How To File Income Tax Returns For Freelancers?

What is Freelancing as per Income Tax Rules?

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. Freelancing is a form of self-employment as you are not hired by the company or placed on its payroll. Various consultants and professions like blog consultancy, software developers, content writers, web designers, tutors, fashion designers, etc. do qualify as freelancers

Taxation for Freelancers

If a freelancer's aggregate turnover in a year is more than Rs. 20 lakhs (Rs. 10 lakhs for North Eastern and Hill states), he needs to register under GST. For most of the services, 18% is the GST rate applicable. Depending on the goods and services offered by the freelancer, the GST rate may vary.

Freelancers are required to pay income tax at the applicable slab rates and claim deductions under the head business and profession. Freelancers can also file ITR under the presumptive taxation scheme under section 44ADA. The presumptive taxation scheme allows them to pay tax on only half of the gross annual income if it does not exceed 50 lakhs.

New Regime (FY 2024-25)

Old Regime (FY 2024-25)

For any payment made by a freelancer to a professional of an amount exceeding Rs.30,000, a TDS @10% is applicable. Freelancers can also file income tax returns through the ITR-4 form under the Presumptive taxation scheme.

Freelancers not opting for the Presumptive Taxation Scheme can file their returns in ITR-3, which is applicable for income from businesses and professions.

Exemptions or Deductions

How to File Income Tax for Freelancers?

To meet the income tax filing requirements as a freelancer, the following steps should be followed, and ITR should be filed within the deadline -

Step 1: Determine the total income earned during the financial year from April 1st to March 31st.

Step 2: Assess the eligible expenses and deductions that can be claimed for the given financial year.

Step 3: Choose the relevant form, either ITR-3 or ITR-4, and complete all the necessary information on the form by logging into the Income Tax e-Filing portal.

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Is Advance Tax Applicable to Freelancers?

In the case where a freelancer's overall tax liability exceeds Rs 10,000, it becomes necessary to make advance tax payments in every quarter of the financial year. The advance tax should be settled in four installments, with the due dates falling on the 15th of June, September, December, and March, respectively, before the conclusion of the financial year.

Here are the steps you need to follow to pay the advance tax -

• Go to the Tax Information Network of the IT department.
• Proceed under challan 280
• Fill in your personal information.
• Verify the information before proceeding.
• Make the payment and receive the tax receipt.
• Keep the receipt safe to furnish the details at the time of ITR filing.

Advance tax payments are mandatory if your tax liability exceeds 10,000. However, you can still optimize your tax savings with the help of our team of experts. Don’t wait until the last minute – plan your finances wisely and pay your advance tax dues on time. Contact our tax experts today for a consultation!

Application of GST to Freelancers

Previously, freelancers were subject to VAT and Service Tax. These levies have now been replaced by the Goods and Services Tax (GST).

If you are involved in selling goods, GST has taken over from the previous VAT system. The GST rate depends on the specific goods you are selling. For instance, if you manufacture and sell cakes to bakeries, you are required to charge 18% GST, which is currently the applicable rate for cakes.

In the case of providing services, a standard rate of 18% GST is applicable to most services. As a freelancer offering services, you are obligated to collect 18% GST from your clients. You can refer to our convenient GST Rate Finder to stay updated on the latest rates.

For example, if your total bill to a client amounts to Rs. 75,000, the GST rate being 18%, the GST amount would be Rs. 13,500 (75,000 * 18%). Therefore, you should invoice your client for Rs. 88,500, with Rs. 13,500 being the GST collected from the client. This GST amount must be remitted to the government. It's worth noting that the earlier Krishi Kalyan cess and Swaccha Bharat cess are no longer applicable under the GST regime

GST Registration for Freelancers

Freelancer is considered a service provider, and being a service provider, freelancer may need to opt for a GST registration in the following situations:

Turnover Threshold:

• Rs 20 lakh: Most states require GST registration if the annual turnover exceeds Rs 20 lakh.
• Rs 10 lakh: Certain North-Eastern states have a lower threshold of Rs 10 lakh.
• Online Information and Database Access and Retrieval (OIDAR) services: Freelancers providing OIDAR services must register under GST regardless of their turnover.

However, there are a few additional points to consider:

• Freelancers with an annual turnover below Rs 50 lakh can opt for the composition scheme, which simplifies GST compliance. Under this scheme, the GST rate is fixed, and filing requirements are reduced.
• The GST Act does not specify any threshold limit for the export of services, which means that any freelancer who exports services outside India is required to register for GST, irrespective of the value of the service.

Freelancers and Taxation - Understanding Income Tax Obligations for Freelancers

Not everyone is drawn to the traditional 9-to-5 job structure. Some individuals prefer the flexibility to pursue their passions and avoid the monotony of a fixed routine. This is why many people choose freelancing as their mode of work, whether it's from the comfort of their own home, a trendy café, or a shared coworking space. However, it's important to note that according to income tax regulations, freelancers are also responsible for paying taxes on the income they earn, just like salaried employees and business owners.

Earning through freelancing typically involves taking on specific assignments for a predetermined duration and receiving payment upon successful completion and submission. In this arrangement, you do not become an official employee of the hiring company, and you won't receive benefits such as Provident Fund (PF) as mandated by the Company Act. Freelancers have the freedom to work from any location of their choice and complete tasks within the agreed-upon deadline.

According to income tax laws in India, any income derived from the application of your intellectual or manual skills is categorized as income from a profession. This income is taxable under the category of "Profits and Gains from Business or Profession." Your total income will consist of the sum of all receipts you receive while carrying out your profession. To compile this information, your bank account statement can serve as a reliable document, assuming that you received all your professional income through banking channels.

Additionally, freelancers are entitled to deduct from their income certain expenses they have incurred in the course of their work. These expenses can encompass a wide range of items, from office furniture to transportation costs incurred while visiting clients. However, it's important to note that these expenses must be directly related to the specific job being undertaken.

Conditions for Deducting Expenses from Freelance Income

• The expense must be related to the freelance work in progress.
• It must have been entirely and solely spent for work-related purposes.
• The expense should have arisen within the tax year.
• It should not constitute a capital or personal expenditure by the freelancer.
• It should not be incurred for any unlawful or prohibited activities.

Deductible Expenses Against Income

Rental Payments:

• Rent paid for a property used for your work can be deducted.

Repair Costs:

• Expenses for repairs to rented property are deductible.
• Repairs to business-owned property are also eligible for deduction.
• Deductions are applicable for repairs to equipment like laptops and printers.

Depreciation:

• When purchasing a long-lasting capital asset, it's not immediately expensed.
• Instead, a portion of its cost is gradually deducted over its useful life, known as depreciation.
• For example, if you buy a laptop for Rs.60,000 for freelance work, and it's depreciated at 33.33% annually, Rs.20,000 is expensed each year until it's fully depreciated.
• The Income Tax Act specifies asset types, depreciation methods, and rates.

Office Expenses:

• Deductible expenses include office supplies, equipment purchases (e.g., printers), monthly telephone and internet bills, and transportation costs related to work.

Travel Expenses:

• The cost of travel, whether within India or abroad, for client meetings can be deducted.

Meal, Entertainment, and Hospitality Expenses:

• Deductions are allowed for expenses incurred during client meetings, dinners, or other outings aimed at generating or retaining business.

Local Taxes and Business Property Insurance:

• Local property taxes and insurance for business-owned property are deductible.

Domain Registration and App Purchases:

• Expenses related to domain registration and the acquisition of apps for product testing are considered deductible.

How to Claim Expenses for both Personal and Professional Purposes?

When assets or expenditures are utilized for a combination of professional and personal needs, only a reasonable portion of the expenses and depreciation can be claimed as a deduction, not the entire amount, for instance, if you use your mobile phone for both business and personal calls, only the portion of your mobile bill that is reasonably attributed to your freelance work will be considered eligible for deduction.

There are certain expenses that are explicitly prohibited from being deducted from your income. Let's examine two case studies to illustrate this:

Case Study 1:
Rohit, a freelance photographer, rents premises from his married sister to conduct his freelancing work. Rent is an allowable expense that can be deducted from Rohit's freelancing income. However, because the premises belong to Rohit's sister, if he chooses to pay her an amount higher than the reasonable market rent, this excess payment will not be considered deductible. It is important to consider whether such actions might attract scrutiny from the Income Tax Department when filing his income tax return.

Expenses that are disallowed as a deduction from your income

• Income tax payments made by you.
• Any interest, penalty, or fine incurred due to non-payment or late payment of income tax.
• Payments made to relatives are not eligible for deduction if:
  
  • You have received goods, facilities, or services in return.
  • Payment to a relative (spouse) or to a person with a substantial interest (20% or more in equity or profits) in your business.
  • The payment: a) Does not align with the fair market value of the goods, facility, or service. b) Is not a legitimate necessity for your profession. c) Provides you with a benefit when the expense is incurred.
• Expenses exceeding Rs.10,000 in cash will not be allowed for deduction.

Case Study 2:
Rohit, a freelance photographer, rents premises owned by his married sister for his freelancing work. Rent is an allowable expense that can be deducted from Rohit's freelancing income. However, if Rohit decides to pay his sister an amount higher than a reasonable market rent, this may draw the attention of the Income Tax Department.
Rohit claimed the rent as a business expense, reducing his overall income. His sister, having no other income, paid only a 10% tax on the rental income. The Assessing Officer may disallow the rent payment that exceeds the fair market value of the premises, especially when the recipient is a relative.
For assistance with your income taxes and tax filing, you can turn to Tax Experts who can help you file your ITR accurately and maximize your tax refund.

Income Tax Filing Process for Freelancers

The procedure entails the following steps:

• Visit the Income Tax E-Filing Portal.
• Obtain the ITR-4 form from the 'download' section.
• Complete the ITR-4 form comprehensively. This includes providing essential information, calculating gross total income, listing deductions and taxable total income, providing details of business and professional income, specifying TDS (tax deducted at source), and reporting advance tax and self-assessment tax particulars.
• Utilize Form 26AS for tax calculation purposes. Certain sections of the form offer opportunities for tax deductions and exemptions.
• Additionally, you can claim expenses that are exclusively and wholly related to freelance work conducted during the tax year. These expenses may encompass items such as property rent, repair costs, travel expenses, municipal taxes for business property, and domain registration fees, all of which can be included as deductible expenses.

Books of Accounts for Freelancers

Here are the two types of accounting methods that freelancers can follow to maintain their books of accounts -

• Accrual Basis of Accounting
• Cash Basis of Accounting

Note that the accounting method you choose should be consistent throughout your operations.

How to Select an Accounting Method?

Choosing an accounting method may initially seem like a way to lower your tax liability, especially if you opt for the cash-based method. However, it's important to recognize that this choice might merely defer your tax payments rather than provide genuine tax savings. Once you commit to a specific accounting method, frequent changes for tax reduction or avoidance are not permitted.

Typically, it makes more sense to adopt the Accrual Basis method unless your income receipts are irregular, uncertain, or unpredictable. The Income Tax Act mandates the maintenance of books of accounts for income tax purposes, with specific requirements detailed in section 44AA and Rule 6F.

Calculating Total Taxable Income and Tax Payable

To effectively reduce your tax liability, you can take advantage of deductions provided under Section 80 of the Income Tax Act. Section 80C, for instance, offers tax relief on specified expenses and encourages taxpayers to save for the future through deductions on investments in financial products.

Net Taxable Income = Gross Taxable Income – Deductions

Under this section, you can lower your taxable income by up to Rs. 1.5 lakh by claiming deductions for actual investments or expenses incurred. Additionally, if you are 60 years or older and your net taxable income exceeds Rs. 2.5 lakh, you will be subject to income tax.

Tax Obligations for Freelancers

For a freelancer, if the total tax liability in a financial year surpasses Rs. 10,000, it becomes mandatory to make quarterly tax payments known as advance tax.

How to Compute Advance Tax:

Eligibility: You need to pay advance tax if your estimated tax liability for the financial year (April 1st to March 31st) is ₹10,000 or more after considering tax deducted at source (TDS) and tax collected at source (TCS).

This applies to individuals, businesses, and professionals with income from sources other than salary.

Steps to Calculate:

• Estimate your total income: Include sources like income from business/profession, capital gains, interest income, rent, etc.
• Deduct eligible expenses: These could be business expenses, professional fees, interest paid on home loans, etc. (Refer to Income Tax Act for specific deductions).
• Apply applicable tax slab: Calculate tax on your net income based on the chosen tax regime (old or new).
• Reduce TDS/TCS: Subtract any TDS/TCS already deducted from your income.
• Calculate payable advance tax: Based on the financial year (2023-24), here's the breakdown:
• By June 15th: Pay at least 15% of your estimated tax liability.
• By September 15th: Pay at least 45% of your estimated tax liability (minus what you paid by June 15th).
• By December 15th: Pay at least 75% of your estimated tax liability (minus what you paid earlier).
• By March 15th: Pay the remaining balance (100% minus previous payments).

The due date for Advance Tax

To know more about ITR-4, read our guide on ITR-4.

How to Pay Advance Tax?

Here are two ways -

• Pay online through the IT Department’s website.
• You can also fill a paper challan and deposit tax physically.

Penalties for Non-payment of Advance Tax

Interest under Sections 234B and 234C apply when you fail to pay advance tax. To avoid Interest Penalty under these sections –

• Advance tax is required to be paid when tax liability in a year is Rs. 10,000 or more
• Advance tax payments done until 31st March of the year should be 100% of your total tax payable.

Section 234B is applicable when Advance Tax is not paid, and since Advance Tax is payable on the dates specified by the IT Department, 234C is applicable when interest is not paid by the due dates.

Key Considerations Regarding GST

• If your total revenue from freelancing work does not exceed Rs. 20 lakhs, GST is not applicable. (For mandatory GST registration requirements, click here.)
• If your turnover for selling goods or services is below the specified threshold, you may be eligible for the composition scheme.
• GST is not applicable to zero-rated supplies, such as exports.
• Ensure that your invoices comply with GST regulations. How to Determine Whether GST Registration is Required:
• You must register for GST if your annual aggregate turnover exceeds Rs. 20 lakhs (Rs. 10 lakhs for hill states and North Eastern states).

How to Make GST Payments:

• GST payments can be submitted online, and it is compulsory for payments exceeding Rs. 10,000 to be made online.
• The frequency of GST deposits (quarterly or monthly) depends on your turnover and your choice of the composition scheme.
• Please note that interest may be applicable for delays in remitting service tax to the government.

How to File GST Returns?

The frequency of filing GST returns, whether quarterly or monthly, is determined by your turnover and your choice of the composition scheme. Businesses falling under the composition scheme and those with annual sales below Rs. 1.5 crore for the sale of goods can file returns on a quarterly. In the case of service providers, this limit is set at Rs. 50 lakhs.

Once you obtain a GST Identification number, it becomes mandatory for you to file GST returns.

Should Freelancers File TDS Return?

Any payment made by a freelancer or a small business owner exceeding Rs. 30,000 in a financial year is subject to a 10% TDS deduction, which must be remitted to the government.

Furthermore, a freelancer is obligated to deduct TDS only if they are subject to an audit. If their annual gross receipts surpass Rs. 50 lakhs, they are required to undergo a financial audit. Otherwise, there is no need to withhold tax at the source.

Freelancers must determine if TDS is applicable based on the TDS regulations. Additionally, once tax is deducted, the withheld amount must be remitted to the government.

Which is Better: Freelance or Working as a Salaried Person?

The answer is not simple. Both cases have their own pros and cons, and which one is the right option will depend on one’s own perspective and many other aspects like one may prefer to work freely, and another may prefer to work under an employer.

As far as taxes are concerned, the Income Tax Act is more generous towards salaried individuals, and they get more benefits. Let’s understand how.

Firstly, in the 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 the case of freelancing, one is required to deposit advance tax during the year if his/her taxes exceed Rs. 10,000.

Secondly, a salaried person gets Form 16 from his employer, covering all income, deductions, etc. Meanwhile, freelancers have to jot down all their income and expenses during the year and take care of the taxes.

Hope this article helped you understand how to file Income Tax Returns for freelancers. If you still feel confused about how to file an ITR as a freelancer and need professional help, you can count on us. Tax2win provides expert CA services right at your fingertips.

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