Self-employment in India creates both unique opportunities as well as problems. Since the individual does not receive such privileges of salaried jobs as PF contribution or even employersponsored insurance schemes, every move he makes towards the lessening of tax liability. In this Indian market, a number of tax saving schemes save its purest form of money from paying extra income tax, and so not only reduce taxable amount but deposit riches in the same account to obtain some target time ahead into the future.
Tax Liability of Self-Employed India
In India, tax liability for self-employed refers to the tax that such individuals in India have to pay on their entire income. As self-employed individuals do not have TDS they must make up for it by calculating and giving the tax payments directly out of their pocket. The first step to managing a business is to secure an Advance Tax payment.
Tax-saving choices are actually problematic for the self-employed in India
- Section 80C – Investment in Tax Sparing Instruments
Section 80C of the Income Tax Act is one of the most vociferated tax-saving clauses in India. A self-employed person can benefit from the various investment options available to him under this section.
The most common options are:
- Employee Provident Fund: EPF is pretty much something wherein it’s all about the salaried more so, but there’s still a provision by the government wherein one can enroll themselves voluntarily also for even the self-employed.
- Public Provident Fund: Guaranteed one by the Government, which again will pick up till ₹1.5 lac on taxes, that are at the very outset being deducted. However, it’s tax-free, with all returns, and the best kind of long-term investment.
- National Saving Certificates (NSC): NSCs are highly remunerative in terms of interest and also have tax advantages under Section 80C. The interest generated is taxable, but the investment made is eligible for deductions.
- Tax-Saving Fixed Deposits (FDs): Tax-saving FDs provide tax deduction under Section 80C for a five-year lock-in period. The interest accrued is taxable, but the investment is eligible for deduction.
- Section 80D – Health Insurance Premiums
The tax deduction is available for the health insurance premiums paid to the individual, spouse, children, and parents under Section 80D. The amount of the deduction will be different based on the insured’s age:
- Up to 25,000 premiums for self, spouse, and children can be claimed
- If the person being must be a senior citizen; then, the person is entitled to a deduction up to 50,000.
This is the best option for entrepreneurs who are considered self-employed. This not only contributes to a lesser taxable income of the individual but also provides the individual with medical expenditure coverage.
- Section 80E: It provides for the deductions under education loans
If you have borrowed for education, then the interest paid on the loan can be claimed as a deduction under Section 80E. This could be a wonderful way to reduce your tax burden if you are self-employed and are continuing your education or taking loans for children’s education.
- Section 24(b) – Interest on Loans taken for Purchase / Construction of House/ Flats
Tax savings are the known advantages for self-employed persons who have taken a home loan under Section 24(b). An overwhelming majority of the self-employed are putting their money into a property, and the deduction is a real help in reducing income tax, while you also get to build your long-term assets.
- Section 10(13A) – House Rent Allowance
Section 10(13A) allows house rent paid on a property that is rented out for business or personal purposes. This can be claimed only if you do not own a house. The lowest of the following can be claimed as deduction:
- Rent paid minus 10% of the total income.
- 50% of the total income if one is staying in metro city like Delhi, Mumbai, Chennai, Kolkata else 40% in case of stay at non-metro city
- Actual rent paid
It also helps the persons who are self-employed people by letting out space to execute the business and also will help those people who will not have a house for residing.
- National Pension Scheme
NPS is a good retirement planning tool and also helps in saving tax. Under Section 80CCD, the following are allowed as tax-deductible contribution towards NPS
- You can save upto ₹1.5 Lakh under Section 80C.
- You can also save extra ₹50,000 beyond the ₹1.5 lakh cap for NPS contribution.
For all self-employed individuals, NPS provides another layer of retirement savings that is not only tax-efficient but also safe in creating a corpus at retirement.
- Deduction of Income Tax for Donations
If you are a donor who believes in giving to charities, you can take advantage of tax deductions under Section 80G for donations made to eligible charitable institutions. You can even get 100% deduction with no qualifying limit for donations to certain funds, such as the Prime Minister’s Relief Fund.
Best Saving Schemes for the Self-Employed
Other than saving taxes, a self-employed person has to think of saving in the long term, so proper saving schemes have to be undertaken. Among the best saving plans are those that save tax but also give financial security. Some of these plans include:
- Public Provident Fund (PPF)
PPF is a long-term savings scheme whose interest is tax-free, Section 80C that provides tax deductions, and which guarantees return. It is a very good investment option for the risk-averse self-employed people who, by nature, want to invest their money in such a way as to enjoy good growth along with tax-saving benefits. PPF has a lock-in period of 15 years and is ideal for retirement or long-term saving.
- Post Office Monthly Income Scheme
The Post Office Monthly Income Scheme is the most suitable scheme for the self-employed who are looking for a regular source of income. The interest rate, even though it is taxed, guarantees a fixed and uninterrupted profit, which is very good for retirement or reinvesting it in your business as well.
- Tax-Saving Fixed Deposits
Tax-saving fixed deposits (FDs) is another low-risk investment option. They carry with them a 5-year lock-in period and earn deductions under Section 80C. The return attracted is taxable, but its growth is assured. Such investments are very useful to self-employed persons, where they need safe and sound investments.
- Sukanya Samriddhi Yojana
This scheme also acts as a great tax-saving scheme for a self-employed person who has daughters, and it also secures the future of your child. So this can be considered one of the best savings schemes for parents who want to raise funds for their daughter’s education or marriage.
- Rural Development Bonds
Rural Development Bonds are those investments that save tax and help build the nation. Section 80C provides tax relief. The interest rates may not be as high, but it does come with the added benefit of supporting the rural infrastructure development in India.
Conclusion
Be Self-Employed in India offers both opportunities and challenges related to income taxes and savings. And at the bottom line, it’s just planning, be proactive in saving and investment, and using all available tax-saving tools, which a self-employed individual should take to reduce his tax liability and thus live prosperously.