How to Reduce your Taxable Income as a Self Employed Individual
06 April, 2023
All earning individuals in India, whether self-employed or salaried and with an annual income of more than ₹ 3 lakh are required to pay income tax to the government. But while the process of Income Tax Return (ITR) filing and the payment of income tax is simple for salaried professionals, self-employed individuals may find it a bit complicated.
It’s because they do not earn fixed income every month, and hence, the process of tax calculation for them is entirely different. Therefore, it becomes crucial to understand the tax structure for self-employed people in India and the steps they should take to claim income tax deductions.
Who is considered self-employed for income tax purposes?
As per the Income Tax Act 1961, all earning individuals who are not receiving a fixed income or salary from an employer or a company are considered self-employed. Furthermore, the income earned by self-employed individuals in India comes under the head “income from business or profession” for the calculation of income tax.
Below are a few of the related definitions under the Income Tax Act 1961:
Self-employed is the one who sells their products or services to an individual or company without entering into a long-term contract
A self-employed individual can be involved in a business, trade, commerce, or profession
Examples of occupations that come under profession include author, doctor, painter, dancer, auditor, designer, and lawyer, among others
There are two options for self-employed to calculate their taxable income. The first is through ITR Form 4 under Section 44ADA, where they are taxed as per the presumptive taxation scheme. The second option is through ITR Form 3, which can be used by an individual or a Hindu United Family (HUF)
Income tax deductions for self-employed
The Government of India allows certain income tax deductions to help self-employed individuals reduce their tax liability. Below are some common tax deductions available for self-employed taxpayers under various sections of the Income Tax Act 1961:
1. Deductions under Section 80C
Section 80C allows a tax deduction of up to ₹ 1.5 lakh for investments made in certain tax-saving instruments. These are generally long-term savings instruments that come with pre-defined lock-in periods. By availing of tax deductions under Section 80C, you can save tax of up to ₹ 46,800. Below are some common investment instruments that qualify under Section 80C:
National Savings Certificate (NSC)
Tax-saving five-year Fixed Deposits (FDs)
Premiums paid for life insurance policies
Equity-Linked Savings Scheme (ELSS)
Unit-Linked Insurance Plans (ULIPs)
2. Claimable expenses
As a businessperson or self-employed individual, you can incur several expenses to run your business or practice. You can claim certain expenses listed under the Income Tax Act 1961 as deductions to reduce your taxable income. However, you will need to produce legitimate proof of these expenses to claim a deduction. Below are some common expenses that you can claim as tax deductions while filing your ITR:
Rent for shop or office
Repair or renovation costs
Cost of buying office supplies
Monthly utility bills
Travelling expenses
Food expenses
Professional fees
3. Deduction for health insurance
If you have purchased health insurance plans for yourself or your family members, you can claim income tax deductions under Section 80D. Under this section, a maximum deduction of ₹ 25,000 is available for paying medical insurance premiums for a policy for self, a spouse, or dependent children. You can also claim an additional ₹ 25,000 for a policy for your parents. If any of the insured is a senior citizen, the limit for maximum tax deduction is increased to ₹ 50,000. Hence, the total deduction can go up to ₹ 1 lakh.
4. Deduction on education loan
If you’ve taken an education loan for higher education for yourself, your spouse, or your children, you can claim tax deductions under Section 80E. This deduction is available on the interest component of the Equated Monthly Instalment (EMI) paid for an education loan. There is no limit on the maximum amount that can be claimed as an income tax deduction under this section.
5. Interest on a business loan
If you have availed of a business loan to expand or grow your business, the interest paid towards the loan can be claimed as a deduction. It’s because the interest incurred by you for your business loan would be treated as your business expense. Again, there is no limit on the maximum amount that you can claim as a deduction for a business loan.
6. Deduction under Section 87A
If you have opted for the new income tax regime to file your ITR, you can claim an additional deduction of ₹ 12,500. However, this deduction is available only for taxpayers with an annual taxable income of less than ₹ 7 lakh after claiming all deductions under other sections.
As a self-employed individual, you can enjoy the flexibility to manage your taxation. You can take complete control of your expenses and ensure to pay minimum income tax. However, it requires proper tax planning, awareness, and attentiveness on your part. With HDFC Bank by your side with its varied offerings, investing, borrowing and tax planning are a breeze.
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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.
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