E-Tax Filing for the Self-Employed: Strategies that Can Simplify the Process

Self-employed individuals have greater challenges when it comes to filing income tax returns than salaried individuals. Self-employed workers must take care of themselves, just as the company's human resources department does for its paid staff. Advice on which ITR to file, which deductions to take advantage of, which regime to choose, etc., may be necessary. Effective tax planning can lower your tax liability and boost your income. In the current context, where tax regulations are changing rapidly, becoming tax-compliant is a significant challenge. This article will discuss a number of tax preparation strategies that Indian independent contractors can benefit from.

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Table of Contents

• Understand the Tax Treatment

• Choose the Right ITR

• Claim Tax Deducted at Source

• Include Other Income

• Maintain Proper Records

• Conclusion

• Frequently Asked Questions

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Understand the Tax Treatment

A person who does not receive a set wage from a business is considered self-employed. You are employed based on your manual or intellectual abilities under a contract or assignment. Therefore, your income is Profit & Gains of Business & Profession from a tax standpoint. The total money you get from all of your clients within a financial year is subject to taxes. Your gross income for the year should include all profits, regardless of how small they may be.

Maximise Deductions

Since your income is considered a business's profits and gains, you can also deduct some of the costs you paid to start the business. These costs can be used to lower your income and associated taxes. These expenditures include things like office space rent, client meeting meals and entertainment, computer and equipment depreciation, travel expenses, etc. The expenses you incurred while working on your assignments should be deducted. Besides claimable expenses, you can also include deductions such as:

• Investments made in tax-saving instruments up to Rs. 1.5 lakh can be deducted under Section 80C. PPF, NSC, NPS, FDs, life insurance premiums, ELSS, and ULIPs are a few examples of typical investments.

• Deduction for Health Insurance: Under Section 80D, you are eligible to claim a tax deduction if you have bought health insurance for your family or yourself. Up to Rs. 25,000 can be deducted from your taxes for medical insurance premiums paid for you, your spouse, or your dependent children. An extra Rs. 25,000 can be deducted for a policy that covers your parents. For each category, the deduction limit rises to Rs. 50,000 if any covered individual is an elderly person. Therefore, if one's parents and/or family are elderly, the total deduction may reach Rs. 1 lakh.

• Deduction for Education Loan: Under Section 80E of the Income Tax Act, you are eligible to claim a tax deduction if you, your spouse, or your children have taken out an education loan for further education. Only the interest portion of the loan's EMI is eligible for this deduction. The total sum that can be deducted under this clause has no upper limit.

• Interest on a Business Loan: Since interest is seen as a business expense, you may claim it as a tax deduction if you have taken out a business loan for expansion or growth. The amount that you can deduct for business loan interest has no maximum limit.

• Section 87A Deduction: You are eligible to claim an extra Rs. 12,500 deduction if you have opted for the new income tax regime, but only if your taxable income (after other deductions) is less than Rs. 7 lakh per year.

Consider Presumptive Scheme

Additionally, you can choose to use Section 44AD's presumptive taxes, which allows you to claim 8% or 6% of your turnover as income. Only self-employed assessees are eligible for the presumptive taxation plan under section 44D of the Income Tax Act. For tax filing under the presumptive taxation method, the assessee's yearly turnover must be less than Rs. 2 crores. According to this plan, business owners must make at least 8% of their gross sales. For professionals, 50% of their gross receipts is considered the minimum income.

Opt for the Right Tax Regime

Additionally, you must decide which tax regime to use in light of your investments and any additional deductions you might need to take advantage of.

Choose the Right ITR

For the self-employed, ITR-3 or ITR-4 would be the appropriate ITR form. One crucial step in completing your income tax returns online is selecting the appropriate ITR. Here is a comparison between the two to help you choose the right one:

Claim Tax Deducted at Source

Each time a client pays you, the money is received after tax (TDS) has been deducted. The Income Tax Act's Sections 194J and 194C, which require TDS on payments made to professionals and contractors, should also be known to you. Typically, 10% or 2% of the payments that are made to you are subject to TDS deductions. The good news is that you can e-file your tax returns and get a refund of the TDS that was withheld on your behalf, just like salaried assessees do.

Include Other Income

To properly calculate your taxable income as a self-employed assessee, you must remember to include income from all other sources, including interest income, dividend income, and profits from the sale of shares or real estate. Every time a client pays you, the money is received after tax (TDS) has been deducted.

Maintain Proper Records

Keep a thorough record of your company's earnings and outlays in an appropriate accounting book. A chartered accountant (CA) should examine your account book if your yearly income is more than Rs. 75 Lakh. Make sure you are ready to provide documentation, such as invoices, bills, and receipts, to support each claimed deduction and demonstrate the accuracy of your claims.

Conclusion

Every self-employed person benefits from the freedom to handle their taxes on their own. To guarantee the biggest tax savings, they can take total control of income and expense planning. One of the many advantages of working for yourself is that you can save money on taxes. But doing so calls for meticulous preparation, awareness, and competent advice. You can consider seeking expert help to plan your taxes and file your ITR accurately as a self-employed assessee.

Frequently Asked Questions

1. Who is considered as self-employed for tax purposes?

   According to the Income Tax Act, anyone without a set income or a salary from a company may be regarded as self-employed. A business, trade, or profession could be the person's occupation. Painting, writing, auditing, medicine, law, architecture, and other vocational vocations can be classified as professions.

   
   

2. How do I calculate my self-employment tax?

   A businessman's or self-employed person's earnings are subject to self-employment tax. It is computed using the current rates on self-employment net profits, which are determined by deducting business expenses from business revenues and Chapter VI A deductions.

   
   

3. Do self-employed people pay more taxes?

   It differs depending on the situation. There are several options for tax savings for both self-employed and salaried individuals in the form of deductions and exemptions. Furthermore, with a few exceptions, an individual's income from each of the five heads is taxed at uniform rates after it has been totaled to determine their net total income.

   
   

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

   No, a company loss is exempt from paying taxes. Additional losses may be deducted from the firm profits of the following year or years and carried forward to the following four financial years.

   
   

5. How can I avoid taxes as a self-employed assessee?

   By making the most of the exemptions and deductions offered by the Income Tax Act, you can lower your tax obligation.

   
   

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

   By investing in tax-saving products and subtracting all of your expenses from your income for that fiscal year, you can lower your taxes, which will immediately lower your quarterly taxes.

   
   

7. How can self-employed professionals do tax planning?

   It's crucial for self-employed professionals to file ITR 4 in order to avoid missing out on professional cost claims. These have the potential to greatly lower overall taxable income. Nonetheless, the costs must be reasonable and supported by adequate documentation. To take advantage of the deduction benefits, people might plan their expenses well in advance. After assuming that profits for the business or profession equal 50% of gross receipts, individuals filing the ITR-4S are permitted to claim deductions under Sections 80C, 80CCD, 80D, etc. Therefore, efficient tax planning can aid in lowering the tax obligation even more.