An income from profession means the income earned due to the skill you possess (intellectual skill or a manual skill). As per the Income Tax Act, income from such profession will be taxable under the head ‘Profits and Gains of Business and Profession’.The income earned by a freelancer is also taxable under the same head.
For the purpose of taxation, freelancers have been divided into two categories.
Category 1 - Specified Professionals
Category 2 - Others.
Income Tax Law distinguishes freelancers into two categories. The first category includes the specified professionals and rest fall in the second category. As per Section 44AA, for the first category following professions have been Specified :
For the purpose of taxation, freelancers have been divided into two categories.
Here, comes the good news for the above mentioned Category 1 Specified Professionals!! Through Budget 2016, Government has decoded the tax break for small professionals. Continuing with the saga of presumptive taxation , government came up with Sec 44ADA for specified resident professionals.
But there is a catch!!
Sec 44ADA shall be applicable only on those resident specified professionals whose
Gross Receipts < or = Rs. 50,00,000 during the year In other words, a Resident Indian engaged in the above discussed profession but having gross receipts exceeding Rs. 50,00,000 is not eligible to opt for Sec 44ADA.
For the purpose of taxation, a person can do freelancing under any business status. May it be as
*It is to be noted that in case of LLP and company, the option for presumptive taxation u/s 44ADA is not available.
Sec 44ADA contains the provision for computing gains from profession on a presumptive basis.
“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.”
In simple words, if a person is a specified professional and having gross receipts less than or equal to Rs. 50 lakhs then sec 44ADA is for him!
As per sec 44ADA, he has to offer at least 50% of his gross receipts as profit i.e. the amount on which tax shall be levied. or, we can say out of your gross receipts, government considers 50% as expenses and 50 % as profit.
Any deduction covered u/s 30 to 38 i.e. expenses incurred in relation to your business or profession shall be deemed to have been already given effect and therefore no deduction under those sections shall be allowed. Which means once offering income for taxation under this section will abate from claiming rent, commutation, telephone bills etc. However, deduction under Chapter VIA (Sec 80C, 80D etc.) such as LIC, PPF, Mediclaim etc shall continue to be allowed.
The best part of section 44ADA is that the persons opting this are freed from the burden of maintenance of book keeping and thereby from audit of those books !!
However, under the following situations, an assessee is required to keep and maintain books of account as per section 44AA and get them audited u/s 44AB :
The books of account which are required to be maintained by the specified professionals have been specified in Rule 6F of Income Tax Act, 1961.They are namely,
But this requirement of maintenance of books is to be fulfilled only if gross receipts of a person carrying on specified profession exceeds Rs. 1,50,000. This limit is to be checked in all the three immediately preceding years. And in case of a new profession, only if it is likely to exceed Rs.1,50,000 in the year of set up.In simple words, the books specified under Rule 6F are not required to be maintained only in case of following :
A person is required to be audited u/s 44AB, if he falls under the below criterias :
In simple words,
If a person is carrying a business and fulfill any conditions (a or b or c) then he has to get his accounts audited by a chartered accountant of such year. Similarly, if a person is carrying a profession and fulfill any conditions (a or b) then he also have to get his accounts audited.
In both the cases, the audit is to be done before a specified date (30th September) and audit report is to be furnished by such date in the prescribed form.
Now, you must be thinking that i belong to the non specified professionals category. So, what do i have to do?
Don’t worry..after learning all about the specified professionals and section 44ADA , now we will switch to the provisions for non specified professionals.
This is the case when you as a freelancer is not engaged in the profession covered under section 44AA(1).
If the profits from the freelancing exceeds Rs 2,50,000 or turnover exceeds Rs 25,00,000 in any of previous 3 years then proper books of accounts are required to be maintained. Books of account are not required to be maintained if above conditions are not met.
Cost of your workspace -
It is a deductible expense.
If you work from a proper office space paying the rent then expenses towards its maintenance can be deducted from your freelancing income.
If you have not taken up a formal space, and work from your home then also you can claim a reasonable portion of expenses towards your freelancing work. You can enter into an agreement with your parents and pay them rent, and claim this rent as your business expense. If you work out of your own house, you can attribute a portion of maintenance expenses to your freelancing work.
Cost of assets used- You must be working using a laptop or a printer or a mobile phone. On such assets, depreciation can be claimed for such assets. Depreciation means a part of the cost of the asset is considered as expense and it can be deducted from your freelancing income. Depreciation can be claimed every year, until the cost of the asset is fully exhausted. This is applicable to assets such as a laptop, printers, desks etc.
Day to day expenses - As a freelancer it helps to maintain a proper record of all the expenses you incur for day to day running of your work. Electricity expenses, telephone costs, internet expenses, courier charges, printer sheets, petrol expenses on travel to meet clients or cab expenses, meal expenses for client meetings are all deductible. Keep a record of your expenses and avoid making payments in cash, since any payment in excess of Rs 10,000 made in cash is not allowed to be deducted. Maintenance proper record of receipts and invoices paid by you.
Cost of subcontracting - You may have to engage another person to help you with your work, any payments made by you to such a person is also deductible. Do remember to deduct TDS if you are paying a salary. TDS deducted by you must also be duly deposited to the tax department.
While you benefit from the freedom and flexibility freelancing brings, a major pitfall is not having mandatory EPF contributions. In case of salaried, deductions towards EPF are made from monthly salary and employer makes a matching contribution. Without much effort, a corpus is built as your EPF balance. Besides a job entitles you to gratuity, leave encashment etc. As a freelancer, you need to save & invest towards these yourself. Consider PPF or public provident fund; it is a risk free investment, though the returns are mediocre. If you are ready for some risk, choose an ELSS fund and start a monthly SIP and stay committed for the longer term. PPF and ELSS investment are eligible for deduction from your total income under section 80C.
You can open a National Pension System (NPS) account and deposit Rs 50,000 or more annually. This way you can claim tax benefit under section 80CCD(1B) of up to Rs 50,000 and also start contributing towards your pension. Since you do not have a medical insurance via employer, purchasing health insurance is important. Cover your family and parents and claim deduction on insurance premium up to Rs 55,000 (25,000+ 30,000 for senior citizen) under section 80D.
Making these investments and expenses can reduce your taxable income by Rs 2 lakhs or more, besides helping you prepare for the long road ahead.
The downside of freelancing is that you have to face expenses and challenges that employees don’t have to worry about. To help you manage the downside of a this profession, sec 44ADA has been introduced by the government.
Any amount received by you against specified services provided to your clients, will be taken as your freelancing income. It will not matter, whether your client is within India or outside.
But, your total taxable income will include
The answer is not simple. Both the cases have their own pros and cons and which one is right option will depend on one’s own perspective and many other spheres like one may prefer to work freely and another may prefer to work under an employer.
In respect of taxes, if we compare a salaried person or a freelancer, then obviously a salaried person stands at a better position.We will let you know how.
Firstly, in case of a salaried person, TDS shall be deducted by his employer every month automatically so the requirement of payment of advance tax gets dispensed in their case.Whereas in case of freelancing, one has the responsibility to deposit advance tax during the year if his taxes during the year if the amount of tax exceeds Rs. 10,000
Secondly, a salaried person gets Form 16 from his employer covering all income, deduction etc. This facilitates a lot to him while filing his return.Whereas for a freelancer he himself has to jot down all his incomes and expenses during the year and take care of the taxes.
Yes. Income earned from freelancing activities is subject to the Income Tax.
The most important and basic condition to claim any expense as deduction against your income, is that expense should directly relate to your profession as a freelancer. We have described some expenses below for your better understanding:
GST will become applicable on you, if your Gross Receipts during the FY exceeds ₹ 20 Lacs. In case of Special Category States, the above limit shall become ₹ 10 Lacs.
In case of salary income you do not have to worry about PF, Form 16 & Advance Tax, as these things are taken care by your employer on your behalf. The same benefit is not available if you earn income as a freelancer.
If you are not liable to tax audit u/s 44AB, then ITR needs to be filed by 31st July of assessment year otherwise 30th Sept of assessment year.
Normally, Sec 44ADA, presumptive taxation for professional is applicable to all the specified professionals.
Presumptive Taxation means using indirect method of determining tax liability. Here the taxable income is computed on assumptions in place of actuals. The entity is required to declare, a fixed predetermined percentage of it’s business turnover/ gross receipts, as income & pay a fixed percentage of that income as tax.
As per this section, only those professionals can opt for presumptive taxation:
The below mentioned specified professionals can opt for Presumptive Taxation scheme, only if their Gross Receipts does not exceed ₹ 50 lac in the previous year.
Specified professionals have to maintain books of account,
In that case, you need to file return using ITR-1 (income upto 50 lakhs) or ITR-2, depending upon your amount of salary income.
If you opt for Sec 44ADA, then you should file return using Form ITR-4.
In case you are liable to get accounts audited, then use ITR-3 to file return.
No, you cannot opt for Sec 44ADA. Only option available to you is to get accounts audited.
No, you cannot opt for Sec 44ADA.
You have the option to either choose from cash method or accrual method of accounting. The only condition is that, once a method is adopted, it needs to be applied consistently.
If you are eligible for 44ADA, then you need to deposit advance tax on or before 15th March of the previous year. The whole amount is required to be paid in single installment.
If your tax liability exceeds ₹10,000 during the previous year then you need to pay advance tax.
If you do not pay advance tax on time, then you will be required to pay interest under section 234B & 234C.
Conclusion : In this post, you’ve learned about the tax provisions of working as a freelancer and difference between freelancer and a salaried employee.There are pros and cons about both choices, so it’s your time to decide which path to continue with. So take your time, engage in some self-analysis, understand and then decide!! Happy Filing :)
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