India is the second-fastest-growing freelance market in the world. Freelancing has seen a tremendous surge in the past 2 years as the world experienced an immense uncertainty in jobs due to the pandemic. Freelancers are now being considered as the future of business.
Though freelancing has a remote-centric work scenario, it is still subject to tax rules. Let us discuss what constitutes taxable income for freelancers and what tax rules apply to freelance income.
A freelancer generates his income by offering his services to multiple companies which results in multiple revenues. In freelancing, the freelancer’s knowledge and skills are put to use to earn income. He receives a fee in return for the services he rendered as a freelancer. The total receipts earned from his multiple jobs comprise his income.
The Income Tax Act and its regulations consider freelancing as the same as owning a business and a profession. Thus, it comes under the category of “Income from business or profession”.
Expenses are an inevitable part, be it under a business or a profession. According to the income tax rules, personal expenses are not deductible. Freelancers are no different. Enlisted are some essential conditions for a freelancer in India to meet regarding expenses-
As per the Income Tax Rules, the following expenses are allowed:
Understand this with an example:
Maya is a freelance designer who works for many companies. Her main expenses include the small office she rents, phone, and internet. She uses 2 phones, one for official purposes and the other for personal use. Additionally, she owns a car as well. However, she only travels by cab when meeting with clients. In such a scenario, what expenses will be deductible?
According to the rules applicable to freelancers under the income tax act, the following expenses apply- Work phone charges, internet charges, rent for office space, and taxi fares. Deductions will not be available for car or personal phone expenses.
Since freelancers fall in the same category as salaried individuals, the tax slabs remain the same for both.
|Income(Rs)||The tax rate in New regime||Income(Rs) for individuals< 60 years (Rs)||The tax rate in the old regime||Income(Rs) for individuals> 60 years (Rs)||The tax rate in the old regime|
|Up to 2.5 lakhs||Nil||Up to 2.5 lakhs||Nil||Up to Rs3 lakh||Nil|
|2.5-5 lakhs||5%||2.5-5 lakhs||5%||3-5 lakh||5%|
|5-7.5 lakhs||10%||5-10 lakhs||20%||5-10 lakh||20%|
|7.5-10 lakhs||15%||10 lakhs and above||30%||10 lakhs and above%||30%|
|15 lakhs and above||30%|
The relevant dates for advance tax are-
|Due date||Advance tax to be paid|
|On or before 15th June||15% or more|
|On or before 15th September||Minimum 45% or more|
|On or before 15th December||Minimum 75% or more|
|On or before 15th March||Full 100%|
You can pay the advance tax in 2 ways-
A freelancer needs to file relevant tax returns just like how other income tax assessees do. Tax filing for freelancers in india can be done with the enlisted steps-
Step 1 – Determine the gross income from April 1st through March 31st of the current financial year. Note, loans are not considered as an income.
Step 2 – Calculate all the expenses associated with your freelance business as they will be eligible for deductions.
Step 3 – ITR-3, the income under the Head of Business and Profession, and ITR-4, if the freelancer applies for presumptive taxation, apply to freelancers under the income tax rules.
Step 4 – When it comes to freelance income tax, freelancers are supposed to provide every detail in the ITR mentioning their income, expenses, deductions, and advance tax paid.
Step 5 – If a freelancer earns more than Rs. 1 crore, their books will be liable for an audit. Also, ITR will be required to be filed by 30th September. However, in the absence of an audit, the freelancer can file the ITR until the 31st of July.
Section 44AD draws the rules associated with presumptive taxation for businesses. According to the section, if your turnover is not more than Rs. 2 crore then you are eligible for the scheme. Yet, you will be required to report 8% income if there are any non-digital transactions and 6% income if all the transactions made are in digital mode.
The rules and provisions for computing gains from the profession on a presumptive basis are provided under Section 44ADA. According to the section, a sum equal to or higher than 50% of the total gross receipts shall be deemed to be the gain from such profession under the head “Profits and gains of business or profession”.
This means if a person offers professional services and has gross receipts less than or equal to Rs. 50 lakhs then Section 44ADA is for that person. According to the section, the freelancer has to offer a minimum of at least 50% of his gross receipts as profit. It will be the amount on which tax shall be levied. In simple words, we can say that out of your gross receipts, the government will consider 50% as profit and 50% as expenses.
By using Section 44ADA, freelancers can reduce their freelance income by 50% and pay tax only on half of that amount. The only condition is that the freelancer’s income should not exceed Rs. 50 lakhs in a financial year.
For freelancers opting for this scheme, they can declare 50% of their gross income receipts in the ITR form 4S. Nonetheless, freelancers should determine which taxation system is the best for their particular situation by properly assessing their expenses.
Understand what is presumptive tax with an example –
Amit is a successful freelancer in finance who earned ₹40 lakh in fiscal 2019. ₹40 lakh is a sizeable amount of money that could attract hefty taxation. Thus, using the benefit of presumptive tax, the taxable income of Amit becomes –
Taxable income = ₹40 lakh / 2
= ₹20 lakh
Without the presumptive taxation scheme, the taxable income would come only to ₹30 lakh because maximum work-related deductions (including travel expenses, meeting expenses, communication expenses) could be ₹10 lakh. This would attract a higher tax.
Given the tax bracket would be 30%, nearly ₹3-4 Lakhs can be saved under the presumptive tax method.
The specified professionals who render their services in Architecture, Legal, Medical, Accountancy, Artists, Interior Decoration, Engineering, Technical Consultancy, Company Secretary, Information Technology, etc. can opt for a presumptive taxation scheme only if their gross receipts do not exceed Rs. 50 lacs in the previous year.
Let us take Amit’s case into the consideration again. if the work-related expenses are more than ₹20 lakh, the taxable income starts to reduce below the halfway mark (as under presumptive tax scheme). Thus, in this situation, you should opt for the presumptive taxation scheme and pay the tax on the lower taxable income. However, in this mode, your books of account will be liable for an audit.
ITR 3 or ITR 4 will be applied to a freelancer as the income earned while working as the same will be considered as an income from a business or profession. All such professionals who are opting for the presumptive taxation scheme can declare 50 % of their gross receipts as their income by filing ITR-4.
Simply put, given the number of cases, where expenses associated with work are higher, is low, it is advisable to adapt to the presumptive taxation scheme.
In the prevailing scenario, many people are earning their living through freelancing. Thus, it is necessary to know how and why do freelancers need to pay tax in India. For additional financial advice, consult a chartered accountant or a financial advisor for clarifications.
Q1: As a freelancer, where can I get the information about the TDS deducted?
Answer: Freelancers can get all information related to TDS deducted on their income from form 26AS.
Q2: Can a freelancer file income tax returns on their own?
Answer: Yes, freelancers can do the whole process from calculation of tax to its payment on the income tax portal online.
Q3: Do freelancers get form 16 as salaried individuals?
Answer: No, since freelancers are not the employees of the company, hence they do not get form 16.
Q4: Will GST apply to a freelancer?
Answer: GST will apply to you if only when your gross receipts during the financial year are more than Rs. 20 Lacs. In the case of Special Category State, the aforesaid limit will become Rs. 10 Lacs.
Q5. Is it necessary to maintain accounting records?
Answer: Specified professionals are required to maintain books of accounts, if their disclosed income is less than 50% of gross receipts, and/or if the turnover exceeds Rs. 50 Lacs.
Q6. If a freelancer has to maintain accounts, which accounting method should he choose?
Answer: If a freelancer has to maintain his accounts, he can opt between the cash method or the accrual method of accounting. Note, once an accounting method is chosen and adopted, it needs to be applied always.