Income Tax Filing For the Freelancers

Income tax filing is an important task for all freelancers. By filing their income tax returns correctly and on time, freelancers can avoid penalties and interest charges, access government benefits, and carry forward losses to future years. The guide below will help the freelancers file and submit their taxes easily, and securely.

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What is ‘Freelancing’ As Per Income Tax Rules?

As per the Income Tax Laws, any income generated by an individual through the application of their manual or intellectual skills is categorized under "Profit and Gains from Business and Profession." In the context of taxation, freelancing is treated as a business and profession. This means that freelancers are required to follow the tax rules applicable to businesses, which include filing their income tax returns accordingly.

Freelancers consist of a diverse range of professionals, such as blog consultants, software developers, content writers, web designers, tutors, and fashion designers, among others. Regardless of the nature of the freelancing work, the income derived from these activities is considered taxable.

What is Freelancing Income?

Freelancing income is a unique form of compensation that arises from undertaking specific assignments or projects on a contractual basis. Unlike traditional employment, freelancers are not considered employees of the companies they work for, and they do not receive benefits like the Provident Fund (PF) mandated by the Company Act. Instead, freelancers work as independent professionals, offering their intellectual or manual skills to complete tasks within a predetermined time frame.

From a legal and taxation standpoint, freelancing income falls under the category of "Profits and Gains from Business or Profession" according to income tax laws in India. This classification recognizes the unique nature of freelancing work, acknowledging that individuals are essentially operating as independent professionals or businesses. As a result, the income generated from freelancing activities is subject to taxation, and freelancers are required to fulfill their tax obligations in accordance with the prevailing laws.

Gross income in freelancing is calculated as the aggregate of all receipts received while performing professional tasks. The income could stem from a variety of sources, including project fees, hourly rates, or other agreed-upon compensation structures. To keep track of their earnings, freelancers often rely on their bank account statements, which serve as a reliable record of all financial transactions related to their professional activities.

The gross income is to be calculated for a given financial year, i.e. from 1st April of a year to the 31st March of the next year. Loans taken (for any purpose) do not count as income.

Expenses that are Deductible and Can be Claimed as Deduction

As a professional or business owner, it's essential to be aware of the various expenses that can be claimed as deductions against your income. Understanding these deductions not only helps in minimizing your taxable income but also ensures that you are maximizing your financial benefits. Here are some key expenses that you can consider claiming:

  1. Rent of the Property:

    • If you rent a property for business purposes, the rent paid can be deducted from your income.

    • This includes not only the rent for your office space but also any other property rented exclusively for work-related activities.

  2. Repairs Undertaken:

    • Costs incurred for repairs to the rented property are deductible.

    • If you own the business property and undertake repairs, those expenses are also eligible for deduction.

    • Repairs to essential equipment like laptops and printers used for work can also be claimed.

  3. Depreciation:

    • When you purchase a capital asset, such as a laptop or other equipment, the cost is spread over its useful life through a process known as depreciation.

    • The annual depreciation expense can be claimed as a deduction against your income.

    • It's important to follow the guidelines laid down by the Income Tax Act regarding the type of assets, methods of depreciation, and applicable rates.

  4. Office Expenses:

    • Various day-to-day expenses related to running your office can be claimed, including the cost of office supplies, printer purchases, telephone bills, internet bills, and conveyance expenses.

    • Keep detailed records of these expenses to ensure accurate deduction claims.

  5. Travel Expenses:

    • The expenses related to business travel, whether within or outside of India, are deductible.

    • This includes transportation, accommodation, and other necessary expenses incurred during your business-related trips.

  6. Meal, Entertainment, or Hospitality Expenses:

    • Expenses related to client meetings, dinners, or outings with the purpose of obtaining or retaining business can be claimed.

    • Keep proper records and receipts to substantiate these expenses in case of an audit.

  7. Local Taxes and Insurance for Business Property:

    • Any local taxes and insurance premiums paid for your business property can be considered as deductible expenses.

  8. Domain Registration and App Purchases:

    • Costs associated with domain registration and purchasing apps for testing your products are allowable deductions.

    • Ensure that these expenses are directly related to your business activities.

Income from All Other Sources that Need to be Included

Apart from the income a freelancer gains from freelancing,  they should also include other incomes in the ITR. Some of these incomes include:

  • Gains made from a property, in the form of a sales gain, or a rental return

  • Incomes accrued on the savings account, or Fixed Deposit, in the form of interest

  • Incomes from trading in shares, equity, debentures etc.

  • All kinds of other incomes

  • Any income gained from the employer, in the extra hours that you worked during the year

  • Any other income not specified here

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Exemptions or Deductions

Just like the salaried individuals and the business persons, the freelancers can also claim various deductions/tax exemptions, when they file their income tax returns.

Deductions/Tax Exemptions Under the Section 80

Section and its Part Deduction/Tax Exemption Provided
Section 80C Offers a deduction of up to Rs 1.5 Lakhs, for payments made towards the life insurance policies, provident fund, superannuation, tuition fees, construction/purchase of any residential property/fixed deposits etc.
Section 80 CCC Tax deductions for investments made towards the pension plans. The maximum exemption limit is Rs 1.5 lakhs
Section 80 CCD Exemptions towards investments made in the Central Government Pension Schemes. Both, contributions made by the employer, and the taxpayer, are exempt from taxation, provided the investment made does not increase 10% of the salary of the individual
Section 80 CCF The exemptions are provided for investments made in the infrastructure bonds (long term) that are notified by the Government of India. The section offers a maximum exemption of Rs 20,000
Section 80 CCG The section provides a maximum deduction of Rs 25,000 for the investments made in the government Equity Saving Schemes, to certain specified Indian citizens and residents
Section 80 D Under this section, expenses made towards the payment of premiums of the health insurance policies are exempted. The  freelancer can also buy the policy for a spouse or child, and claim the deductions
Section 80 DD The section provides deductions towards treatment of normal and severe disabilities, which may go up Rs 1.25 lakhs
Section 80 DDB Exemptions towards treatment of certain specified diseases
Section 80 E Deductions towards loans taken for education purposes
Section 80 EE The Section is exclusively for individuals and exempts the payments made towards a loan, for buying a property for residential purposes
Section 80 G The Section offers up to a 100% deduction for donations made to charitable funds, including the Prime Minister Relief Fund, and the National Defense Fund among others

Section 80 also has some other sub-sections, which provide for tax exemptions.

TDS Deductions for Freelancers 

Tax Deducted at Source (TDS) is a concept in Indian taxation where a certain amount of tax is deducted from the source of income before the payment is made to the recipient. This is done to ensure that the recipient pays the due tax on their income. TDS is applicable to both salaried individuals and freelancers. The clients often deduct the TDS when they make payments to a freelancer. You can claim the TDS for freelancer deductions, when filing the ITR form, and save money.

TDS Rates for Freelancers

The TDS rate for freelancers is 10% of the total payment made to them. However, if the freelancer does not provide their Permanent Account Number (PAN), the rate of TDS deduction increases to 20%.

Freelancers can use Form 26 AS, which provides taxpayers with a consolidated view of all the TDS/TCS deducted from their income. You can also view the TDS taxes deducted online. The form is linked to the PAN number and helps you know all the TDS that have been deducted. While filing the ITR, be sure to include all the deductions. 

What are the Tax Applicability and Income Tax Return (ITR) Procedures for Freelancers?

Freelancing has become a popular career choice in India, offering flexibility and independence to individuals providing various services. However, it's essential for freelancers to understand the tax implications and comply with the Income Tax and GST regulations.

  1. Income Tax for Freelancers:

    Freelancers fall within the purview of Income Tax regulations and are required to pay taxes based on their income. The applicable income tax rate depends on the total income earned during the financial year. Freelancers have the option to choose between different tax regimes, each with its own set of rules and deductions. Below are the income tax rates that are applicable for freelancers below 60 years of age: 

    Income Tax Slab Old Tax Regime New Tax Regime (until 31st March 2023) New Tax Regime (From 1st April 2023)
    Rs 0 - Rs 2,50,000 - - -
    Rs 2,50,000 - Rs 3,00,000 5% 5% -
    Rs 3,00,000 - Rs 5,00,000 5% 5% 5%
    Rs 5,00,000 - Rs 6,00,000 20% 10% 5%
    Rs 6,00,000 - Rs 7,50,000 20% 10% 10%
    Rs 7,50,000 - Rs 9,00,000 20% 15% 10%
    Rs 9,00,000 - Rs 10,00,000 20% 15% 15%
    Rs 10,00,000 - Rs 12,00,000 30% 20% 15%
    Rs 12,00,000 - Rs 12,50,000 30% 20% 20%
    Rs 12,50,000 - Rs 15,00,000 30% 25% 20%
    More than Rs 15,00,000 30% 30% 30%
  2. Goods & Services Tax (GST) for Freelancers:

    For freelancers with an aggregate turnover exceeding Rs. 20 lakhs (Rs. 10 lakhs for North Eastern and Hill states) in a year, GST registration becomes mandatory. The standard GST rate for most services is 18%, though it's important to note that this rate can vary depending on the nature of the goods or services provided by the freelancer.

  3. Presumptive Taxation Scheme under Section 44ADA:

    To simplify the tax process for freelancers, the Presumptive Taxation Scheme under Section 44ADA of the Income Tax Act, 1961, is available. Freelancers can choose this scheme and pay taxes on only half of their gross annual income, provided their total income for the year is less than Rs. 50 lakhs. This scheme can significantly reduce the tax burden for eligible freelancers.

  4. Tax Audit for Gross Annual Income Exceeding Rs. 1 Crore:

    Freelancers whose gross annual income exceeds Rs. 1 crore are subject to a mandatory tax audit for their business income. This audit ensures compliance with tax regulations and accurate reporting of income.

  5. TDS (Tax Deducted at Source) for Freelancers:

    When a freelancer makes payments to professionals that exceed Rs. 30,000 in aggregate during the financial year, TDS becomes applicable at a rate of 10%. This deduction is aimed at ensuring the smooth collection of taxes and can impact a freelancer's cash flow.

  6. ITR Filing for Freelancers:

    Freelancers utilizing the Presumptive Taxation Scheme can file their income tax returns using the ITR-4 form. This form is specifically designed for those opting for presumptive taxation and provides a simplified process for filing returns.

    For freelancers not availing of the benefits of the Presumptive Taxation Scheme, the ITR-3 form is applicable. This form is designed for reporting income from business or profession and requires detailed information about income, expenses, and other financial aspects.

Advance Tax Payment Schedule for Freelancers

Advance tax is a system in which taxpayers are required to pay a portion of their estimated annual taxes in installments throughout the financial year rather than waiting until the end of the year.

For freelancers, it is mandatory to make advance tax payments in four installments during the financial year. The due dates for these installments are as follows:

  • 15th June

  • 15th September

  • 15th December

  • 15th March

These dates are strategically spaced throughout the year to distribute the tax burden evenly and avoid last-minute financial strain. It is essential for freelancers to calculate their estimated annual income and tax liability accurately to make timely payments.

  1. Penalties for Non-Payment

    Failure to pay advance tax on time can result in penalties and interest charges. The Income Tax Department imposes penalties under Sections 234B and 234C for non-compliance.

  2. Section 234B

    Section 234B comes into play when the taxpayer fails to pay any advance tax. If the total tax liability for the year is Rs. 10,000 or more, the taxpayer is obligated to make advance tax payments. Non-compliance with this provision leads to the imposition of penalties.

  3. Section 234C

    Section 234C is applicable when the taxpayer fails to pay the required amount of advance tax by the due dates specified by the Income Tax Department. The interest levied under this section is to ensure timely and consistent payments throughout the financial year. To avoid interest penalties:

    Ensure that advance tax payments made until 31st March of the year are equivalent to 100% of the total tax payable.

What are the Forms that Need to be Used While Filing the ITR?

A freelancer can use the form ITR 4 while filing tax returns. If your income is more than Rs 1 crore, your account books should be audited, according to the ITR laws (Section 44AB). In this case, you must file the ITR before 31st of September.

When your turnover is less than Rs 1 crore, no audit is required, and the last date for submission of ITR is 31st July. 

In case a freelancer opts for the Presumptive Method of taxation, under the Section 44AD, and the section 44AE of the Income Tax Act, the ITR Form 4S should be used.

FAQ's

  • Can individuals with a fixed salary who engage in freelance work during their free time benefit from the Presumptive Taxation Scheme?

    Yes, both salary and freelance income are subject to income tax. Salary income is computed in a regular manner, while the Presumptive Taxation Scheme applies exclusively to freelance income.
  • Do freelancers file ITR 3 or ITR 4?

    Freelancers can file either ITR-3 or ITR-4 depending on their income and whether they have opted for the presumptive taxation scheme.
  • What is the method for determining aggregate turnover for GST registration?

    According to GST regulations, aggregate turnover is derived by combining the taxable sales value, exempt sales value, export of goods and services, and interstate supplies made by the business.

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