Have you claimed these deductions?
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Chandralekha Mukerji
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For the salaried class, it is easy to file eturns. There is Form 16 to turn to.
There are also defined and well known heads under which
salaried employees can claim deductions.However, for freelance
professionals and consultants, it's a different story . To claim certain
deductions, besides having to keep records of various financial
transactions, they have to ensure that some little-known conditions are
also met. “Quite often, they tend to miss out on claiming genuine
expenses because of lack of awareness,“ says Varun Advani, COO,
makemyreturns.com.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 can claim expenses directly related to his or her business. This includes rent, repairs, office supplies, telephone bills, Internet bills, travel expenses--domestic and foreign--meals, entertainment and hospitality-related expenses connected with the business. These have to be business-related expenses and not personal. If you are using a mobile phone or Internet connection for 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 the percentage of the bill which can be allocated to professional expenses,“ says Archit Gupta, Founder and CEO, ClearTax.in.
Similarly , in case you are living in a rented apartment and are using a room to carry out business-related activities, you can show a proportional amount as business rental.“Even if the house belongs to your parents, you can pay them rent and show it as a business expense,“ says Sudhir Kaushik, CA and CFO, Taxspanner .com.
Compliance Tip:
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 accountpayee 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 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%. 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 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 from your interest and principal repayment claims before you show it under the capital asset depreciation column,“ says Kaushik.
Compliance Tip:
The percentage you can charge as depreciation varies hugely, even within a 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. “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,“ says Advani.Entrepreneurs often take services from professionals outside India. Some of them work as consultants, while others are on pay-rolls.“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,“ says Advani.
Compliance Tip:
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.
OPERATIONAL EXPENSES
A freelancer can claim expenses directly related to his or her business. This includes rent, repairs, office supplies, telephone bills, Internet bills, travel expenses--domestic and foreign--meals, entertainment and hospitality-related expenses connected with the business. These have to be business-related expenses and not personal. If you are using a mobile phone or Internet connection for 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 the percentage of the bill which can be allocated to professional expenses,“ says Archit Gupta, Founder and CEO, ClearTax.in.
Similarly , in case you are living in a rented apartment and are using a room to carry out business-related activities, you can show a proportional amount as business rental.“Even if the house belongs to your parents, you can pay them rent and show it as a business expense,“ says Sudhir Kaushik, CA and CFO, Taxspanner .com.
Compliance Tip:
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 accountpayee 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 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%. 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 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 from your interest and principal repayment claims before you show it under the capital asset depreciation column,“ says Kaushik.
Compliance Tip:
The percentage you can charge as depreciation varies hugely, even within a 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. “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,“ says Advani.Entrepreneurs often take services from professionals outside India. Some of them work as consultants, while others are on pay-rolls.“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,“ says Advani.
Compliance Tip:
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.
