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Important Tax Questions To Ask If You Are Self-employed

Adhil Shetty

Regular Income Tax-filing Under ITR-4 and Presumptive Tax Method Under ITR-4S are the two modes of tax filing for the self-employed. Take a pick after weighing the benefits of both.

Important Tax Questions To Ask If You Are Self-employed

Being self-employed sounds great as it gives you freedom and flexibility to work at your own pace. However, self-employment comes with its own set of challenges. The biggest challenge that a self-employed individual faces is of taxation. A self-employed professional in India can choose from the two options/modes available for tax filing.

Before making a choice, a self-employed tax payer should ask the important question – which option benefits the most in the long run?

First Option: Regular Income Tax-filing Process Under ITR-4

In this case, a self-employed person should keep a record of all expense-related documents for a period of eight years from the date of filing the return.  A receipt must be available in order to claim deductions for all expenses related to profession such as salary to employees, rent, office expenses, telephone and electric bills, depreciation on assets and other miscellaneous expenses from total income. The self-employed individual should compulsorily get a tax audit performed if his income is more than Rs 50 lakh for the assessment year 2017-18.

Benefits Of This Tax Filing Process

You can claim all the expenses related to your profession against your income and hence, you can reduce your taxable income. But you need to back every expense with documentary evidence.

Second Option: Presumptive Tax Method Under ITR-4S

In this process, your work related to filing income tax becomes quite easy as you can straightaway claim deduction for expenses @ 50 per cent of the total income. Your tax will be calculated on the remaining 50 per cent of the income plus any interest income.

There are few obvious benefits of this process of filing income tax.

  • You don’t need to maintain a documentary evidence of your expenses for next eight years from the date of filing the returns
  • You don’t need to get your books of accounts audited
  • After the 50 per cent deduction for expenses from total income, you can even claim deductions under Sec 80C, 80CCD, 80D and others

Hence, this process is extremely beneficial for self-employed professionals who earn less than Rs 50 lakh per year and do not wish to maintain record of expenses.

However, irrespective of which method you follow for taxation, you will be liable for 10 per cent TDS on your receipts. However, you can always apply for a refund for the excess tax paid.

Important Questions To Ask

Here are some questions to ask yourself before you choose the mode of filing income tax.

  1. Can you easily maintain documentary evidence of each expense for eight years?
  2. Will you earn over and above Rs 50 lakh per year and your expenses will be more than the 50 per cent of your total income?
  3. Are you okay to comply with tax audit if you earn more than Rs 50 lakh per year?

If your answer is yes to all the above questions, then you can go ahead with the regular process of filing income tax. If not, the presumptive tax is best for you.

However, please choose the method wisely because if you choose presumptive tax method, then you must continue with it for the next five years. If you switch to the regular process of filing income tax before the five year is completed, you cannot go back to presumptive tax method for the next five years.

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