As an individual who is not receiving a salary, it can be challenging to navigate the tax system in India. Whether you are a freelancer, a business owner, or someone who receives income from other sources, you are likely concerned about minimizing your tax liability and saving money on taxes.
While paying taxes is a necessary obligation, there are several legal ways to save money on taxes in India.
In this article, we will explore various strategies that non-salaried individuals can use to reduce their tax burden and keep more of their hard-earned money.
We will discuss topics such as deductions, exemptions, tax-saving investments, and more. By the end of this post, you will have a better understanding of how to optimize your tax planning and save money on taxes in India.
So, let’s dive in and explore the various ways to reduce your tax liability as a non-salaried individual in India.
Read more: How To Save Money As A Teenager
1. Income tax slab for non-salaried individuals
The new tax system provides greater tax savings for those who are not salaried by prohibiting deductions. Non-salaried employees are unable to make use of HRA exemptions or standard deductions, in contrast to salaried taxpayers.
Please be aware that persons must adhere to the old tax regime in order to claim deductions under Sections 80C and 80D.
Let’s use an example to better comprehend the non-salaried individual’s income tax bracket:
Suppose an individual has a gross income of Rs. 10,00,000.
|Deductions||Old tax system||New tax system|
|Section 80C||Rs. 1,50,000||NA|
|Section 80D||Rs. 15,000||NA|
|Taxable Income||Rs. 8,35,000||Rs. 10,00,000|
|Tax Payable||Rs. 79,500||Rs. 75,000|
|4% Cess||Rs. 3,180||Rs. 3,000|
|Annual Tax Payable||Rs. 82,680||Rs. 78,000|
In the old tax regime, if an individual who doesn’t receive a salary earns Rs.10 Lacs annually and claims deductions of Rs.15,000 for health insurance under Section 80D and Rs.1.50 Lacs tax benefit under Section 80C, they would have to pay approximately Rs.82,680 in taxes.
On the other hand, if they do not claim any deductions under the new tax regime, they can save Rs.4,680 and pay Rs.78,000 in taxes. Hence, the new tax slab could be advantageous for non-salaried individuals.
For those with business income, it’s important to note that once an individual opts for the new tax regime, they cannot change their option. Therefore, it is crucial to make the decision before filing the IT return for AY 2021-22.
While the proposed tax structure appears to provide relief to non-salaried taxpayers, it may still be a complicated process. In such cases, taxpayers can seek the assistance of professionals.
2. Types of Investments for Non-salaried People
Before delving into specific investment options, it’s important to keep in mind a few investment principles. These principles may not directly impact your investment performance, but they can affect your peace of mind.
One of these principles is to invest the income earned from high-risk assets and investments into safer instruments.
Conversely, the income earned from safer investments should be directed toward high-risk investments. Another important principle is to always save for retirement.
By adhering to these principles, you can not only be content with your investment choices but also achieve financial independence from your economic activities.
Fortunately, there are several investment options available that can help you achieve these objectives. Depending on how frequently you want to invest, some of the best investment options are listed below.
The Public Provident Fund (PPF) is a long-term investment alternative that has an appealing rate of interest and offers returns on the amount invested. Income tax does not tax the returns and interest earned under this scheme. Section 80C deductions can be claimed on the amount deposited during a year by opening a PPF account under this scheme.
Every year, the Finance Ministry sets the interest rate that is paid on March 31. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.
PPF has several essential features, such as a minimum tenure of 15 years, which can be extended in blocks of five years as per the individual’s preference. For each financial year, the minimum investment allowed is Rs 500, and the maximum is Rs 1.5 lakh, which can be invested in a lump sum or a maximum of 12 installments.
An account can be opened with just Rs 100 a month, and annual investments above Rs 1.5 lakh will not earn interest and will not be eligible for tax savings. Deposits into a PPF account have to be made at least once every year for 15 years, and deposits can be made through cash, cheque, demand draft (DD), or online fund transfer.
Since PPF is backed by the Indian government, it provides guaranteed, risk-free returns and complete capital protection, making it a low-risk investment. PPF returns are fixed, and they are used as a diversification tool for the investor’s portfolio.
The PPF interest and maturity amount are tax-free under section 80C of the Income Tax Act, 1961, making it a tax-efficient investment. PPF amount can be withdrawn partially from the seventh financial year onwards.
The National Pension Scheme is a government-backed social security initiative that is available to employees across various sectors, except for those in the armed forces. This scheme aims to encourage individuals to invest in a pension account throughout their employment and receive a monthly pension after retirement.
A percentage of the investment goes towards equities, which may not offer guaranteed returns but generally provides better returns than other traditional tax-saving investments like PPF. The scheme has been in existence for over a decade and has delivered annualized returns of 9% to 12%, with the option to change fund managers if necessary.
Self-employed individuals who contribute to NPS are eligible for tax breaks, including a tax deduction of up to 20% of gross income under Section 80 CCD(1), subject to a limit of Rs. 1.50 lakh under Section 80CCE, and an additional tax deduction of up to Rs. 50,000 under Section 80 CCD(1B).
The returns of the National Pension Scheme depend on the performance of the assets invested in, which makes it a market-linked product.
The scheme allows investors to choose an asset mix and a fund manager, who will then invest the money in specific schemes covering equity, government debt, corporate debt, and alternative assets.
The scheme offers two investment options, tier-1, and tier-2, with the former being exclusively for retirement and remaining locked until the investor reaches 60 years of age.
Read more: PMEGP Loan Scheme
Unity Linked Investment Plans (ULIPs) are a versatile investment option that offers a blend of equity, debt, or balanced funds under the same plan, making them highly tax-efficient. They also provide deductions on invested money, maturity proceeds, and withdrawals under 80C. ULIPs offer tax-free money and come with an inbuilt life cover that ensures the financial security of your family even after your untimely demise.
Canara HSBC Life’s Invest 4G ULIP plan is an excellent example of how you can ‘insure’ your financial goals. For instance, if you want to accumulate Rs. 50 lakhs in the next 20 years and invest Rs. 1 lakh every year, you can start with the Invest 4G ULIP plan with a life cover of Rs. 10 lakhs.
If, unfortunately, you meet with an accident in the 8th policy year, the insurance policy will pay Rs. 10 lakhs to your family immediately. The insurer will then invest the remaining premiums, and at the time of intended maturity, your family will receive the total accumulated fund value from the policy.
ULIPs can also help you achieve important financial goals such as your child’s education and marriage. If used correctly, they can be the best investment for your retirement, allowing you to generate tax-free pension income after retirement. Even after you retire, you can withdraw from other retirement investments and add funds to your ULIP plan. While pension income is taxable, you can withdraw up to Rs. 5 lakhs a year from pension funds with zero tax liability and invest an additional Rs. 1.5 lakhs in the ULIP plan.
3. Filing ITR for a Non-salaried Person
The benefits of filing income tax returns are numerous. However, the main justification for filing an ITR is that anyone whose income is above the taxable limit must.
Let’s concentrate on the requirements for tax filing for sources of income like organizations since we are discussing non-salaried applicants in this context. If you’re unsure of how to submit an income tax return for a business or non-profit organization, know that you must do so regardless of whether you made money or lost money.
The ITR forms that apply to various non-salaried person categories are included in the following table. Pick the option that best fits your profile.
|Form type||Who is it applicable for|
|ITR-5||LLPs, business trusts, AOPs, BOIs, cooperative societies, local authorities, insolvent estates, investment funds, artificial juridical persons as defined in Section 2(31)(vii), and estates of deceased individuals|
|ITR-6||Companies excluding the ones filing returns under Section 11|
|ITR-7||Individuals and companies claiming exemption under Section 139(4A) /139(4B) /139(4C) /139(4D) /139(4E) /139(4F)|
4. Process of Filing ITR
1. Online method
Here is a step-by-step tutorial on how non-salaried employees can file their income tax forms online:
- Go to the income tax e-filing portal.
- Click on “IT Return Preparation Software” on the right sidebar.
- Select the correct assessment year from the drop-down menu.
- Download the ITR-5, ITR-6, or ITR-7 forms as per your suitability.
- Extract the downloaded ZIP file and open the form.
- Fill in the personal details under “PART A – GENERAL (1).”
- Click on the “Pre-fill” option to quickly fill in personal details.
- Enter your e-filing user ID, password, and date of both/incorporation to pre-fill most of the fields for required information.
- Fill in the other mandatory fields which are still empty.
- Select the type of company and state if it is a private or public company.
- Under “Filing Status,” select the section depending on the time of filing and return type.
- Fill in the remaining fields where you have to choose between “Yes” and “No.”
- Head on to the next section and similarly fill in all necessary fields until the entire form is filled.
- Click on the “e-Pay Tax” button under “Part B – TTI” if you need to pay a penalty.
- Under the last tab titled “Verification,” enter your details to complete the declaration.
- Check all filled-in details for any mistakes.
- Click on the “Submit” button.
- Enter your user ID, password, and DOB in a new window to confirm submission.
- Enter your user PIN in the next dialogue box before finally clicking “OK.”
The next screen will display a message saying, “ITR Submitted Successfully.”
2. Offline method
To file ITR offline for a non-salaried person, follow these steps:
- Visit the income tax e-filing portal.
- Follow steps 1 to 3 of the online filing process.
- Download the file in MS Excel format and extract the ZIP file or select “Download Pre-filled XML” and import it to pre-fill available details.
- Fill in all fields with required information similar to the process described in the online method.
- Generate the XML and save it.
- Sign in to the e-filing portal with your user ID, password, and security code.
- Choose “Income Tax Return” from the “e-File” menu.
- Select the required assessment year, filing type, and ITR form type on the income tax return page.
- Click on “Upload XML” under submission mode.
- Choose from the options to verify ITR and hit “Continue,” then upload your ITR XML file and attach other necessary documents depending on your chosen verification type.
- Finally, click on “Submit.”
You may be questioning whether the lengthy process of filing an Income Tax Return (ITR) is worthwhile. However, completing this process has several benefits, which we will outline below.
- If you have paid more taxes than your liability for a specific Assessment Year (AY), filing an ITR enables you to claim this excess amount and save on your income.
- By filing returns before the due date, taxpayers can carry forward their “Loss of Income” to subsequent years if the amount exceeds the refundable limit for the AY.
- When seeking loans from financial institutions, ITR copies are often requested. Therefore, filing your returns can expedite the approval process for these financial products.
- ITR documents can serve as evidence of your place of residence and income, which is advantageous for self-employed individuals and freelancers.
- ITR copies are mandatory for visa applications and other procedures, such as applying for a credit card or high-coverage insurance policies.
- Most importantly, filing your returns before the due date can prevent substantial fines, interest, and even legal complications in the future.
Read more: Different Types of Income Tax in India
Here are some measures that taxpayers should keep in mind while filing their income tax returns:
- It’s important to be aware of the due date for filing your returns and try to file them before that date.
- If you’re filing a belated return because you missed the due date, be aware of the various late penalties that may apply.
- Make sure to download Form 26AS to check the actual tax you’ve paid before filing your returns.
- Choose the correct ITR form based on your taxation category.
- Calculate your total income, tax liability, and tax paid carefully. Clear any dues before filing your returns.
- Check the list of required documents for ITR filing to ensure a smooth process.
- Double-check all the details you enter while filling out your ITR form to ensure accuracy.
In conclusion, as a non-salaried individual in India, you may face unique challenges when it comes to managing your tax liability. However, with the right strategies and planning, it’s possible to minimize your tax burden and save money on taxes. From taking advantage of deductions and exemptions to investing in tax-saving instruments, there are several legal ways to reduce your tax liability.
By following the measures discussed in this article, such as staying updated with due dates, choosing the correct ITR form, and checking your actual tax paid before filing, you can ensure a smooth and hassle-free tax filing process.
Remember, tax planning is an ongoing process, and it’s essential to stay informed about changes to tax laws and regulations. By doing so, you can optimize your tax planning and keep more of your hard-earned money in your pocket. So, start implementing these strategies today and take control of your tax situation!