Income Tax Filing for Self-Employed Professional or Business Owner

As a citizen of India aged 18 or above, every individual who earns a steady stream of income is required to pay tax on the earnings to the government under the Income Tax Act, 1961.

A taxpayer is called as ‘Assessee.’ As per the Income Tax Act, an Assessee is “An individual who is liable to pay taxes for the income earned by him/her in a given financial year. Besides, every person who has been taxed in the previous years is also considered as an Assessee. The IT Department identifies the Assessee by their PAN i.e., Permanent Account Number.”

Income Tax Filing for Self-Employed Individuals

When it comes to computation of income for Self-Employed Individuals, the income is classified under the following heads –

• Profit and gain from Business or Profession

• Capital Gains
• Income from other sources
• Income from house property

Who is considered as a Self-Employed Individual?

A self-employed individual can be defined as a person who offers their services to various employers, without the existence of any long-term contract, through a business or profession.

As per the Income Tax Act, a business is defined as any trade, commerce, or manufacturing unit.

While the act doesn’t explicitly define what is meant by ‘Profession,’ it has been considered that vocations like Doctor, Lawyer, Architect, Astrologer, Painter, Author, Sculptor, etc., are Professions. 

The tax is calculated on the profit, after the due deduction of the expenses as well as losses incurred from the overall income through the business, profession, or vocation.

It must be noted that Professionals are required to get their accounts audited by a Chartered Accountant. They must then submit a Tax Audit Report if the gross receipt is Rs. 50 lakh or more in the given financial year. 

Income Tax Filing for Self-Employed

A self-employed individual must file the Income Tax Return-4 also known as ITR-4. When filing the returns, the individual can claim the expenses incurred to generate the revenue, which will be eligible for the deduction, subject to the availability of valid proof in the record.

Presumptive Taxation Scheme

This scheme has been specifically introduced for –

• Professionals with total gross receipts of Rs. 50 Lakh or less

• Businesses with an annual turnover of Rs. 2 Crore or less

Under the scheme, professionals and business owners do not need to maintain records and books of accounts, as the profit is assumed at 50% of gross receipts for professionals, and that at 8% of turnover for businesses in a given financial year. The Income Tax is then levied in accordance with this presumption, as per the applicable tax slab.

The scheme entitles the Assessee (Individual, Hindu Undivided Family, or Partnership Firm)to claim deductions on investments including but not limited to –

• Tax-Saving instruments under Section 80C

• Medical Insurance Premium under Section 80D

• Deductions under Section 80 of Chapter VI A

Any Assessee who has opted to file the ITR under Presumptive Scheme can opt out of the scheme in the following financial year, and file their ITR normally. This, however, would imply that they are not entitled to avail the benefits of the Presumptive Taxation Scheme for 5 financial years from the year of opting out.

Business owners and professionals who do not qualify under the Presumptive Tax Scheme must use a Chartered Accountant’s help to get their books of accounts audited and file their Income Tax Returns accordingly.

Tax Rates for Self-Employed/Businessmen

As indicated above, the gains and profits earned by a self-employed professional or business owner are taxable. The rate at which such profit is taxed is equivalent to those at which other incomes are taxed. However, the tax slabs differ on the basis of the age of the Assessee. Let us take a quick look at the various tax slabs – 

For individuals aged 60 years or below, including Hindu Undivided Family, Association of Persons, Body of Individual andArtificial Juridical Person

For Senior Citizens aged between 60 and 80 years

For Super Senior Citizens, who are 80 years or above in age

Income Tax Surcharge

Here are some details pertaining to the surcharge levied on Income Tax that you must be aware of –

• In case when the total income is between Rs. 50 lakh and Rs. 1 Crore, the amount of income tax will be increased at a rate of 10% by a surcharge. As a marginal relief, in this case, the total amount payable, i.e., Income Tax + Surcharge shall not exceed the Income Tax payable on the total income of Rs. 50 lakh by more than the amount of income exceeding Rs. 50 lakh.  

• In case when the total income exceeds Rs. 1 Crore, the amount of income tax will be increased at a rate of 15% by a surcharge. As a marginal relief, in this case, the total amount payable, i.e., Income Tax + Surcharge shall not exceed the Income Tax payable on the total income of Rs. 1 crore by more than the amount of income exceeding Rs. 1 Crore. 

Income Tax Cess

In addition to the income tax and the surcharge, an Assessee is also required to pay a Health and Education Cess, calculated at the rate of 4% of the total amount of income tax and surcharge.

Income Tax Rebate

Under Section 87A, if the total income of the Assessee does not exceed Rs. 3, 50,000, in the given financial year, they will be entitled to a rebate of 100% on income-tax or Rs. 2,500, whichever is lower.

We hope that you now have a clear picture regarding income tax filing for self-employed professionals and business owners.

Also Read: How to Save Income Tax on Your Salary?

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