To avoid tax-time surprises, periodically review your taxes throughout the year. Don't forget to make necessary quarterly tax payments to avoid under-withholding penalties. Complete all of your paperwork on-time, particularly if you are billing clients or customers. Many companies will take several weeks to process invoices. Keep copies of all receipts for tax time.
Under the tax laws, the income of a self-employed person (freelance writer/journalist, independent consultant, and businessman, professional) would fall under the head of income from business or profession.
A self-employed person can have income that is more tax efficient by at least 15% as against similar salary income.
All expenses related to the business can be claimed as business expenses. Vouchers/bills would be required to support expenses and hence book keeping is important for this category. Other expenses including rent or home office expense, travel costs, communication costs (telephone, internet), business meetings, supplies and utilities can be claimed as expenses. For being deductible, expenses must be both ordinary (common and accepted) and necessary (appropriate and helpful) in your work/business. If such expenses are incurred partly for work purposes and partly for personal purposes, you can deduct only the work related expense.
If the business/ work employs assets like laptops/computers, furniture, UPS and vehicles, depreciation can be claimed on them. Make it a point to maintain bills of capital expenditures. Bad business debts may also be written off. Business losses can be carried forward for 8 years.
Normal deductions are allowed for self-employed individuals. Section 80C allows investments in PPF (Public Provident Fund), insurance /unit linked insurance plans, pension plans, ELSS (equity linked savings scheme), NSC (National Savings Certificate), infrastructure bonds, FDs (fixed deposits) apart from home loan principal repayment. Tuition fees for your child's education can also be claimed. The overall limit of this section is Rs 1 lakh. Section 80D provides deduction for medical insurance premiums of oneself and family upto Rs 15,000. An additional Rs 15,000 can be claimed towards medical premiums of parents. If you are staying in a rented home you can claim the rent paid as deduction u/s 80GG, upto Rs 24,000, based on certain conditions. If you buy a house, you can claim a deduction of upto Rs 1.5 lakh on interest paid.
Avail a family floater policy with reasonable cover to protect your family from any major medical costs that might arise. The premiums paid towards life and health policies will provide for tax breaks u/s 80C and 80D. It is important to have appropriate life insurance cover to offer protection for family, especially since there would be no benefits from the company (if one were salaried) that would have accumulated.
Distribute your income
If you have family members who can help in various aspects of your business, it makes sense to employ them (legitimately) and offer an appropriate remuneration. By hiring a family member to work, you will effectively shift a part of your income to your relative.
Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. One can also form a Hindu Undivided Family (HUF) as a separate entity, which helps further distribute income to this entity as well.
Don't miss out on the permissible deductions:
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