Income Tax for Self-Employed: Taxable Income & Deductions

Taxes for the self-employed individuals in India can be calculated in presumptive schemes or real profit schemes based on their annual turnover and income. Self-employed individuals need to file an Income Tax Return using Form-3 or Form-4 based on the scheme. Learn in detail about these schemes to comply with Indian tax laws. 

Key Highlights

• Tax for self-employed individuals can be calculated in a presumptive scheme or real profit scheme.
• Based on the scheme, you need to file ITR in Form-3 or Form-4.
• You can claim expenses as deductions in your ITR.
• Your income tax slabs for each scheme vary based on the old regime or new regime.

Self-Employed Individuals: Meaning

The Income Tax Act, 1961 highlights that self-employed individuals include all individuals who do not receive a salary from employers, but sell products or services to other individuals or companies. It includes business, commerce, trade or profession. 

Examples of self-employed individuals include doctors, traders, authors, shopkeepers, dancers, painters, auditors, designers, lawyers, astrologers and others. They can file an ITR under Section 44ADA using Form 4 or Form 3 (for individuals and Hindu Undivided Families).

Process to Calculate Taxes for the Self-employed

If you are a self-employed individual, you can calculate income tax in the following ways:

1. Presumptive basis wherein you do not claim deductions for investments and expenses
2. Real Profit basis wherein you claim deductions and expenses before tax calculation on your real profit.

Tax Filing Under the Presumptive Taxation Scheme

Presumptive Taxation Scheme applies to self-employed individuals under Section 44D of the Income Tax Act, 1961. Here are the important things to remember pertaining to this scheme:

• If you are filing tax returns under this scheme, your annual turnover and gross receipts should not exceed ₹3 crore. 
• The minimum income of the business owner needs to be 8% of gross receipts. For professionals, the minimum income needs to be 50% of gross receipts.
• This income plays a significant role in income tax calculation for self-employed individuals. 
• In the case of digital receipts, the minimum income for tax is calculated at 6% of the digital receipt amount. 

Tax Filing Under the Real Profit Scheme

You need to remember the following points for the Real Profit Scheme of tax filing:

• You can claim multiple deductions to compute your taxable income. The deductions can include insurance premiums, interest paid on business loans, wages to employees and additional expenses for your business.
• As a self-employed individual, you can include additional expenses such as internet and telephone bills, travel costs and other costs incurred towards your business.
• For all deductions, you need to submit proof of expenditure.
• You need to have a business account book wherein if your annual income is more than ₹50 lakh, you need to consider auditing your accounts book by a Chartered Accountant.
• You need to choose the Real Profit Scheme if your annual turnover exceeds ₹3 crore. 

Income Slab and Taxes for the Self-employed

The income tax slab rates for self-employed individuals differ based on the old and new regimes as follows:

If you choose the old regime, here are the tax slabs:

If you choose the new regime, here are the tax slabs:

ITR-3 Vs ITR-4 for Self-Employed Individuals

To know if you need to file ITR-3 or ITR-4, check out the differences here:

Expenses that Self-employed Individuals Claim as Deduction

You can claim the following expenses as deductions against income:

• Property Rent: If you operate your business from a rental property, you can claim the rent paid as expenses.
• Cost of Repair: You can claim the cost of repair for rental as well as owned property. Further, you can claim deductions for equipment repairs such as laptops or printers. 
• Depreciation on Capital Assets: If you purchase an asset that lasts more than one year such as a laptop, you need to claim its cost across the years and not in the year of purchase. Thus, you can claim depreciation of capital assets. 
• Office Expenses: You can claim office expenses which include purchasing office supplies, bills for the internet and phone, conveyance expenses and other purchases. 
• Travel Cost: If you go on visits to meet your clients, you can claim the travel expense as a deduction. 
• Meal, Entertainment or Hospitality Expenses: Expenses pertaining to business meals and hospitality can be claimed as a deduction. 
• Digital Tools and Subscriptions: If you use tools for domain or app registration for testing your products or services, you can claim it in deduction.
• Local Taxes and Insurance on Business Property: If you pay insurance for your business property or local taxes, you can claim it as a deduction. 

Final Word

Taxes for the self-employed can be calculated with deductions or without deductions. Based on the method you are eligible for and your annual turnover, you can claim deductions for your expenses. One such deduction is applicable for making an investment in tax-saving fixed deposits under Section 80C of the Income Tax Act, 1961. 

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