 50% of the gross receipts of the profession in the financial year. The assessee has to pay income tax following the income tax slab applicable in this case.

Under this scheme, the assessee does not need to keep records and books of accounts. This scheme is optional in nature. The assessee can follow this scheme or follow a more traditional method whereby all accounts are audited by a chartered accountant.

The assessee filing tax under the presumptive scheme is eligible to claim a tax deduction under Sec. 80C and deduction on tax-saving medical insurance premiums under Sec. 80D of the Income Tax Act. Additionally, benefits under Sec. 8 Chapter VI A can also be availed.

Also, it is not incumbent upon a person availing presumptive taxation this year to follow the same every year. One can just as easily opt out of this scheme and file their tax returns by following traditional means in the following year. However, once an assessee has opted out, they cannot opt for assessment under the presumptive scheme for the next five consecutive financial years.

Calculator of Income Tax for the Self-employed

After the tax formula and rules are discussed comes the tax slab:

  • For assessees up to 60 years of age

For Income up to Rs. 2,50,000Nil
For Income between Rs. 2,50,000 and Rs. 5,00,0005% of the amount in excess of Rs. 2,50,000
For Income between Rs. 5,00,000 and Rs. 10,00,00020% of the amount in excess of Rs 5,00,000
For Income above Rs. 10,00,00030% of the amount in excess of Rs. 10,00,000

  • For assessees aged between 60 years and 80 years

For Income up to Rs. 3,00,000Nil
For Income between Rs. 3,00,000 and Rs. 5,00,0005% of the amount in excess of Rs. 3,00,000
For Income between Rs. 5,00,000 and Rs. 10,00,00020% of the amount in excess of Rs 5,00,000
For Income above Rs. 10,00,00030% of the amount in excess of Rs. 10,00,000

  • For assessees aged more than 80 years

For Income up to Rs. 5,00,000Nil
For Income between Rs. 5,00,000 and Rs. 10,00,00020% of the amount in excess of Rs. 5,00,000
For Income above Rs. 10,00,00030% of the amount in excess of Rs 10,00,000

Surcharge and other rules:

For individuals:

  • In case the total income exceeds Rs. 50 lakh, the income tax shall increase by a surcharge of 10% of such tax. This surcharge is subject to marginal relief.
  • In case the total income exceeds Rs. 1 crore, then the income tax rate shall increase by a surcharge of 15%.
  • On the amount of income tax and the surcharge applicable, 4% will be charged as health and education cess.
  • The assessee is eligible to get a rebate under Sec. 87A if the total income is less than Rs. 3,50,000. The rebate is either 100% or Rs. 2500, whichever is less.

For LLP and FIrms:

  • If the taxable income does not cross Rs. 1 crore, then 30% tax will be levied including the cess.
  • If the taxable income crosses Rs. 1 crore, a surcharge of 12% will be levied
  • The health and education cess will be charged at the same rate as for individuals, i.e., at 4%

For Companies:

  • For the AY 2019-20, tax at 30% is levied on domestic companies. In case the gross receipt does not exceed Rs. 250 crore in the previous year, the tax rate is 25%.
  • 7% and 10% surcharge shall be applicable for taxable income more than Rs. 1 crore and Rs. 10 crores respectively.

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