• A software freelancer with expected earnings of more than 50 lakhs but only for 2 years

I am a software engineer and have expected annual earnings of around 54lakhs for 2 years. And maybe I'll close the freelance if customer didn't extend the contract.
My question is if I go with sole proprietorship I'll have to pay 30% of tax. Which becomes around 16lakhs which is crazy...
I don't have any plans to grow it into business after 2 years what should I do to save taxes... Many are suggesting that I open an opc with msme certificate to save tax.
And when I close the company after 2 years I don't have to pay any taxes. Is this valid?
Asked 5 months ago in Income Tax

Yes, you don't have to pay any additional tax when you close the OPC after two years.

Your OPC will be taxed @ 25% for FY 2022-23 if its total turnover or gross receipt during the previous year 2020-21 does not exceed Rs. 400 crore. 

For taxation, OPC is treated the same as a Private company. 

If you want to close your business in future, then you can strike off your OPC without any additional tax burden. You have to bear the ROC filing cost only for the company's closure. 

Puja Sharma
CA, Jaipur
63 Answers

Not rated

First of all 54 lakhs would be your receipts and not your income and hence tax needs to be calculated on income and not tax.

How will opening an OPC will save tax. it could save around 5% tax not more than that.

Everything of future tax and all depends on the way you distribute income received.

 

I would recommend to book phone consultation for better discussion.

 

Hope you find the information helpful, if yes do rate if 5 and provide your valuable feedback for my improvement.

Thank you

Naman Maloo
CA, Jaipur
4065 Answers
70 Consultations

5.0 on 5.0

Hi,

Yes opening up OPC could save taxes around 5% as tax rate for companies is 25% as compared to sole proprietors. Further, your income would be revenue less allowable expenses. Also, it can be better planned to reduce overall taxability. Also, closing of OPC would not lead to taxability. 

I would recommend to book phone consultation for better discussion.

Thank you

Prerna Peshori
CA, Pune
94 Answers

5.0 on 5.0

- Income tax is payable on the net profit. If there are no business expenses then entire turnover would be treated as  net Profit. You can open OPC and claim lower tax deduction of 22% u/s 115BAA. No additional tax on closing of OPC.

- GST would also be applicable as turnover in a financial year exceeds Rs. 20 lacs.

- If it is an export of services then you have to apply for LUT, collect FIRC, raise proper invoices alongwith proper service agreement etc.

Vivek Kumar Arora
CA, Delhi
4493 Answers
619 Consultations

5.0 on 5.0

If you go for solo ownership tax will be payable as per your slab rate

 

Also when you are into professional service you can claim expenses upto 50% so ideally you can claim net income (after 50% Deduction) of Rs. 27 Lakhs for 2 Years and and if i divide that in 13.5 Lakh every year effective tax payable in each year after all deduction will be 1.64 Lacs

 

So total tax we can bring down to Rs. 3.28 Lacs which will be approx. 6% of total income. We can also work out ways to further reduce it by 0.75K to 1 Lac

 

Additionally you also need to take GST Registration for this income since your yearly income will exceed Rs. 20 Lacs which is threshold for GST 

Vishrut Rajesh Shah
CA, Ahmedabad
826 Answers
34 Consultations

5.0 on 5.0

As you are a freelancer, your earnings are in the nature of professional income. If your gross receipts are less thant Rs 50 Lakhs, then you will be covered under presumptive taxation u/s 44ADA. In that case your professional income will be only 50% of your earnings. However, as your earnings are more than Rs 50 lakhs, you will be covered under tax audit. 

You may reduce your tax liability to certain extent with tax planning by specified investments u/s 80C,  contribution to NPS and health insurance.

As a proprietary concern, your tax liability will be based on slabs. However, when you convert it into a partnership firm, LLP or a company, then the tax liability will be at 25-30% without any slabs. Further, the cost of compliance may also need to be matched with he savings.

You also need to get registered under  GST and  file GST Returns.

B Vijaya Kumar
CA, Hyderabad
965 Answers
124 Consultations

5.0 on 5.0

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