10 things a self employed person should know for better tax compliance

In India, a self employed person is taxable as an individual. His or her income based on the source from which it’s derived gets added to different heads of income to calculate taxable income.

However, if you do proper planning, your taxable income can be reduced. Hence, you will be liable to pay less tax.

Based on certain parameters, our tax laws has asked a self employed person to do or not to do certain things for better compliance.

In this article we have listed top 10 things that a self employed person should know for better tax compliance in India.

Structure your salary to get maximum tax benefits

Salary is the first and foremost thing that you should plan before any other tax planning. In tax law, we have certain exempted allowances such as house rent allowance, children education allowance, hostel allowance and other parts which can be structured to pay less tax at the end of the year.

Calculation of tax on salary income depends on the amount you received against these components and pay against it.

For instance, in case of house rent allowance, you need to calculate based on the basic and dearness allowance you get, rent you pay and the city of living.

If you structure your HRA allowance based on your eligibility then tax can be saved.

Limit your taxable income up to which tax liability is nil

At present, for the financial year 2018-19 and 2019-20, basic personal income tax exemption limit is Rs 2,50,000 for individuals up to 60 years of age. If the individual is between the age of 60 to 80 years, basic exemption limit is Rs 3,00,000. Above 80 years of age, the exemption limit is Rs 5,00,000.

In addition to above exemption limit, you can also claim tax rebate under section 87A.

As per section 87A, if your taxable income is Rs 3,50,000 or less, you are eligible to claim rebate of Rs 2,500 for the financial year 2018-19.

For financial year 2019-20, as an individual you can claim Rs 12,500 as rebate under section 87A if taxable income is Rs 500000 or less.

You can reduce your taxable income by investing in eligible investment schemes and by taking tax benefit of certain specified expenses if you paid for it.

While doing planning, you should try to keep your taxable income below the limit of Rs 3,50,000 or Rs 5,00,000 as the case may be to avoid tax.

Avoid clubbing of salary income of spouse

Salary or commission paid to spouse out of business can get clubbed into the taxable income of the other spouse who has substantial interest in the business.

However, if such salary or commission is justified according to the technical or professional qualification and experience of the spouse, then clubbing provision doesn’t apply.

The biggest disadvantage of clubbing is that income of one person get added to other person’s taxable income by increasing the slab rates, due to which tax liability also goes up.

To achieve full tax benefits, you should structure your salary and shareholding pattern to avoid clubbing.

The main objective to avoid clubbing of income is that each individual should enjoy the basic exemption limit that is not chargeable to income tax. If you do proper tax planning, then your taxable income can be reduced below the zero tax limit of Rs 5,00,000.

Take full benefit of tax deductions

As an individual you are eligible to number of tax deductions starting from section 80C to 80U of income tax act,1961.

For instance, under section 80C, if you have invested in any or all specified investments listed in this section or paid for the specified expenses, then you can reduce your taxable income up to a maximum limit of Rs 1,50,000.

Section 80C specified number of investments and expenses. Here is a list of certain popular investments and expenses:

  • Public provident fund or PPF
  • Employee provident fund
  • Life insurance premium
  • Sukanya samriddhi yojana
  • 5 years fixed deposits
  • Tuition fees
  • Payment for Principal amount of home loan

Apart from section 80C, you can also take tax benefits under different sections based on your eligibility such as section 80CCD, 80D, 80DD, 80DDB, 80E, 80TTA/B, and 80U of income tax act, 1961. These deductions are over and above the limit of Rs 1,50,000.

Claim loss from house property to reduce taxable income

House property is the best investment for an individual. Government has also provided tax benefits to individuals who wants to buy their dream house or invest in house property.

If you have taken home loan for construction, renovation, renewal or reconstruction of your house property then, you can claim tax deduction under section 24 of income tax act,1961 up to a limit of Rs 2,00,000 for the post construction period if such construction is completed within 5 years.

In addition to it, you are also eligible to claim deduction for pre-construction period interest in 5 equal instalments.

If you claim these interest incurred by you under the head house property, then loss from it can be set-off against income from other heads in the same year. Balance if any left out can be carried forward and set off against income under the same head.

If the property is let out you can also claim 30% as standard deduction while calculating income/loss from house property.

You are not required to submit any documents while filing return of income to claim loss from house property.

Maintain books of account for business

Books of account has to be maintained by your business in case you have a proprietorship concern.

If you get salary from your company or Partnership firm, then you need not maintain any books of account. However, the Partnership firm and company has to maintain books of account as stated in the income tax act,1961.

Type of books of account and when it has to be maintained are stated in section 44AA.

If you are running a proprietorship business, make sure that you maintain books of account as per section 44AA. If you are running a partnership, being a partner you should make sure that your firm maintain books of account as per section 44AA.

According to section 44AA, a doctor, lawyer, chartered accountant, cost accountant, company secretaries, information technology professional, artist, architect, other specified professional and businesses are required to maintain books of account if conditions to this section is satisfied.

Tax audit u/s 44AB and TDS

A proprietorship concern is required to tax audit under section 44AB if turnover for the year exceed Rs 1 Crore.

This means, as a self employed person, if your proprietorship business turnover exceeds 1 Crore, then you have to get your books of account audited from a practicing chartered accountant.

For a professional, the limit is Rs 50 Lakh instead of Rs 1 Crore.

This means if you are a doctor, lawyer, chartered accountant, cost accountant, company secretary, information technology professional or artist, then your books of account are to be audited by a chartered accountant in practice if turnover or gross receipts crosses Rs 50 Lakhs.

If as a individual you are required to get your accounts audited, then tax has to be deducted on certain specified transactions as per the TDS provisions applicable.

Don’t forget to take benefits of presumptive taxation scheme

We have three different type of presumptive taxation scheme applicable to a proprietorship business:

  • Section 44AD – For a business
  • Section 44ADA – For a Profession
  • Section 44AE – For a goods carriage business

Presumptive taxation scheme under section 44AD is applicable to a proprietorship business when it’s turnover doesn’t exceed Rs 2 crore. The concern proprietor is required to disclose 8% of its business turnover as profit.

If you are running professional services as a proprietor, then benefits of section 44ADA can be taken by disclosing 50% of your total gross receipts as profit from the profession.

In case of goods carriage business, Rs 7,500 per vehicles should be considered as income if you are owner of not more than 10 goods carriage.

The benefits of these presumptive taxation scheme is that you are not required to maintain any books of account.

Pay advance tax on or before due date

Advance tax has to be paid if your net tax liability for the year is Rs 10,000 or more. It has to be paid in installments on or before the due dates.

For instance 1st instalment payment has to be done on or before 15th June of the financial year. Advance tax in this instalment has to be 15% of your total estimated tax liability.

File annual return of income

You need to file your return of income on or before 30th july of the assessment year for the relevant financial year. If it’s liable to tax audit, then the return of income has to be filed on or before 30th September instead of 30th July.

For instance, you have to file your return of income for the financial year 2018-19, on or before 30th July 2019 if you are not required to do tax audit. In case it’s required to be audited, then the due date of filing is 30th September 2019.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.