Manmeet Bajwa worked at a firm that demanded more hours than she was willing to devote. Tired of the monotony of her corporate life, Manmeet decided to be her own boss. Having saved enough money, and armed with a smart business plan, Manmeet set out to live her dream of becoming a business owner. She now went from being a salaried employee to a self-employed individual and so she had to prepare for the tax responsibilities as a self-employed tax filer. Here are the tricks she found helpful while filing her income tax.
She deducts tax at source:
The Income Tax act specifies the various types of transactions that require the buyer/service receiver to deduct tax at source while paying the seller. As a self-employed individual, Manmeet deducts the mandatory 10% TDS while paying her business agent his commission.
She avoids making cash payments as much as possible:
As per the IT act, Manmeet avoids making cash payments exceeding ₹20,000 in a single day to single person, except by demand draft or cheque. Except for rule 6DD which provides certain exceptions of cash payments, Manmeet conducts all her payments through electronic transfers, cheques and demand drafts.
She records her cash expenses properly:
Since Manmeet owns a business that is labour intensive, there are situation when she is forced to pay in cash e.g. payments made to daily wage workers. But she is aware that if she does not keep a record of these indirect wages and manufacturing expenses, she will end up paying a huge amount of tax annually. To prevent this, Manmeet maintains all cash receipts with the thumb imprint or signatures of labourers employed. This helps her claim proper deductions when she files taxes.
Manmeet files her IT returns on time:
Manmeet is well aware of the benefits of filing income tax returns on time. This helps her reap the benefit of carrying forward the losses on income earned from her business. She knows that business income losses may be carried forward for 8 consecutive years and can be set off against the income earned in the future if not set off against the income earned in the present year. To reap this benefit, Manmeet files her IT returns in advance.
Manmeet sells her mutual fund SIPs in instalments:
Manmeet invests in mutual fund SIPs. But she realizes that each instalment is regarded as a separate instalment. She is aware that she can earn capital gains only on long-term instalments. She doesn’t wait for her entire mutual fund to mature and instead starts selling her mutual fund in instalments, after the completion of the first year or 12 instalments. As such, she sells her instalments on FIFO or First-in First-out basis to avoid tax on short term capital gains.
Manmeet invests in PPF:
Since Manmeet is a self-employed individual; she doesn’t qualify for employer provident fund. She has therefore opened a PPF account in which she can deposit up-to ₹150,000 per annum as per Section 80C of the Income Tax Act. The deposit in the PPF account comes under the EEE bracket allows her to earn exemption on the principal invested amount, the interest earned on it and the total amount on withdrawal.
Manmeet invests in life insurance premiums:
Manmeet also utilises part of the tax-exempted ₹150,000 to pay for health insurance policies purchased for herself and her citizen parents. This way, she is investing in tax-saving instruments and earning a tax deduction of ₹50,000 to ₹75,000 while also securing her family from paying high medical bills to treat all kinds of ailments.