Income Tax for the Self-Employed, Businessperson and Freelancers

Overview of the Tax System

Every Indian citizen is subject to direct taxation if they have a source of income. The income tax department has classified its provisions by the income source, and the type of occupation one is involved in.

A self-employed person is a business owner or independent contractor. They either work under a contract or offer their services temporarily to various people or organisations. 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.

Basics of TDS

For the computation of taxes, one needs clarity on certain aspects of the TDS exercise– like, handling Tax Deducted at Source (TDS), and, most importantly, choosing the right form of ITR.

Understand How to Tax Treat Your Income

In comparison to submitting taxes as a paid employee, the process for reporting income taxes for the self-employed is very different. The income of the self-employed is not credited to a fixed account. Instead, a self-employed person is responsible for totalling all of their earnings.

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, must 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 return 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 ₹10,000, you will receive ₹9000 after ₹1000 (10% of ₹10,000) is deducted from the total amount.

Tax Audit

After deducting all losses and expenses incurred while generating the gross income, profit needs to be calculated. In other words, profit is defined as net income.

In general, self-employed individuals are not permitted to submit an audit report. The income must be audited if the gross receipt for the relevant financial year is ₹50 lakhs or higher.

Presumptive Taxation Scheme

The presumptive taxation scheme has been introduced for professionals whose gross total receipt is less than ₹50 lakhs. In contrast, the business's total income is less than ₹2 crores in a financial year.

Here, the profit is estimated using an assumption of 8% of the business's gross receipts and 50% of the profession's gross receipts for the fiscal year. Following the applicable income tax bracket, the assessee must pay income tax.

The assessee is exempt from this scheme's requirement to maintain records and books of accounts. This plan is not required. The assessee may use this plan or a more conventional approach in which a chartered accountant audits all accounts.

The assessee filing tax under the presumptive scheme may claim a tax deduction under Section 80C of the Income Tax Act and a deduction for tax-saving medical insurance premiums under Section 80D of the income tax act. Benefits under Section 8 of Chapter VI A are also available.

Furthermore, a person who takes advantage of presumptive taxation this year is not required to do so yearly. One can easily opt-out of this scheme and file their tax returns the following year using traditional methods. However, once an assessee has opted out, they are no longer eligible for assessment under the presumptive scheme for the next five fiscal 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 assessees aged between 60 years and 80 years

• For assessees aged more than 80 years

Surcharge and other rules:

For individuals:

• In case the total income exceeds ₹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 ₹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 ₹3,50,000. The rebate is either 100% or ₹2500, whichever is less.

For LLP and FIrms:

• If the taxable income does not cross ₹1 crore, then 30% tax will be levied including the cess
• If the taxable income crosses ₹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 ₹250 crores in the previous year, the tax rate is 25%
• 7% and a 10% surcharge shall be applicable for taxable income more than ₹1 crore and ₹10 crores respectively.

Why Vakilsearch?

We have a team of professional chartered accountants who will file your taxes in a hassle-free way. Every year thousands of taxpayers choose Vakilsearch to claim their TDS and do taxes. Our team will be completely transparent in the entire process and we will inform you about the benefits of filing tax returns. Our support team will check your queries and get back to you in a timely manner.