Tax Planning for Self-Employed

ToI 10/2/09


Self-employment can be an interesting proposition as you get to play your own boss. Not just that, a self-employed person can also have income that is more tax efficient by at least 15% as against similar salary income.


Under the tax laws, the income of a self-employed person (freelance writer/journalist, independent consultant, businessman, professional) would fall under the head of income from business or profession. If you are self-employed, here are a few tips that will help you enhance your tax efficiency.


Take full advantage of all business expenses

All your work/business related expenses can be claimed as business expenses. Vouchers/bills would be required to support expenses and hence book keeping is important for this category. A variety of 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 workrelated portion.


One can also claim depreciation on work related assets like laptops/computers, furniture, UPS and vehicles. Hence bills of capital expenditures should also be maintained. Bad business debts may also be written off. Losses can also be carried forward for 8 years.


Distribution of 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.


Availing deductions

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.


Hedge your risk & save taxes

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. If you have liabilities, cover your insurance policy under the Married Women’s Property Act, so that the proceeds of the policy cannot be attached in case of inability to repay loans.


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.



A self employed person can enjoy great tax efficiency if his/her finances are well planned.

Remember to avail of depreciation benefits on capital expenditure.

Look at ways of distributing income within the family and by using the HUF structure.

Give priority to tax saving avenues that have the one time payment option and avoid large commitments if your income is irregular.

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