Salaried employees have several avenues to save tax. But self-employed persons do not have options like standard deduction, employee provident fund, deduction for house rent allowance, etc. However, there are some tax benefits/investment avenues available to self-employed as well. Let us see what these are.
Section 10(13A) of the Income Tax Act provides for tax exemption to a salaried person in respect of rent paid for a rented accommodation occupied by him, if he is in receipt of House Rent Allowance (HRA) called by whatsoever name.
In order to help self-employed taxpayers and salaried taxpayers who do not receive any HRA for rent paid for accommodation occupied by them, tax laws have Section 80 GG. This category of taxpayers, who pay rent but do not receive any HRA, are entitled to claim a deduction up to Rs 5,000 per month, in excess of 10% of their total income, subject to a maximum 25% of their gross total income. Both these deductions can only be claimed in respect of the accommodation occupied by them, provided the accommodation is situated in the place where they are employed or carrying on their business or profession.
Salaried people have the benefit of saving tax by contributing to the Employee Provident Fund (EPF). No such benefit was available to the self-employed until 1968, when the Public Provident Fund (PPF) scheme was launched.
The PPF account can be opened by salaried and self-employed both. Both the EPF and PPF entitle the contributor for tax deduction under Section 80 C for an amount up to Rs 1.50 lakh. Moreover, the interest received as well maturity proceeds of both schemes are fully tax free. The rate of interest for PPF account is announced quarterly. The current rate of interest for PPF is 8% p.a. for the next October-December quarter. For PPF you can claim tax benefits under section 80 C even if you contribute to your account or the accounts of spouse or any children.
Government employees as well as those working in undertakings owned by government get pension after retirement. Likewise, salaried persons also get pension out of provident fund contribution made, as part of it goes towards pension. Self-employed do not have any such facility.
National Pension System (NPS) affords an opportunity to a self-employed person to accumulate funds and get pension after retirement. Self-employed can contribute to NPS and claim tax benefits up to 20% of gross total income. Though NPS contribution is eligible for deduction under Section 80 CCD(1) within the overall limit of Rs 1.50 lakh per annum as stipulated under Section 80 CCE, taxpayers can claim additional benefits under Section 80 CCD(1B) up to Rs 50,000 for NPS, in case the existing limit of Rs. 1.50 lakh gets exhausted without NPS contribution. With this additional benefit even one can contribute up to Rs 2 lakh (1.50 lakh basic and Rs 50,000 additional benefit) to NPS in case one does not have any other eligible item for tax deduction.
NPS account can be opened by only an Indian citizen, even by those settled outside India. The subscriber to NPS account has to mandatorily buy annuity with 40% of the corpus from a life insurance compamy and 40% can be withdrawn tax free. In respect of the balance 20% of the corpus the subscriber can either withdraw it and pay tax on it or he can buy annuity with it. The annuity received from insurance company is taxable as and when received. Though the salaried can claim the standard deduction up to Rs 40,000 in respect of pension received, no such benefit is available to self employed who receive pension from the insurance company for annuity bought under the NPS.
