Be it the salaried, freelancers, business owners – each of these taxpayers is taxed differently under the Indian income tax laws. While Indian companies and firms have a fixed rate of tax calculated on their tax profits, the individual, AOP, HUF, and BOI taxpayers are taxed based on the income slab they fall under.
Here are the Income-tax rules for different classes of income groups;
The income is taxed under the head ‘Salaries’ if received under the employer-employee relationship. For instance, Archit Gupta Founder and CEO of Clear says, “if the taxpayer receives a pension from his former employer, such income is taxable as ‘Salaries’, whereas if the pension is received by family members (Family Pension) due to the death of the taxpayer, such income should be taxed as ‘Income from other sources.”
The definition of ‘Salaries’ is not exhaustive; it includes wages, gratuity, pension, commission, perquisites, fees, the advance salary, leaves encashment, the employer’s contribution to a Recognised Provident Fund over the prescribed limit, etc.
Gupta explains, “The taxpayers can claim the income tax exemption, which is available on a few of the salary components given either as ‘allowances’ or ‘perquisites’.” For instance, the exemption for HRA allowance, LTA allowance, food coupons, etc., is available as specified in the income tax rules.
A freelancer’s income is an income earned from skills. Hence, Gupta points out, “such income shall be treated as income from a profession. As per the Income Tax Act, professional income should be taxed under the head ‘income from business or profession’,”
Industry experts clarify certain people carrying on professions have been divided into two categories for taxation purposes: Specified professionals as per the Income Tax Act and Others.
Gupta says, “The specified professionals (Section 44AA) can tax their professional receipts as per the presumptive taxation scheme (Section 44ADA) if prescribed conditions are satisfied. Under the said scheme, an amount equal to or higher than 50 per cent of the total gross receipts earned from freelancing shall be the income from such a profession.” There is no need to maintain books of accounts and conduct audits if you opt for the presumptive taxation scheme.
However, if the gross receipts exceed Rs 50 lakhs in any financial year, or if the profits and gains under the presumptive taxation scheme for professionals are claimed to be lower than the deemed income (50 per cent of gross receipts) in any financial year and the income exceeds the basic exemption limit, the books of accounts should be audited for that financial year.
If you are a non-specified professional, Gupta says, “the gross receipts from freelancing shall be reduced by the expenses incurred. The net profit shall be taxed under the head ‘income from business or profession’. In such cases, one needs to maintain accounts for the same.”
Small business owners with a turnover of less than Rs 2 crore and satisfying other conditions can opt for a presumptive taxation scheme (Section 44AD). Under Section 44AD, experts say, businesses are eligible to offer to tax a minimum net income of 8 per cent of the gross turnover. If 95 per cent of the transactions are digital transactions, the net income to be offered to tax is reduced to 6 per cent in such cases.
Gupta explains, “If profits and gains from business under Section 44AD are claimed lower than the deemed profits in any financial year, and income exceeds the basic exemption limit, the taxpayer’s books of accounts need to be audited. However, suppose a taxpayer is not eligible for a presumptive taxation scheme. In that case, books of accounts need to be maintained, and the net income (after reducing the expenses) should be taxed under the head ‘income from business or profession’.”
“The taxes can reduce their tax liability by investing in various investment schemes that qualify for deduction from the taxable income,” he adds.