Freelancing in the coming days will establish itself more and tends to have a bright future. It is becoming increasingly common for individuals to work according to their choices (where they want, what they want, and when they want). According to recent statistics, one in four freelancers worldwide is Indian.
It has been estimated that the market size of Indian freelancers is likely to reach $20-$30 billion by 2025. Like other employees, freelancers are also needed to pay taxes; however, the procedure differs slightly. So, without further delay, let’s get straight to the step-by-step guide on tax for freelancers.
Who is a Freelancer, and do they need to pay Taxes?
Generally, freelancers are those people who prefer working for themselves. Mostly they do their job at home and not from a registered company. Freelancers are hired to work on certain tasks for a specific duration. As a result, they get paid upon the completion of their assignment. Besides all the comforts offered to freelancers, they are subjected to pay tax on whatever amount they earn.
The gross income of a freelancer is the total of all the receipts they get when they carry out their duties for clients based either in India or outside. The gross income of a freelancer is calculated for a given financial year which starts on April 01, 2021, and continues till March 31, 2022. The bank statement of a freelancer is a significant piece of evidence that can be used to show the payment received while assessing the tax liabilities of freelancers.
Process of filing ITR for freelancers
Freelancers in legal professions like medical, architectural, accounting, engineering, technical consultancy, film, interior decoration, and others can file ITR. Freelancers who serve non-specified areas, like CA, doctors, lawyers, etc., are also eligible to file income tax returns. However, freelancers need to follow specific steps and procedures to file an income tax. The steps involved in filing and income tax are mentioned as follows.
- Firstly, the gross income from April 01 to March 31 of the given fiscal year is calculated. Loans that are debt obligations are not considered income; hence one must try to omit it.
- Secondly, calculate the expenses incurred in the freelance business to claim a tax deduction.
- You need to select an appropriate one from the below-mentioned forms and fill it out.
- The ITR-3 form applies to individuals who are getting benefits from business profits. These individuals might carry on businesses or professions that have returned, including income from house property, capital gains, salary/pension, etc.
- The ITR-4 form applies to people who choose the presumptive income schemes according to the Income Tax Law Section 44AD and 44AE. Freelancers from professions under Section 44ADA will receive business incomes as specified in Sections 44AD or 44AE. They will also receive a salary, pension, or any other income over ₹50 Lakhs.
- The essential details like taxable income, deductions, expenditures, and paid advance tax are to be mentioned in the final step.
Some vital thing to remember is that the forms mentioned above can be downloaded from the official portal of the Income Tax Department. Once downloaded, they can be filled offline and uploaded to the XML file in the same IT portal itself. On the other hand, individuals are also eligible to fill them in the portal and submit forms after digital verification.
If individuals make more than ₹1 crore in a financial year, the IT Department officials will audit the income. Individuals can file ITR by September 30 of a financial year if this is the case. If the income is not audited, they can file ITR by July 31.
How does a freelancer deposit tax with the government?
The tax payments needed by freelancers are different from that of ordinary workers. The reason being their nature of work. They are variable in terms of volume, as a result of which, they have variable income.
All freelancers, business people, and corporate workers must pay an advance tax. The taxes from freelancers are collected quarterly since the income of types of workers and corporations can vary. This type of tax is also known as the ‘pay-as-you-earn tax’. As per data, it was found that if the total tax liability owed by a freelancer for the financial year crossed the overall sum of ₹10,000, the taxpayer must pay off their due amount based on 4 quarterly installments.
|On or before September 15||You need to pay at least 45% of the advance tax, as reduced by the tax paid in your last installment.|
|On or before December 15||You need to pay at least 75% of the advance tax as reduced by a tax paid in your last installments.|
|On or before March 15||You need to pay the whole amount (100%) of advance tax as reduced by the tax paid in your last installments.|
Calculation of Advanced Tax
To calculate the advance tax, the following steps are needed to be followed.
- First, you need to calculate your total taxable income. This can be done by adding up all of your earnings.
- After that, calculate your tax liability by learning under which tax bracket you fall.
- If you want to calculate the remaining tax to be paid, then any TDS deducted can be reduced from the tax liability.
- Advance taxes are to be paid before the set deadlines if the amount is more than Rs. 10,000.
Section 44AD, How to calculate it, and how is it beneficial?
Section 44AD states that some freelancing professionals are eligible for presumptive taxation only if their gross income for the year does not cross ₹50 lakhs. This profession includes:
- Interior decorators
- Technical consultants
- Medical practitioners
- Other professions like- Film artists, producers, actors, editors, directors, art directors, music directors, singers, dance directors, camera operators, lyricists, screenplay writers or dialogue writers, story writers, costume designers, Authorised representatives, and any notified professional.
If you are wondering how to calculate tax under 44AD, Section 44AD is a presumptive taxation scheme. Under this scheme, income is estimated based on 8% of turnover. In the case of digital receipts and payments, it is done based on 6%. Hence there is no need for a taxpayer to maintain books of accounts.
There are several reasons why Section 44AD is the most suitable for freelancers.
- Since freelancers do not have many expenses, with the help of this scheme, they can save the work of maintaining books of accounts.
- Under the presumptive taxation system, the profits equal 50% of gross receipts.
- Under Section 80, deductions can be claimed over and above presumptive tax.
- Under Section 44AA, there is no need to maintain books.
Therefore, this scheme has benefited the ever-growing community of freelancers in India.
ITR Filing for Freelancers and Applicability of Taxes
Freelancers in India are needed to pay tax in the form of income tax and GST. As freelancers fall under the purview of GST, they must register under the State or Union Territory. Through this, a freelancer will make taxable supplies of goods or services or both in case his aggregate turnover exceeds ₹ 20 lakhs. If the freelancer only supplies goods, the maximum limit to obtain registration is ₹40 lakhs. However, in the case of particular category states like Sikkim, Arunachal Pradesh, Himachal Pradesh, Uttarakhand, Assam & Meghalaya, the freelancers giving taxable supplies need to obtain a registration.
This is done when the aggregate turnover crosses ₹ 10 lakhs or ₹ 20 lakhs in case of an exclusive supply of goods only. The GST rate may vary depending on the goods and services offered by the freelancer. Income tax is also needed to be paid by freelancers according to the applicable rate. Below is a table that mentions the income tax slabs and rates for Individuals ( who can be resident or non-resident) under the age of 60.
|Tax Slabs||Old Tax Rates||New Tax Rates|
|0 – 2,50,000||Nil||Nil|
|2,50,001 – 5,00,000||5%||5%|
|5,00,001 – 7,50,000||20%||10%|
|7,50,001 – 10,00,000||20%||15%|
|10,00,001 – 12,50,000||30%||20%|
|12,50,001 – 15,00,000||30%||25%|
|15,00,001 & above||30%||30%|
This way, tax deductions can be claimed depending on the tax regime a freelancer chooses. The Presumptive Taxation Scheme under Section 44AD of the Income Tax Act, 1961, can also be opted for. This will depend on the nature of the income the freelancer is earning.
What is meant by Tax Deducted Source rates for Freelancers?
Like other individuals and business owners, freelancers can also reap tax deduction benefits. Individuals can claim tax-saving deductions, which are available to salaried individuals. On the other hand, freelancers can claim deductions available to business owners.
The amount of money deducted in the form of tax by the payer before making a payment for any service is known as Tax Deducted Source. It is part of your tax obligation to the government on your income and is deducted before the payment is received. The online facility TRACES can be used by freelancers who will generate form 26AS.
This form will give you a list of TDS deductions made on the income through the year. Hence this information can be used while filing returns. This will ensure you are paying taxes only once on your income. They must have your PAN details as this system is linked to one’s PAN.
The conditions needed to claim expenses as a deduction from freelancing income are as follows:
- The expense must be on the freelancing work that is being undertaken.
- The expenses have been spent entirely and solely serving the purpose of your work.
- The expenses are incurred during the tax year.
- It must be noted that it must be something other than capital or a personal expenditure of the freelancer.
- The expenses must not be incurred for any purpose against the law and is an offense.
What are some expenses that can be claimed as a deduction against income?
Below are a few expenses that can be claimed as a deduction against income.
1) Properties Rent
If you have taken a property on rent for carrying out your work, then the rent you pay can be deducted.
2) Undertaken Repairs
If you have agreed to pay for the repairs to the rented property, then the cost of these repairs can be deducted. Business property and carrying out repairs can also be deducted. Repairs to your laptops, printers, and other equipment are also subject to deduction.
The benefit of an asset, like purchasing a capital asset, is generally expected to be more than a year. These assets are not capitalized and are not subjected to being charged when they are purchased. Each year, a small part of the cost is spent and is permitted to be reduced from your income. Hence this expense charged each year is known as depreciation. The type of assets, methods, and rates of depreciation are managed and applied by the Income Tax Act.
4) Expenses in Office
There are expenses as well that are needed to carry out the work, like purchasing printers, office supplies, monthly telephone bills, internet bills, and conveyance expenses. All these can be claimed in the form of a deduction.
5) Expenses on Travel
The cost of traveling to meet your clients within or outside India can also be claimed by deduction.
6) Expenses on the meal, entertainment, and hospitality services.
These expenses can be claimed while conducting client meetings and taking your clients out on outings or dinners. The money has been spent purposely to get new business or retain existing business.
7) Expenses on local taxes and insurance for your business property
Domain registration and apps that can be purchased are also claimed as expenses which will help in testing the product.
8) Contracting Cost
Freelancers are also needed to list the services of another person or firm. In such cases, the payments made on a long-term contractual basis are also subjected to the deduction.
Expenses that cannot be claimed as Tax Deduction
Below are some expenses that cannot be claimed as Tax Deductions.
- Expenses which have been used for personal purposes are not subject to deductions. Like in the case of phone bills or meals, expenditures for personal issues are entirely invalid. If the phone is used for business and personal purposes, then only a certain proportion of the business expenditure is subjected to the deduction.
- In the case of money paid to relatives in exchange for products and services, that is not important to the business and is not subjected to the deduction. For example, if anyone rents a house from their relatives, they need to pay more market rent to avail of higher education which cannot be deducted as an expense.
6 Tax Deductions for a Freelancer
Below are some tax deductions a freelancer can choose.
1) Tax Deduction on Premiums Paid towards Life Insurance Policies (Section 80C)
Deductions can also be claimed by freelancers upto ₹150 000 under Section 80C of the Income Tax. This is only possible if they save or invest money in a life insurance policy. Therefore it can be considered a win-win situation for freelancers. The reason is not only will they save taxes, but they will also support their loved ones against financial emergencies.
2) Tax Deduction on Premiums Paid towards Health Insurance (Section 80D )
Freelancers can use this for tax savings. For senior citizens, the maximum deduction allowed is ₹25,000 and ₹50,000. The deduction can also be claimed of ₹5,000 on Preventive Health Check for spouse, self, parents, and children.
3) Tax Deduction on Education Loan Interest Payment ( Section 80 E )
Interest on educational loans taken for higher education can also be used for tax savings by freelancers. However, it is to be noted that the loan has to be taken from an approved charitable institution or a financial institution. Since there is no higher limit for this kind of deduction, it can be used for 8 years or until the interest has been cleared.
4) Tax Deduction on Contribution Made to Approved Charitable Organisations (Section 80G)
Contributions to specific charities and relief funds are entirely subject to the deduction.
5) Tax Deduction on Medical Expenses of Handicap/Disabled Taxpayer (Section 80U)
Expenses incurred on medical treatment of a disabled freelancer or a dependent family member are eligible to receive a tax deduction of up to ₹75,000 (in case of 40% to 80% disability). However, in case of severe disability (that is higher than 80% disability), the limit is ₹1,25,000.
6) Tax Deduction on Income from House Property ( Section 24(b))
Tax exemptions can be earned on home loan interest payments. Under this section, you can earn tax-free interest of up to ₹2 lakhs. However, there is a condition provided that the construction is completed within five years of the loan term.
Therefore, I hope you have a rough idea of how freelancers pay their taxes. The process of paying taxes by freelancers is slightly more complicated as they have income from multiple sources and usually have more than one client. You can always choose some sites that will offer hassle-free and affordable pricing plans but also allow you to deduct fees from your income and claim it as an expense.