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How to save on Tax for professionals?

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Ignoring the claims you are entitled to could result in a big tax outgo that's easily avoidable

Action Plan

  • Capture income from regular clients and customer services correctly and promptly
  • Maintain a log book for official travel and related costs
  • Claim deduction on the rent paid for residence
  • Support TDS with certificates issued by the entity that deducted taxes

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In this world nothing can be said to be certain, except death and taxes," said Benjamin Franklin. While the former is inevitable, efficient planning can soften the latter's blow. Here, we examine some key tax-planning strategies that professionals such as lawyers and doctors may adopt. As a starting point, note that 'income net of expenditure' is taxable under the head 'profits and gains of business or profession'.

Capturing income and expenses. At the outset, income from regular clients and from customer services should be captured correctly. Income/honoraria from activities such as giving lectures, if applicable, should be offered to tax.

Office expenses, cost of utilities, staff expenses, travel and telephone expenditure and Internet charges incurred for professional purposes are some examples of deductible expenses. Professionals need to constantly update themselves technically, but related expenses such as attending seminars and conferences, updating professional skills and knowledge, professional membership fees and subscription costs for professional journals, tend to be ignored in computing deductible expenses.

Most self-employed individuals have to incur some capital expenses depending on the nature of the profession, e.g., office equipment such as computers, diagnostic instruments, furniture and fixtures. Depreciation for these assets can be claimed at the rates prescribed: where the asset is put to use for a period of less than 180 days in the year of purchase, the entitlement for depreciation will be at 50 per cent of the prescribed rates. Books, being annual publications, are entitled for a depreciation of 100 per cent.

Getting documentation right. Complications arise when the professional uses his property for both residential as well as professional purposes. In such cases, a reasonable proportion of the actual expenses incurred on maintaining the property, related taxes and utility costs need to be attributed to the professional services rendered. Same is the case when the professional uses his own car for commuting, for both official and personal purposes. Maintaining a log book for official travel and related costs is a must. Invoice copies of expenses incurred may be stored and produced to the tax authorities later to substantiate these. The tax laws mandate maintenance of specified books of account if one's professional income/gross receipts exceed the prescribed limits. Also, a tax audit is mandated if the gross receipts exceed Rs 15 lakh during the financial year.

Knowing deductions available. Employer-funded retirement plans in the form of gratuity and provident fund do not exist in the case of professionals. Therefore, there is an even greater need for conscious savings and efficient retirement planning—such savings for a rainy day can also help to reduce taxes if the investments and contributions are made in specified instruments. Getting a health and a life cover also helps. The expenditure incurred by a professional towards paying rent for his residence (in excess of 10 per cent of his total income) can be claimed as a deduction, subject to a ceiling of Rs 2,000 per month or 25 per cent of his total income, whichever is lower.

Exercising caution. If income has been subject to tax deduction at source (TDS), it needs to be supported by certificates by the person who has made the deductions. Income tax due (over and above the TDS) is required to be paid in advance over three instalments during the financial year. Timely payment of taxes helps in reducing the interest cost. However, claiming a refund arising out of excess TDS on receipts could be tedious and it may impact the cash flow. Hence, a certain amount of planning is important in the payment of tax.

Approaching the tax authorities for a certificate for lower TDS could be considered if the TDS is expected to be more than the tax payable. With the processing of returns through the Central Processing Centre, the issue of refunds could be faster if tax returns are filed electronically. This should be kept in mind while filing the return.

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

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These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

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  2. HDFC TaxSaver Invest Online
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  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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      2. ICICI Prudential Regular Gold Savings Fund
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