In India, the government has levied direct tax under the name Income Tax on a person who is known as “assessee” under Income Tax Act, 1961 and Income Tax Rules, 1962. The assessee has been defined under Income Tax Act, 1961 as:
An individual who can be a salaried person or owner of proprietorship firm, a Hindu Undivided Family also known as HUF, a partnership firm, a limited liability partnership firm, a registered company with Registrar of Companies, etc. The Income Tax Department identifies the assessee by their PAN i.e. Permanent Account Number.
All income of the person is classified under the following five heads for charging income tax and computation of total income, namely :
- Income from Salary
- Income from House Property
- Profit and gain from Business or Profession
- Capital Gain
- Income from Other sources
Who is considered as Self-Employed?
Self-employed means a person who sells his or her services to different employers without a long-term contract with any of them. Income Tax Act, 1961, levies tax on income of Self-employed persons under the head “Profit and gain from Business or Profession”. In the act, self-employment is called a profession. Business has been defined in the Act as, “any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture”. But Profession has not been defined in the Act. Profession also includes Vocation as given in the Act. Thus, a painter, a sculptor, an author, an auditor, a lawyer, a doctor, an architect, an astrologer comes under profession or Vocation.
Profit should be computed after deducting all losses and expenses incurred for earning the income in the regular course of business, profession or vocation. Professional Income earners have to get their accounts audited by Chartered Accountant and submit tax audit report if their gross receipt is Rs. 50 lakhs or more in a financial year.
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Self-Employed Tax Filing
In normal tax filing process by self-employed earner, they have to file Income Tax Return– 4 (ITR-4). They are allowed to claim all the expenses which are incurred to earn revenue from profession. These expenses are deductible subject to valid proof in record. Under the presumptive scheme, it is deemed to have been allowed the deduction of all the expenses and depreciation to arrive at profit from profession.
Presumptive Taxation
Government has introduced a presumptive taxation scheme for professional earners whose total gross receipts are less than Rs. 50 lakhs in financial year and businesses whose turnover is less than Rs 2 crore. Under this scheme, they do not have to keep all such records, books of accounts, etc. The profit is assumed at 8% of gross receipts for businesses and 50% of the gross receipts of profession in a financial year and accordingly they have to pay Income Tax as per Income tax rates applicable on them. This scheme is optional for them. If they do not go under the scheme, they have to get their books of account audited by Chartered Accountant and accordingly file the Income Tax return and pay tax. Under the presumptive scheme, assesses can claim tax saving investments under section 80C, and medical insurance premium under section 80D. All deductions under section 80 of chapter VI A are allowed. This scheme is applicable to only an Indian resident assesse who is an Individual, Hindu Undivided Family (HUF) or Partnership Firm.
If any resident assesse has opted to file Income Tax Return under the Presumptive Scheme in any financial year, in the next financial year, they may opt out of presumptive scheme and file Income Tax Return as a normal assessee. However in this case, they then cannot avail the benefits of the presumptive scheme for the next five financial years. For example:
If the resident assessee opts to file Income Tax Return under the presumptive scheme for the financial year 2016-2017 and 2017-2018, and in next financial year 2018-2019, the assesse opts out of the presumptive scheme and files Income Tax Return under normal course then he/she cannot opt to file his/her return under presumptive scheme for the next five financial years that is 2019-2020 to 2023-2024.
Tax Rates for Self-Employed/Businessmen
- Profit and gain from profession is taxable at the same rates as other income. It is levied at the following rates for FY 2024-25 (AY 2025-26), depending on the category of person :
In case of Individual whose age is below 60 years, Hindu Undivided Family, Association of persons, Body of Individual, artificial juridical person
| Old Tax Regime | New Tax Regime | ||
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 2,50,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 2,50,001 – Rs. 5,00,000 | 5% above Rs. 2,50,000 | Rs. 3,00,000 – Rs. 7,00,000 | 5% |
| Rs. 5,00,001-Rs. 10,00,000 | Rs. 12,500 + 20% above Rs. 5,00,000 | Rs. 7,00,000 -Rs. 10,00,000 | 10% |
| Above Rs. 10,00,000 | Rs. 1,12,500 + 30% above Rs. 10,00,000 | Rs. 10,00,00 – Rs. 12,00,000 | 15% |
| Rs. 12,00,000 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
Senior Citizens (60 years and above but below 80 years)
| Old Tax Regime | New Tax Regime | ||
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 3,00,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 3,00,001 – Rs. 5,00,000 | 5% above Rs. 3,00,000 | Rs. 3,00,000 – Rs. 7,00,000 | 5% |
| Rs. 5,00,001-Rs. 10,00,000 | Rs. 10,000 + 20% above Rs. 5,00,000 | Rs. 7,00,000 -Rs. 10,00,000 | 10% |
| Above Rs. 10,00,000 | Rs. 1,10,000 + 30% above Rs. 10,00,000 | Rs. 10,00,00 – Rs. 12,00,000 | 15% |
| Rs. 12,00,000 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
Very senior citizens (80 years and above)
| Old Tax Regime | New Tax Regime | ||
| Income Slab | Income Tax Rate | Income Slab | Income Tax Rate |
| Up to Rs. 5,00,000 | Nil | 0 – Rs. 3,00,000 | Nil |
| Rs. 5,00,001 – Rs. 10,00,000 | 20% above Rs. 5,00,000 | Rs. 3,00,000 – Rs. 7,00,000 | 5% |
| Above Rs. 10,00,000 | Rs. 1,00,000 + 30% above Rs. 10,00,000 | Rs. 7,00,000 -Rs. 10,00,000 | 10% |
| Rs. 10,00,00 – Rs. 12,00,000 | 15% | ||
| Rs. 12,00,000 – Rs. 15,00,000 | 20% | ||
| Above Rs. 15,00,000 | 30% | ||
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Surcharge:
- The amount of income-tax shall be increased by a surcharge at the rate of 10% of such tax, where total income exceeds fifty lakh rupees but does not exceed one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds fifty lakh rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of fifty lakh rupees by more than the amount of income that exceeds fifty lakh rupees).
- The amount of income-tax shall be increased by a surcharge at the rate of 15% of such tax, where total income exceeds one crore rupees but is less than Rs. 2 crore. However, the surcharge shall be subject to marginal relief (where income one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).
- Between Rs. 2 Crore to Rs. 5 Crore – A surcharge of 25% of the income tax has to be paid
- Above Rs. 5 Crore – A surcharge of 37% (under old regime) and 25% (under new regime) of the income tax has to be paid
- Maximum rate of surcharge on income from dividends or income under the provisions of Sections 111A, 112A and 115AD is 15%
- Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge.
- Rebate under Section 87A: The rebate is available to a resident individual if his total income does not exceed Rs. 3, 50,000. The amount of rebate shall be 100% of income-tax or Rs. 2,500, whichever is less.
In case of Firm and Limited Liability Partnership
- 30% (Including Cess) for Taxable Income Up to Rs. 1 Crore
- The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge
- 12% surcharge for taxable income more than Rs. 1 crore.
In case of Companies
- For the assessment year 2019-20, a domestic company is taxable at 30%. However, the tax rate would be 25% if turnover or gross receipt of the company does not exceed Rs. 250 crore in the previous year.
- The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge
- 7% surcharge for taxable income more than Rs. 1 crore.
- 12% surcharge for taxable income more than Rs. 10 crore.