Self-employed individuals for their tax computation purposes are allowed few of the deductions under the Indian Income Tax Act which can hence reduce their total taxable income by the same proportion. The allowed or permissible deductions are follows:
a) Rent, insurance amount or taxes paid for the premise where from the self-employed individual conducts his or her business or profession.
b) Expenditure incurred on conducting scientific which includes in-house research and contributions made to college, university etc.
c) Insurance premium paid in respect of stores and stock, machinery as well as furniture employed for professional use as well as repairs and depreciation for it is also allowed for claiming tax deduction.
d) Cost incurred on employees including commission and bonus amount as well as health insurance amount tendered for their insurance needs.
e) Interest paid on loan amount secured for professional pursuits is also allowed for deduction.
f) Taxes including securities transaction tax, commodities transaction tax as well as banking transaction tax can all be claimed to reduce total tax liability by the self-employed.
g) Any such expenditure incurred for professional pursuits that is legally correct.
h) Bad debts are to be set-off as not recoverable by the assessee. Losses incurred in the business can be carried forward for eight years.
With such provisions at hand, individuals undertaking their own venture or self-employed professionals can claim all such deductions to arrive at their final taxable income. Nonetheless, few other expenses that are incurred partly for personal and remaining for business purposes are allowed for deduction only for the amount spent for business purposes.
So, depending on the quantum of total income, if a self-employed individual earns over Rs. 10,00,000 in a year, he needs to compulsorily file the income tax return electronically in ITR Form 4 provided for such individuals.
Further, to become more tax-efficient, a self-employed individual with family members who contribute in some or the other way can employ them and in turn shift a part of his income to them. So, all of their remuneration shall also be eligible for claiming deduction. An Hindu Undivided Family (HUF) can also be formed for income distribution. Besides, self-employed individual should also remember to discharge their advance tax liability that is to be paid for any income source for which the TDS is not deducted.