News

Every Indian citizen is required to pay an income tax if he earns an income. An income generating entity is called an assessee which, under Section 2 (7) of the Income Tax Act, 1961, is defined as a person or entity by whom any tax or any other sum of money is payable under this Act. Assessee includes the following –

• Salaried individual
• Self-employed individual or a proprietor of a sole-proprietorship business
• Hindu Undivided Family
• Partnership firm
• Limited Liability Partnership (LLP)
• A company which has been registered with the Registrar of Companies

The tax filing process for different types of assessees is different because their source of income is different. When filing returns under the Income Tax Act, there are five main heads of income under which the income is calculated. These heads include the following –

• Salary income
• Income from house property
• Capital gains
• Income from business or profession
• Income from other sources

While, in case of salaried individuals, the head ‘salary income’ is relevant, for self-employed individuals or professionals, most of the income is recorded and calculated under the head ‘income from business or profession’. As such, the tax filing process followed by salaried and self-employed individuals differs. Let’s understand how tax is supposed to be filed by self-employed assessees –

Who is a self-employed assessee?

A self-employed assessee would be an individual who does not have a fixed income or salary from an organisation. The individual either sells his services to various businesses without having a long term contract or is himself engaged in business of trade, commerce, manufacturing or related activities. Moreover, if an individual pursues a vocation in which he/she specialises, he would be called a self-employed professional like a doctor, lawyer, architect, etc.

Tax filing for self employed

The income which is earned by self-employed individuals is recorded under ‘income from business or profession’. Calculation of taxable income under this head can be done in two ways which are as follows –

• The tax liability can be calculated on the basis of presumptive taxation wherein the income is calculated without claiming any deduction for the expenses incurred by the business or profession on generating its revenue
• The tax liability can be calculated on the real profit which has been calculated after claiming the actual expenses incurred during the course of business or profession to generate revenue.

Tax filing under presumptive taxation scheme

The concept of presumptive taxation is relatively new and so many self-employed tax payers are not very conversant with the concept. So, let’s understand the presumptive tax scheme in details –

• The scheme of presumptive tax is applicable for self-employed assessees.
• If the assessee is a self-employed professional, the presumptive taxation scheme would apply to him/her under Section 44DA of the Income Tax Act, if the gross receipts are below INR 50 lakhs in a financial year.
• In case of businesses, if the turnover of the business is INR 2 crore or below in a financial year, the scheme of presumptive taxation would be applicable under Section 44AD of the Income Tax Act.
• Under the presumptive taxation scheme, the minimum income from business is deemed to be 8% of gross receipts. In case of profession, the lowest profit is deemed to be 50% of the gross receipts.
• If the business maintains its receipts in digital mode, i.e., in the form of cheque, credit cards, net banking proofs, etc., the minimum income for tax purposes would be calculated @ 6% of the digital receipts.
• These percentages are applied on the income generated and the taxable income from business or profession is calculated.