Income Tax Filing For the Freelancers

There is no age limit for freelancing. A plethora of work opportunities, and the favorable tax rules, ensure that freelancing is now more fruitful than before, for those who wish to make a living out of it, or who do it part time. The term “Freelancing” relates to self-employment and consultancies.  A number of professions and consultants qualify as a freelancer. The photographers, medical/legal/architectural consultants, software developers, tutors, and fashion designers, among other professions, are regarded as freelancers, when they do not work for a given salary.

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The freelancers mostly work on the project, or on an assignment basis. Income tax for consultants in India is quite lucrative, and offers ample of savings.

With the evolution and growth of internet and web, web freelancing has also become an attractive earning avenue, for those who wish to seek part time (or even full time) income. The income of the freelancers and bloggers, on the web, comes through sources including:

  • The affiliate sales

  • Advertisements (from the avenues, including Direct Ad Sales, and Google AdSense among others).

  • Services relating to web content writing, SEO, blog consultancy, web designing, web development and others.

So how would freelancers pay their income tax , and file the Online income tax returns (ITR) in India. The guide below will help the freelancers file and submit their taxes easily, and securely.

Know Your Gross Income

The income of the Freelancer is categorized under the income head “Business and Profession". The first step to file for the income tax returns is to calculate your gross income during the year. As most of the times the payment to a freelancer is done online these days, it is rather easy for a self styled professional to calculate his or her gross income.

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 an income.

Deduct the Expenses

All the expenses of the financial year that a freelancer makes towards securing the business are to be deducted from the gross annual income. The tax rates are applicable on the profits only.  The business expenses can be in the form of the internet charges, the telephone expenses, and others. For instance, if you are a software developer, and work as a freelancer, you can deduct the expenses that you make towards software purchases and testing an Android application, when you make it.

For some expenses that relate to both personal and business purposes (like internet and telephone), see the monthly consumption and payment trends, and allocate a reasonable percentage towards the business (or deduction) purpose.

Depreciation Deductions

You should deduct all the expenses that relate to depreciation also, from the net annual turnover, or the gross income. Each year the equipments (including the electrical items) undergo wear and tear, and their value decreases.

The amount of decrease is termed as depreciation. Photographers for instance, can calculate the depreciation accumulated towards the cameras, and the printing equipment. Web freelancers can denote the depreciation that they incur towards the laptops, computers, and other devices and gadgets that they use.

Depreciation is an economically beneficial way of spreading the cost of a given asset over a period of time, rather than showing the expense in an upfront manner, as these gadgets are used for a long period of time.

If you are working in a rented space, you can claim for the rent exemptions. The fee that is paid by you towards gaining or holding membership of a professional association, and the business subscriptions, are also exempt from taxation.

Hence all kinds of expenses that are made by freelancer towards business purposes are exempt from taxation. The expenses should be legal, and should not be made towards the personal purposes.

Include Income from All Other Sources

Apart from the income a freelancer gains from freelancing, he or she 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

Exemptions or Deductions

Just like the salaried individuals and the business persons, the freelancers can also claim plethora of 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 increases 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 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 loan 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 the donations made to the charitable funds, including the Prime Minister Relief Fund, and the National Defense Fund among others

 

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

Credit the TDS Deductions

All the income that a freelancer gain, after the TDS (Tax Deducted at Source) has been reduced from it, is useful towards exemptions. The clients often deduct the TDS when they make payments to a freelancer. You can claim the TDS for freelancers deductions, when filing the ITR form, and save good amounts of money.

The freelancer can use the Form 26 AS for the purpose. See all the TDS taxes deducted online itself here, at TRACES. 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. 

Advance Tax

When the total tax liability of the freelancer is more than Rs 10,000, he or she may also be required to pay the Advance Tax. Advance Taxation is the payment of taxes during frequent intervals, in a given year, instead of paying the tax once, during a given year. If you fail to pay this tax, there would be interest charged on your final tax account, under the Section 234 B, and 234 C, of the Income Tax Act. 

Presumptive Taxation

Freelancers can also use the Presumptive Taxation method, and escape the tedious task of account bookkeeping, when they earn an income less than Rs 50 Lakhs during the given financial year. 

This scheme was earlier only available to the business men, but now it extends to include the freelancing professionals as well. The tax is levied @ 8% of the total gross annual income for the businessmen. For instance, if a businessman earns a turnover of Rs 100, he or she can denote Rs 8 as profit. The income is charged under “Profits and Gains", under the "Business and Profession" head. 

The new section 44ADA, which was inserted into the 44AD of the Income Tax Act, brings the professionals into the purview of the tax relief. The presumptive assumption rate is 50% for the freelancers. Hence, on Rs 100 turnover, the profit will be assumed to be Rs 50. 

You may like to Read: How to efile Income Tax

 

What are the Income Tax Taxation Slabs

The same taxation slabs apply to the freelancing individuals as well. Incomes up to Rs 2.5 lakhs are not taxed upon, income between the values 2.5 lakhs to 5 lakhs are taxed @ 10%, 5 to 10 lakhs @ 20%, and above 10 lakhs @30%. The freelance calculate income tax shows the values as per these tax rates only. 

Forms to be Used While Filing the ITR

A freelancer can use the form ITR 4 while filing the tax returns. If your income is more than Rs 1 crore, your account books should 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 July 31st

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.

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