For all self employed individuals, in a business or a profession, the income tax guidelines prescribe a different set of norms for filing of tax returns. Freelancers independent consultant, small time businessman/professional, independent doctor, singer etc… whatever the profession may be, all fall under the purview of income tax and have to file returns under a separate head – “Income from Business or Profession”. Here is a quick guide to help self employed tax assesses plan and file their income tax returns.
Accounting of Tax
As per the income tax guidelines self employed individuals are to choose one of the following methods to account their tax. The ITR-4 form meant for filing taxes seeks information on the basis of the method of accounting used.
- The Mercantile System- This system considers transactions (both income and expenses) in an accounting period on actual accruals. In other words, the mercantile system considers income and expenses when they actually occur in the accounting period, irrespective of whether money for it was received or paid out.
- The Cash System- In this system income and expenses are recognized when cash for the transaction is received or paid out, irrespective of when the service for the transaction was actually performed.
The Applicable Tax Form- ITR 4
The ITR- 4 is used to file returns for the self employed. This form could be submitted in either one of the ways.
- Furnishing in paper form
- Furnishing electronically under digital signature
- By transmitting the data in the return electronically and thereafter submitting the verification of the return in return form ITR-V
- By furnishing a bar-coded return.
Payment of Advance Tax
Unlike the salaried, self employed individuals, do not have a fixed income or periodicity of earning, nor is there any tax deducted at source. To avoid any tax evasion, the income tax guidelines mandate payment of Advance Tax.
Advance Tax payable is based on the income estimated for the financial year. This tax payable is 30% of tax that is to be paid by September 15, another 30% by December 15 and the balance 40% is to be paid on or before March 15. Advance tax is payable only in case the tax payable is in excess of Rs. 5,000.
Tips to Enhance Tax Efficiency
There are several tax deductions and benefits that the self employed assesses could utilize. Here is a quick peep into them.
- Take advantage and claim work and business related expenses such as rent, travel costs, telephone/internet bills, supplies and utilities. Vouchers and bills in support of the expenses must be maintained
- Claim vehicle costs or mileage allowances and home costs if you work from home.
- Normal deductions are permissible for self employed assesses. Deductions under Section 80C allows investments in PPF, insurance, unit linked insurance plans, pension plans, ELSS, NSC, bonds and fixed deposits. Section 80D allows deduction for medical insurance premiums of oneself and family. Section 80GG allows the rent paid as deduction.
- Distribution of income- You could legitimately hire your family member to help you in your profession/work. By doing so you could shift a part of your income by way of remuneration for the work done by the member. This could effectively reduce your tax liability.
Mandatory Requirements for Self Employed Assessee
Maintenance of Books
Section 44AA of the Income tax mandates compulsory maintenance of books by individuals/ businesses, if the yearly gross receipt of the profession exceeds Rs. 1, 50,000. If the gross receipts of a profession do not exceed Rs. 1, 50,000 in any one of the three years immediately preceding the previous year, or where the profession has been newly setup in the previous year, and the total gross receipts in the profession for that year is not likely to exceed the said amount, then there is no requirement to maintain any books of account.
Tax Audit Report
As per section 44AB of the income tax act, every person carrying on a business and whose total receipts or turnover exceeds Rs. 40 Lakhs, are required to obtain a tax audit report from a chartered accountant.
Due Dates for Filing Returns
For assessees who do not have to get their accounts audited, the due date for filing tax returns is 31st July. Where the accounts are to be audited, the due date to file returns is 30th Sep.
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