👍👍👍Smarter tax options for self-employed – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/portfolio/big-story/smarter-tax-options-for-self-employed/article66466482.ece

There are many advantages to their moving to the new tax regime, from the old

Union Budget 2023 offers new triggers for the self-employed to rejig their taxes, finances and investments in a smarter way. Compared to the salaried, the self-employed are likely to experience less predictable inflows and outflows of cash, while their needs for wealth creation and financial protection remain the same. Here’s how such folk can plan their finances.

The limit for presumptive tax has been increased to ₹75 lakh, from ₹50 lakh, for specified self-employed folk belonging to select professions under section 44AD and 44ADA of the Income Tax Act, including freelancers, professionals, and consultants. To avail of this higher limit, total cash receipts of the taxpayer during the year must not exceed 5 per cent of gross receipts/turnover. If you belong to the eligible professions and have annual income up to ₹75 lakh, it makes sense to switch to the presumptive tax regime, where the profits or gains from your profession are assumed to be at 50 per cent of your income for tax purposes.

Read also: Budget’s nudge to HNIs: Change investments, adopt new tax regime

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This 50 per cent assumption on expenses may leave you with a higher disposable income and ability to save, while freeing you from the hassles of maintaining books of accounts and proof of expenses for the taxman’s sake. Many self-employed professionals end up splurging on electronic devices, consumables, books, stationery, telephone charges, entertainment, in excess of actual needs, in a bid to bump up their expenses for tax set-off. This can be avoided with presumptive tax.

But while you may save tax, your working capital requirements may go up as the Budget does not provide a corresponding measure for reduction of TDS. TDS rate for professionals under section 194J is 10. per cent. However, effective tax rate under presumptive tax scheme may come to less than 10 per cent, according to Nangia Andersen LLP, who adds that for these individuals earning lower income, higher TDS gets deducted. So, professionals may face cash constraints due to higher deduction of TDS.

Simpler, more liquid products

If you are a self-employed person who is not eligible for presumptive tax, you can still consider moving from the old to new tax regime, to gain greater flexibility in your savings avenues. This may entail higher tax outgo which needs to be weighed against the greater flexibility you gain in planning your finances. Tax devices under the old regime, such as section 80C, 80CCD, etc, tend to force taxpayers to lock money into low-return and illiquid savings instruments that may not suit folks with lumpy income and need for anytime liquidity. Moving to the new regime may help you shift to simpler and more liquid products — such as equity index funds for your long-term goals, listed NCDs and passive debt funds for your short-term goals and the NPS Tier 2 account for your retirement savings.

With tax breaks in mind, the self-employed often turn to sub-optimal routes for protecting their dependents from unforeseen life events. A case in point is single-premium insurance policies or high-premium traditional products that promise assured but poor returns. With the Budget proposing to tax proceeds from policies when the investor pays over ₹5 lakh in premium per year, it is best to avoid insurance products for your investment needs. Instead, switch to pure term covers to get the most bang for buck in protecting your dependents. A ₹1-crore term cover for a 30-year-old carries a modest annual premium of ₹12,000-24,000 for men and ₹10,000-20,000 for women.

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