In this blog, I seek to discuss presumptive tax for freelancers. But before that, let us quickly touch upon freelancing income, and expenses that are allowed for deduction so that you understand the taxation part well.
What Is Freelancing Income?
Freelancing income is the income that you get when you are hired for a specific term, and get paid when the work is completed or submitted to the company/individual requesting the work.
In this case, you are not an employee of an organization, and thus you are not entitled to a salary or any form of benefits such as incentive, bonus, provident funds, insurance, and the likes.
As a freelancer, the organization generally does not mandate the person to visit the office, and he/she can work at leisure from any place convenient to the individual.
As per income tax norms, any income generated where the person displays his/her intellectual or manual skills is considered as Profits from business or profession.
The Deductions That Can Be Claimed As Expenses
Freelancers are allowed to deduct the expenses that are incurred to complete the work for the income. These expenses could be anything – right from furniture to cab fares to visiting clients on-site. These expenses should be related to the job done.
Following are the conditions to be fulfilled to claim the deduction –
- The expenses should be spent entirely and exclusively for work purpose
- The expenses should be incurred during the financial year for which the deduction is to be claimed
- The payment does not fall in the category of capital expenditure or personal expenditure of freelancer
- The cost should not be for any purpose that is prohibited by law
Some of the categories that are allowed deduction are:-
- Property rent
- Cost related to repairs undertaken to improvise workplace
- The cost associated with the replacement/repair of equipment such as laptops, printer, etc.
- Depreciation on fixed assets
- Expenses towards office supplies, telephone bills, electricity expenses, conveyance expenses, etc.
- To work such as purchasing a printer, office supplies, your monthly telephone bills, internet bills, or conveyance expenses.
- Travel Expenses
- Meal, entertainment or hospitality expenses
- Insurance for your business property and any other asset
- Purchase of domain/maintenance activity and the likes
What Happens When The Expenses Are Common To Personal And Professional Purpose?
Often there are situations where the costs incurred are common to both personal and professional purposes. In this case, only a reasonable amount is allowed for deduction and not the full amount.
For example, in cases where you use your mobile phone for both personal and business calls, only the calls made for your freelance work will be allowed for deduction.
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Presumptive Tax Calculation
As a freelancer or a professional, you can pay tax on half of the annual gross income. This can be done using the Presumptive Taxation Scheme that is detailed under section 44ADA of the Income Tax Act. However, the only caveat here is that the annual income should be below ₹50 lakh.
Let us now see 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 till ₹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 30%, nearly ₹3-4 Lakhs can be saved under the presumptive tax method.
What Happens If Your Deductions And Expenses For Conducting Business Are Higher Than Half Of The Gross Income?
Let us again consider Amit’s case, 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 not avail the presumptive taxation scheme and pay the tax on the lower taxable income. However, in this mode, your books of account are required to be audited.
Which ITR To File?
As a freelancer or consultant, either ITR 3 or ITR 4 applies to you since your income will be considered as income from business or profession. Professionals who are opting for the presumptive taxation scheme can declare 50 % of their gross receipts as their income by filing ITR-4.
To conclude, given the number of cases, where work-related expenses are higher, is low, it is advisable to adapt to the presumptive taxation scheme.
Disclaimer: The information related to the tax filing presented in this blog post is generic in nature. Please consult your tax advisor for tax filing advice pertaining to your case. The views expressed here are of the author and do not reflect those of Groww.