Now, one would wonder that why this fraternity has been overburdened with these compliances and what benefits will these compliances ensue. We in this article, will not go into the details of “Why this Law”, as it would open a plethora of legal debates, rather we would focus on the benefits that a freelance professional can ensue from keeping proper accounting records as per section 44AA of the Income Tax Act.
First of all, it is pertinent to point out that, the ignorance of accounting and taxations laws, May not only lead to non-compliance, it may also rob the freelancer from the opportunity to claim proper allowable expenses as per the Income Tax Act, which reduces the total tax liability to a considerable extent. We will discuss some of these allowable expenses in the following paragraphs.
Section 28 to section 43 of the Income Tax Act, deals with Income from Business and Profession and also deals with various deductions allowable to a person carrying on a business a profession and has incurred expenses in connection to his business and profession; Section 32 deals with depreciation and section 37 is a general section, according to which, all legal expenses, incurred in connection with business and profession is an allowable expenses. Some of the indicative allowable expenses, which a freelance or working from home professional may incur are as follows:
- Depreciation: Depreciation can be claimed on any asset owned by the professional in his own name and used for the purpose of his business or profession, as per the prescribed rates of the Income Tax Act. In case of assets used partly for business and partly for personal uses, depreciation can be claimed on proportionate value of the asset. For instance depreciation can be claimed by a freelancer on his Laptops, notepads, iPads, mobile phones, computers, modems and other related electronic devices, furniture and electrical equipments, which he uses for his profession, even though the same may be used at home or while traveling or any other place; Similarly, depreciation can also be claimed on owned conveyances, may it be two wheeler or four wheeler.
- Lease Rentals: Similarly, proportionate value of lease rentals can be claimed as deduction, by way of debiting the same to the profit and loss account of the professional. For instance, if a person is residing In a 1000 sqft, flat and paying a rental of Rs. 10, 000/- per month, he can embark a 100 sqft place as his working area, and claim deduction of proportionate value of rent, i.e., Rs. 1, 000/-, as rental expense incurred for the purpose of his freelance profession. Rental value of cars and other conveyances and any other asset, hired and used for profession can be claimed as deduction.
- Telephone and internet expenses: If the freelance professional, uses his mobile, telephone and internet connection for his profession, the monthly expenses of the same can again be proportionately debited to profit and loss account, keeping the usage into consideration; If a particular connection has been taken specifically for the profession and is most of the time used for the profession, such expenses can be wholly debited to the profit and loss account on actual basis.
- Traveling and conveyance: Fuel, repair & maintenance and chauffer expenses for owned vehicles and hire charges of hired vehicles, used for travel and conveyance for the purpose of profession can be claimed fully or proportionately, based upon the degree of usage. Similarly, if the freelance work requires tours and travels to distant places, the journey tickets, boarding, lodging, food and traveling expenses of the persons traveling for the purpose of profession, and not the family members and friends giving a leisurely company, can be claimed as deduction by way of debiting the same to the profit and loss account.
- Stationery, postage and miscellaneous expenses: Stationery, postage and other miscellaneous expenses, relating to carrying out the freelance work from home or otherwise can also be claimed as deduction from the total income; There can also be certain other expenses, which may vary from case to case and depend upon the nature and scale of business or profession carried out by a person; At times a professional may also appoint assistants, interns, clerks, peons and at times may even sub-contract his work. So the expenses relating to salaries paid to the staff and contract or professional fees paid to a professional colleague are all allowable expenses.
Thus, it will be cherished that the income tax and accounting knowledge and compliance, does not only bring the burden of compliances, rather it also suggests the ways in which the tax liability can be minimized; So by maintenance of proper records and books of account as per the income tax laws, one can not only comply with laws and stay worry free but also reduce his tax expense considerably.
Startups and other businesses feel free to visit Taxmantra.com for comprehensive accounting, legal, regulatory, taxation and other compliance related assistance. Alok can be reached out at email@example.com.