Claim Tax Ddeductions

 





Freelancers and entrepreneurs can reduce their tax outgo by claiming these not-so-well-known deductions.

 

For the salaried class, it is fairly easy to file returns. There is the Form 16 to turn to. There are also clearly defined and well-known heads under which salaried employees can claim deductions. For instance, chances of missing out on deductions towards life or health insurance premium are fairly remote. However, for freelance professionals and consultants, it's a different story. To claim certain deductions, besides having to keep records of their various financial transactions, freelancers have to ensure that some relatively little-known conditions are also met. Quite often, they tend to miss out on claiming genuine expenses because of lack of awareness of certain I-T deductions and conditions. Clearly, information is key to keeping the money in one's own pocket. Here's how freelancers and new entrepreneurs can ensure they do not miss out on deductions they are eligible for.

OPERATIONAL EXPENSES

A freelancer, usually, can claim all expenses directly related to his or her business. The list includes rent, repairs, office supplies, monthly telephone bills, Internet bills, travel expenses--both domestic and foreign--meals, entertainment and all hospitality-related expenses connected with the business. Bear in mind, these have to be business-related expenses and not personal. For instance, if you are using a mobile phone or an Internet connection for both personal and business purposes, only a portion of the bill can be claimed as deduction. One can see the trend for a couple of months and then define a percentage of the bill which can be allocated to professional expenses.

Similarly, in case you are living in a rented apartment and are using one of its rooms for carrying out business-related activities-as a home office-you can show a proportional amount as business rental expense. Even if the house belongs to your parents, you can pay them rent and show it as a business expense. For instance, if you are operating out of a room of a 4-BHK apartment that belongs to your father, you could show one-fourth of the notional rent of the property as your rental expense.

 

When paying in cash, make sure the amount does not exceeds `20,000 per day. As per Section 40 A (3), payments above `20,000, to qualify for deductions, have to be made using an account-payee cheque.

DEPRECIATING ASSETS

On capital expenses, you are allowed to charge a small depreciation every year. Capital expenditures include furniture and gadgets used to set up your office, property bought to run business, etc., where benefits from such assets are usually expected to last more than a year. The depreciation percentage and methods are laid out in the I-T Act for different type of assets, ranging from 5% to 100%. While on a car you can charge 20% depreciation every year, on electronic equipment such as laptops, you can charge up to 60% a year. In case you own the property and only a portion is being used as your office, you can still show depreciation on a percentage of the property value. If you have taken a home loan on this property, make sure you do not claim the amount twice. Deduct the business expense portion from your interest and principal repayment claims before you show it under the capital asset depreciation column

COMPLIANCE TIP

The percentage you can charge as depreciation varies hugely, even within a particular category. For instance, for a building mainly used for residential purposes, you can charge 5-10% depreciation. However, if you have built wooden structures in the office, those can be depreciated at 100% in the first year itself. Then there are different rates for intangible assets such as patents and copyrights. It is important to recognise the block of assets correctly. If in doubt, it is best to take professional help.

PROFESSIONAL FEES

Freelancers often consult other professionals and pay them a fee. If documented, such payments can be claimed as deductions, as they qualify as business expense.However, do not try to fool the taxman. A lot of new entrepreneurs tend to employee their relatives at key positions at higher salaries. At times, they jack-up the salaries to claim higher deductions under business expenses. To check these cases of tax-avoidance, the I-T department says that any payment made over and above the market rate for hiring such a resource, won't be eligible for deduction. Entrepreneurs often take services from professionals outside India. Some of them work as consultants, while others are on payrolls. Either the money is being paid as a fee or as salary, such an expense will be allowed for deductions only when TDS has been deducted and paid to the I-T department before filing taxes.

If you are a professional with a turnover of more than `25 lakh and are liable to get your books of accounts audited, payments such as interest, commission, royalty, etc. won't be allowed for deductions, if you have not deducted the tax at source and submitted it before filing the return.

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