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Self-employment in India stands at a solid 76.01% as per a cumulative indicator report by the World Bank. It includes a wide range of employees - from freelancers and casual labourers to designers and authors. Self-employed people may have unpredictable payment structures which require them to invest in tax saving options.
It is no news that paying taxes is critical to maintaining a thriving economy, and yet, self-employed people sometimes struggle with irregular payment arrangements and a lack of formal accounting processes. Because of these factors, it is necessary to understand how to save tax in India using some dependable income tax saving schemes.
When you think of being self-employed, one of the first questions that pop into your head is whether you need a company to initiate a business. No law makes it mandatory to have a company if you are the sole proprietor and the business functions smoothly. However, if your business grows and you plan to hire a workforce, you will require a company with its bank account and PAN to file taxes easily.
The best way to save tax is an important matter that everyone should consider looking into. Mentioned below is a compiled list of some of the tax saving plans in India available.
Life insurance is an excellent method to protect your loved ones and is one of the most popular tax saving investments. Besides security, it also has several other advantages. For example, it also provides the benefit of tax deductions under section 80C of the Income Tax Act, 1961.
National Pension Scheme is one of the most popular options when people ask - how to save tax in India. It allows self-employed persons to put money aside for their future retirement plans. You can make a regular payment to the schemes at your convenience. All Indian citizens from the age of 18 to 60 can be a part of this plan. Section 80C and Section 80CCD (1B) allow you to deduct your NPS investment.
The Public Provident Fund is another vital part of income tax saving schemes in India. It is a government-regulated micro-savings program and is one of the least risky fixed-income investments. You can contribute to your PPF and get a tax deduction of up to Rs 1.5 lakh each year under Section 80C of the IT Act. Furthermore, the maturity profits and interests are tax-free.
Self-employed individuals could explore ELSS as a viable alternative for capital growth and tax saving plans. ELSS is a mixed equity mutual fund with a three-year mandatory investment lock-in term. The acquisition and withdrawal of funds were formerly tax-free. However, starting 2018, profits of more than Rs 1 lakh per year are subject to a 10% capital gains tax.
ULIPs are a hybrid of investment and insurance that can help self-employed people by being one of the most reliable tax saving options in India. When saving, you should think about the return on capital, liquidity, and taxes. Under Section 80C of the Income Tax Act, payments to a unit-linked plan are tax-deductible.
It is a sound investment that safeguards your money and provides a guaranteed rate of return for a specific duration of time. In addition, your investment in a tax-saving FD also qualifies you for a tax deduction of up to Rs 1.5 lakh each fiscal year.
To file your income tax returns, you can fill an ITR-4 or ITR-4S form, where the former is for those earning from a profession or proprietary business, and the latter is for those with a presumptive business income. Another effective means for freelancers to save taxes is by claiming business-related expenses and other tax rebates under Section 80C of the IT Act.
To summarise, the best way to save tax in India is to make solid investments and join in trustworthy schemes. One can make their self-employment journey smooth sailing by assessing the pros and cons of credible tax saving plans to enjoy multiple tax benefits for the self-employed in India.
- A Consumer Education Initiative series by Kotak Life