India is ranked as the second fastest-growing freelance market in the world. Freelancing is more fruitful now as Income tax for freelancers in India is quite lucrative with many favorable tax rules and savings opportunities. Just like any other individual who earns income has to pay tax, freelancers are also required to pay tax and file income tax returns as per the IT Act. The Income Tax Return filing process for freelancers in India is slightly different from that of salaried individuals. In this article, let’s learn more about the applicability of tax for freelancers, the tax filing process, and ways to save tax.
What is ‘Freelancing’ As Per Income Tax Rules?
As per Income Tax Laws in India, any income generated by an individual by implementing their manual or intellectual skills is considered as ‘’profit and gains from business and profession’’. As per the tax perspective, freelancing is treated as a business and profession. Various consultants and professions like blog consultancy, software developers, content writers, web designers, tutors, and fashion designers, etc. do qualify as freelancers. The tax filing for freelancers could be slightly complicated due to incomes coming from multiple sources.
Applicability of Taxes and ITR filing For Freelancers
Freelancers in India come under the purview of Income Tax and GST (Goods & Services Tax). If freelancers aggregate turnover in a year is more than Rs. 20 lakhs (Rs. 10 lakhs for North Eastern and hill states), he needs to register under GST. For most of the services, 18% is the GST rate applicable. Depending on the goods and services offered by the freelancer, the GST rate may vary.
Freelancers also need to pay income tax as per the applicable rate. Following are the income tax rates applicable for freelancers below 60 years of age:
As Per The Old Tax Regime
|Annual Income||Applicable Tax Rate|
|Less than Rs. 2.5 lakhs||Nil|
|Between Rs. 2.5 lakhs to Rs. 5 lakhs||10%|
|Between Rs. 5 lakhs to Rs. 10 lakhs||20%|
|Above Rs. 10 lakhs||30%|
As Per The New Tax Regime
|Annual Income||Applicable Tax Rate|
|Less than Rs. 2.5 lakhs||Nil|
|Between Rs. 2.5 lakhs to Rs. 5 lakhs||5%|
|Between Rs. 5 lakhs to Rs. 7.5 lakhs||10%|
|Between Rs. 7.5 lakhs to Rs. 10 lakhs||15%|
|Between Rs. 10 lakhs to Rs. 12.5 lakhs||20%|
|Between Rs. 12.5 lakhs to Rs. 15 lakhs||25%|
|Above Rs. 15 lakhs||30%|
Depending on which tax regime the freelancer opts for, tax deductions can be claimed. Freelancers can make use of the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act, 1961 and pay income tax on only half of their gross annual income, provided the total income for the year is less than Rs. 50 lakhs.
If the gross annual income exceeds Rs. 1 crores, a tax audit for business income is required to be done.
Every time a freelancer makes payment to professionals which exceeds Rs. 30,000 (aggregate during the financial year), TDS is applicable at the rate of 10%. Freelancers can file income tax returns by using the ITR-4 form under the Presumptive Taxation Scheme. Freelancers not utilizing the benefits of the Presumptive Taxation Scheme can file their returns using the ITR-3 form, which is applicable for income from business or profession. The due date for filing the ITR for FY 2020-21 and AY 2021-22 is 30th September 2021.
Income Tax Filing process for Freelancers
Following are the simple steps to follow for freelancers to file income tax returns:
- Visit Income tax e-filing portal
- Download ITR-4 under the ‘download’ tab
- Fill in all the details in the ITR-4 form. This includes filling in general information, gross total income, deductions and taxable total income, details of income from business and profession, details of TDS (tax deducted at source), and details of advance tax and self-assessment tax.
- Compute your tax using Form 26AS. Tax deductions and exemptions can be claimed under various sections to save tax. Any expenses exclusively and fully incurred for the freelancing work carried out during the tax year can also be claimed such as property rent, repair expenses, travel expenses, local taxes on business property and domain registration expenses, etc.
Some of the applicable exemptions/deductions
|Section 80 C||Exemption up to Rs. 1.5 on investment towards ELSS, ULIP, insurance, FDs, etc.|
|Section 80 CCD||Investment in central government schemes|
|Section 80 CCF||Exemption of up to Rs. 20,000 on investment in government notified infrastructure bonds|
|Section 80 D||The premium for health insurance|
|Section 80 DD||Exemption up to Rs. 1.5 on treatment for disabilities|
|Section 80 E||Education loan|
|Section 80 G||Donations to charitable trust & relief funds|
You can file the tax returns in two ways:
- Download the ITR-4 form, fill it offline, save the generated XML file and then upload it.
- Fill in the ITR-4 form online at the income tax e-filing portal and submit it after e-verification.
If the total tax liability of the freelancer in the tax year exceeds Rs. 10,000, he/she needs to pay advance tax every quarter. Here is a simple process to pay advance tax
- Go to tax information network of IT department
- Proceed under challan 280 option
- Fill in your personal information – select (0021) income tax other than companies, select the tax payment type, select the right assessment year and provide your address, PAN number, and other contact details along with the mode of payment you choose.
- Double-check the information before you proceed
- Make payment and get the tax receipt
- Keep the receipt secured for furnishing the same information while filing your income tax return.
Knowing the tax rules, benefits of presumptive tax schemes can help freelancers save the tax outgo and file income tax return with ease.
Frequently Asked Questions (FAQs)
Can salaried individuals who do freelancing work in their free time avail of the benefits under the Presumptive Taxation Scheme?
Yes. Income tax needs to be paid on both salary income and freelance income. Computation of salary income will be in a regular way and the benefit of presumptive taxation scheme can be availed for only freelance income.
How can I calculate aggregate turnover to register for GST?
As per the GST law, aggregate turnover can be calculated by aggregating taxable sales value, exempt sales value, export of goods and services, and interstate supplies by the business.
Do freelancers need Form 16 while filing Income Tax Return?
Form 16 issued by the employer helps the salaried individual to file their income tax return. However, the freelancer has multiple sources of income and is taxed under ‘income from business and profession’ can refer to Form 26AS for income tax computation and does not require form 16 for ITR filing.
Can freelancers claim Rs. 50,000 as a standard deduction as applicable for salaried individuals?
No, unlike salaried individuals there are no provisions for freelancers to claim standard deductions of Rs. 50,000.