Creative professionals are so busy in creating new things that they do not realise they are creating tax as well on their incomes. Creative professionals may include architects, designers, interior decorators, advertisers, etc. In this article, we try to make income tax simpler to be understood by creative professionals. This allows them to be more creative in their work instead of worrying about their taxes.
Taxable Sources of Income
1.Income from a full-time job:
The income creative professionals make for working at a company as an employee is taxable under the head of salaries. If he works on a contract basis and receives income in their professional capacity, then it will be taxable as income from profession. You can confirm whether you receive salary or professional income by checking your form 26AS. If the section mentioned in form 26AS is 192, then it is salary, and if it is mentioned as section 194J, then it is professional income. Here’s a guide to help you. Download form 26AS.
2.Income from a foreign client
This is a confusion that creative professionals usually have. Whether the income they make from a foreign client is taxed in India or not? So, the answer is ‘YES’. As an Indian resident, you are receiving income in India, hence your global income will be taxed in India.
What is Presumptive Taxation?
For professionals, Government has introduced a new scheme of presumptive taxation (section 44ADA), under which professionals can file their return declaring 50% of their gross receipts (up to Rs. 50 lakhs) as income, and after deducting section 80 deductions, professionals need to pay tax on balance total income. The creative professionals who are specified to be eligible to opt for this scheme are architectural professional, interior decorator, advertiser or technical consultant.
If you receive income from a foreign client in your foreign bank account, even then it will be taxed in India, if you are an Indian resident. If you are paying taxes on your foreign income in that foreign country, then you can claim tax relief on taxed income (which was taxed twice), while filing a return in India as per DTAA, entered between India and that particular foreign country.
If you are working as an employee or as a partner and you withdraw salary then it will be simply taxed as salary. If you are working on contract basis in your professional capacity, then the income from such activity is considered as professional income. A professional partnership firm can also opt for such scheme if its professional income is up to Rs. 50 lakhs (for FY 16-17).
Presumptive Taxation involves the use of indirect methods to compute tax liability, where the taxable income is calculated based on assumptions instead of actuals. Here, the professional is required to declare a given percentage of gross receipts of professional income as its income, and pay a fixed percentage of it as the tax. As per Finance Act 2016, professionals (as notified by CBDT) with gross receipts up to Rs. 50 Lakhs for the period April 1st, 2016 to March 31st, 2017, can opt for presumptive taxation.
Even if your professional gross receipts are up to Rs. 50 Lakhs, you can opt for normal provisions instead of the presumptive provisions.
Three Benefits to File Returns under Presumptive Tax
Easy to File: The tax form is much shorter and simpler as compared to a complex 30 pages ITR form for filing.
Save Money: Professionals can now file tax returns on their own instead of paying a tax consultant. Typically, consultants charge anywhere from Rs. 5000 – 15000 for such filings.
Save Tax: Usually, professionals do not have many expenses to declare. By declaring 50% of income as profit and balance as expenses, a lot of tax saving can be done.
How is Presumptive Tax Computed?
An example is illustrated to simplify the calculation of tax for you, when you opt for the presumptive taxation:
Aditi is an architect and has worked on several projects that gave her Rs. 40 Lakhs during the financial year. She does not have any other income. She is eligible to file returns under presumptive tax. Her income and tax will computed as shown below:
Income = 50% x 40 = Rs. 20 Lakhs
Her Tax will be computed as per the Tax Slabs for FY16-17Upto 2.5 Lakhs, Tax = 0
Between 2.5 Lakhs and 5 Lakhs, Tax = 10% x 2.5 lakhs= Rs. 25,000
Between 5 Lakhs and 10 Lakhs, Tax = 20% x 5 lakhs= Rs. 100,000
Between 10 Lakhs and 20 Lakhs, Tax = 30% x 10 lakhs= Rs. 300,000
Income Tax Payable = 300,000 + 100,000 + 25,000 = Rs. 4,25,000. Adding cess @3%, total income tax = Rs. 4,25,000 + Rs. 12,750 = Rs. 437,750
Need to file your taxes? Do it here.
This article was originally written by ClearTax and found in its original form here.
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