The tax season is here, and with that comes the process of making last-minute tax-saving investments (we believe this should be done at the beginning of the financial year rather than at the end). While you may know how employees can save on taxes by claiming various deductions, how can the self-employed or businesses reduce their taxable liabilities? For self-employed individuals and businesses, planning for tax means tracking various components, including profits from a business or profession, capital gains, rental income, royalties, and more. To help you with that, in this article, we will cover how to save taxes as a self-employed individual in India.
How Self-Employed People Can Save Tax in India
For self-employed individuals, the most important factor for taxation is keeping a record of every income and expense. This helps you claim deductions and reduce your overall tax liabilities. Deduction limits and rates are revised from time to time; confirm the current position with your tax adviser. Here are some key areas where you can claim deductions:
Business Expenses
Office rent and utilities are fully deductible if used exclusively for business. For home offices, calculate the proportion of space used for business and deduct that percentage of rent and utilities. For example, if your home office occupies 20% of your total living space, you can deduct 20% of your rent and utility bills.
Equipment and supplies costing less than ₹5,000 can be immediately deducted. For more expensive equipment, you can claim depreciation. Don't forget to include the costs of office supplies, software subscriptions, and maintenance.
Vehicle running costs are deductible to the extent the vehicle is used for business. Keep detailed logs of your business trips, and retain the bills, to support your claims.
Travel and accommodation expenses for work trips are deductible, including airfare, train tickets, hotel stays, and meals. Ensure these are directly related to your business and properly documented.
For internet and phone bills, you can deduct the business portion of these expenses. If you use your mobile 60% for business, you can deduct 60% of the bill.
Depreciation Benefits
Depreciation allows you to deduct the cost of assets over their useful life. Different asset classes have different depreciation rates. For example, computers and software can be depreciated at 40% per year using the Written Down Value (WDV) method. Manufacturing businesses can enjoy additional depreciation of 20% in the first year for new plant and machinery. There's also accelerated depreciation of up to 80% in the first year for certain renewable energy devices, promoting the adoption of green technologies. Office cars can also be depreciated at 15% per year. This reduces your taxable income.
Employee-related Expenses
Salaries and wages, including bonuses and commissions, are fully deductible. Ensure these are reasonable for the work performed and properly documented.
Employer's contributions to the Employee Provident Fund are deductible up to 12% of the employee's salary. This not only helps in retaining employees but also provides significant tax benefits.
Staff welfare expenses, such as team-building activities, health programs, and other welfare initiatives, are also deductible, provided they are genuine business expenses and properly documented.
Tax-Saving Investments To Save On Taxes
While business deductions form a significant part of tax-saving strategies, you can also undertake specific investments as a self-employed individual under the old tax regime:
Section 80C Investments
You can claim deductions up to ₹1.5 lakhs under Section 80C. This includes:
National Pension Scheme (NPS)
The NPS offers an additional deduction of up to ₹50,000 under Section 80CCD(1B), over and above the ₹1.5 lakh limit under Section 80C. For businesses, the employer's contribution up to 10% of salary (Basic + DA) is deductible and not taxable in the hands of the employee up to 14% of salary.
Health Insurance Premiums
Under Section 80D, you are eligible to claim deductions for health insurance premiums:
| Who is covered | Deduction limit | If they are senior citizens |
|---|---|---|
| Self and family | ₹25,000 | ₹50,000 |
| Parents (additional) | ₹25,000 | ₹50,000 |
Save Taxes with Government Schemes
The Indian government offers several schemes to support businesses, particularly MSMEs and startups:
MSME-specific Tax Benefits
These include lower corporate tax rates (25% for turnover up to ₹400 crore), simplified compliance procedures, and priority sector lending benefits. Key MSME schemes include the Credit Guarantee Fund Scheme, Credit Linked Capital Subsidy Scheme, and MSME Samadhan for delayed payment resolution.
Start-up India Tax Incentives
Eligible startups can enjoy a tax holiday for 3 out of 10 years and the ability to carry forward losses even with changes in shareholding pattern.
Export-oriented Business Benefits
Exporters can take advantage of schemes like the Duty Drawback Scheme, Export Promotion Capital Goods (EPCG) scheme, and Special Economic Zone (SEZ) benefits. These offer various tax exemptions and incentives to boost exports.
Use Presumptive Taxation
Self-employed individuals in India can utilize presumptive taxation schemes. Instead of computing profit from books of account, taxable income is taken as a fixed proportion of gross receipts or turnover. Which proportion applies depends on which section you fall under, and the two most commonly confused sections work quite differently.
Section 44ADA applies to specified professionals, and computes income at 50% of gross receipts. So a professional with gross receipts of ₹20 lakh in a financial year would be assessed on ₹10 lakh. Section 44AD applies to businesses, and computes income at 8% of turnover, or 6% of turnover to the extent receipts are digital. A business cannot use the professional's 50% figure. In either case, there are certain criteria that have to be met in order to opt into the scheme.
| Criteria | Businesses (Section 44AD) | Professionals (Section 44ADA) | Transport Business (Section 44AE) |
|---|---|---|---|
| Turnover/Gross Receipts Limit | Up to ₹3 crores (if cash receipts ≤ 5% of total receipts) Up to ₹2 crores (if cash receipts > 5% of total receipts) |
Up to ₹75 lakhs (if cash receipts ≤ 5% of total receipts) Up to ₹50 lakhs (if cash receipts > 5% of total receipts) |
No turnover limit |
| Applicable to | Individuals, HUFs, and partnership firms (excluding LLPs) | Professionals with specified gross receipts | Individuals in the transport business |
| Income Calculation | 6% of turnover for digital transactions 8% of turnover for non-digital transactions |
50% of gross receipts | ₹1,000 per ton of gross vehicle weight for heavy goods vehicles ₹7,500 per month or a part thereof for other vehicles |
You need to note that under presumptive taxation, the entire estimated tax liability is paid as advance tax, and the final instalment is due by 15 March of the financial year. Also, once opted for, the scheme must be followed for five consecutive years. If you decide to opt out before five years, you cannot enrol in the scheme for the next five years.
Conclusion
Tax planning as a self-employed individual can be complex, but you can save on taxes by leveraging various schemes and deductions. While you cannot completely avoid paying taxes, you can plan to save your money and improve your business's financial health.
Important information
This article is for general information and investor education only. It is not investment advice, nor a recommendation to buy, sell or hold any security, scheme or insurance product. iCatalyst Capital is an AMFI-registered Mutual Fund Distributor (ARN-300910); any guidance is incidental to distribution and we are not registered with SEBI as an Investment Adviser, Research Analyst or Portfolio Manager. Please consider your own circumstances, and consult a qualified professional where appropriate, before acting on anything written here.
Figures, statistics, tax rates, regulatory limits and third-party data quoted in this article were drawn from publicly available sources and were current as far as we could establish at the time of writing. They change, sometimes often, and we do not independently verify data published by others. Any worked example is an illustration built on a stated assumption, not a forecast. Please check the current position before relying on any number here. Where a company, scheme, insurer or index is named, it is named as a matter of public record and not as a recommendation.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance may or may not be sustained in future and is not a guarantee of future results. Insurance is the subject matter of solicitation.