Income Tax for Self Employed
In India, the government has imposed Direct tax in the form of Income Tax, on a person who is also known as “assessee’’ as per the provision of Income Tax Act, 1961 and Income Tax rules, 1962.
The assessee has been defined under the Income Tax Act, 1961 as:
An individual who can either be a salaried person or owner of the proprietorship firm, Hindu undivided family is also known as HUF, limited liability partnership firm or registered company with the registrar of companies Act, etc. The Income Tax Department identifies the assessee by their PAN i.e. Permanent Account Number.
Income of the person is classified under the following five heads for levying Income Tax and computation of net taxable income which are as follows:
- Income earned from Salary
- Income earned from House Property
- Profit or gain from any profession or business
- Capital gain
- Income earned from other sources
Who all considered Self-employed?
- As per the Income Tax Act, self-employment is called a profession. There is no exact definition of the profession mentioned in the Income Tax Act. Profession also includes Vocation as given in the Act. Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect, an astrologer comes under profession or Vocation
- Business has been defined in the Income Tax Act, any trade, commerce or manufacturer or any adventure or concern trade, commerce or manufacture”
- Self-employed is a person who sells his or her services to different employers without any long-term contract with any of them
- Income Tax Act, 1961 levied on the income of a self-employed person under the head “Profit and gain from business or profession.
- Computation of profit takes place after deducting all the expenses and losses incurred for earning the income in the regular course of business, vocation or profession
- Professional Income earners must get their accounts audited by Chartered Accountant and submit tax audit report if their gross receipt is Rs. 50 lakhs or more in a financial year
Process of tax filing for self employed
In the normal tax filing process by self-employed, they are required to file ITR-4 and can claim all the expenses incurred to earn revenue from the profession. The expenses are deductible subjected to valid proof in the record.
According to the presumptive scheme, deductions have been allowed of all the expenses and depreciation to calculate profit from the profession.
Presumptive Taxation
The government has introduced a concept of presumptive taxation scheme for professional earners whose gross receipts are below 50 Lakhs in the financial year and business whose turnover is less than 2 crores.
Under this scheme, there is no need to keep records or books of accounts, etc. Profit assumed, in this case, is at 8% of gross receipts for businesses and 50% of gross receipts of the profession in a financial year. The scheme is optional for the Self-employed. All is mandate is to get their books of accounts audited by the Chartered Accountant and the same is mentioned at the time of filing Income Tax return and make payment of tax.
Under the presumptive scheme, assesses can claim tax-saving investments under Section 80C, and medical insurance premium under Section 80D.
Deductions are allowed under Section 80 of the chapter VIA. This scheme is applicable to only an Indian resident assessee who falls under the category of individual, HUF or partnership firm.
If the resident assessee chooses to file ITR under the presumptive scheme for any financial year, in the next financial year, may choose presumptive scheme and file Income Tax Return as a normal assessee. But in this situation, they cannot avail of the advantages of the presumptive scheme for the next five financial years.
For example:
If the resident assessee opts to file Income Tax Return under the presumptive scheme for the financial year 2020-2021 and 2021-2022, and in next financial year 2022-2023, the assessee opts out of the presumptive scheme and files Income Tax Return under normal course then he/she cannot opt to file his/her return under presumptive scheme for the next five financial years that is 2023-2024 to 2027-2028.
Tax Rates for Self-Employed/Businessmen
The income tax slab rates are generally revised every year during the budget. This year also, Union Budget 2020 witnessed changes in the income tax slabs. Budget 2020 has given an option to choose between the existing income tax regime and a new regime for the coming financial year 2020-21 based on the category of a person.
New Tax Regime of Budget 2020
The new tax regime offers lower tax rates and new tax slabs and simultaneously removes tax exemptions and will result in lower tax outgo for the taxpayer, according to the finance minister.
Total Income (Rs) | Simplified, optional Tax rate |
Up to Rs 2.5 Lakh | NIL |
From 250,001- Rs 500,000 | 5% |
Rs 500,001- Rs 750,000 | 10% |
From Rs 750,001- Rs 10,00,000 | 15% |
Rs 10,00,001 – Rs 12,50,000 | 20% |
Rs 12, 50,001 – Rs 1500,000 | 25% |
Above Rs 1500,000 | 30% |
Existing Tax Regime
When an individual, HUF or Association of a person, artificial juridical person or body of individual who is below the age of 60 years.
| For income up to Rs 250,000 |
NIL |
| For income between Rs 250,000-500,000 |
5% of amount in excess of Rs 250,000 |
| For income between Rs500,000-10,00,000 |
20% of amount in excess of Rs 500,00 |
| Income above 10,00,000 |
30% of amount in excess of Rs 10,00,000 |
In the case of the senior citizen whose age is between 60 years to 80 years
| For income up to Rs 300,000 |
NIL |
| For income between Rs 300,000-500,000 |
5% of amount in excess of Rs 300,000 |
| For income between Rs500,000-10,00,000 |
20% of amount in excess of Rs 500,00 |
| Income above 10,00,000 |
30% of amount in excess of Rs 10,00,000 |
Surcharge
The income tax amount increased by a surcharge at the rate of 10% of such tax, where total income is above 50 Lakhs but less than 1 crore. However, the surcharge is subjected to marginal relief in such cases.15% surcharge applicable in those cases, where total income is above 1 crore rupees. In this total amount payable in the form of income tax and surcharge does not exceed the total amount payable as income-tax on total income of 1 crore rupees.
Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.
Rebate under Section 87A: The rebate is given to a resident individual if his total income is not above Rs. 3, 50,000. The amount of rebate shall be 100% of income-tax or Rs. 2,500, whichever is less. In case of Firm and Limited Liability Partnership
- 30% (Including Cess) for Taxable Income Up to Rs. 1 Crore
- The amount of income-tax and the applicable surcharge shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge
- 12% surcharge for taxable income more than Rs. 1 crore.
In case of Companies
- For the assessment year 2021-22, a domestic company is taxable at 30%. However, the tax rate would be 25%, if turnover or gross receipt of the company does not exceed Rs. 250 crores in the previous year 2020-21.
- The amount of income-tax and the applicable surcharge shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge.
- 7% surcharge for taxable income more than Rs. 1 crore.
- 12% surcharge for taxable income more than Rs. 10 crores.
