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Which accounting method should freelancers prefer?

Which accounting method should freelancers prefer?

It may appear that by using cash basis of accounting you tax liability will be reduced. However, the reality is – it may only postpone your tax outgo, you will not be able to achieve a tax reduction as such.

Once you choose a method of accounting you are expected to regularly comply with that method. You are not allowed to change the method of accounting often – if your intention is to save taxes or avoid taxes. Usually, it seems more logical to follow the Accrual Basis – unless your receipts are very irregular or are very uncertain.

The Income Tax Act has specified the books of accounts that are required to be maintained for the purpose of Income Tax. These have been prescribed under section 44AA and Rule 6F.

Total taxable income and tax payable

Net Taxable Income = Gross Taxable Income – Deductions

One can reduce their tax outgo by making full use of deductions under Section 80. Section 80C of the Income Tax Act offers tax relief on certain expenses and encourages taxpayers to save for the future (by giving deductions on investments in financial products).

You can reduce your taxable income by up to Rs.1,50,000 by claiming deduction for the amount actually invested/spent under this section.

Which accounting method should freelancers prefer?

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