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Taxation for Self employed business, Profession and freelancers

Updated on: 11 Apr, 2022 05:11 PM

(Covers Professionals like Doctors, Lawyers, Techies, Architects etc.)
As soon as we hear the word - “Self employed or Freelancer”, the first image which comes to our mind is of a person who is being his own boss and having the liberty to manage time at will. But Everything Comes With a Price, so does the joy of freelancing!! We all get stuck, when it comes to additional tax responsibilities. No doubt, freelancing resembles carrying a business activity where you deal with different clients and render them professional services like Finance (CAs), Medical (DR.s), Legal (Advocates), Consultancy (Engineers) etc. The income tax department believes in the same and accordingly taxes your income as Profit and Gains of Business and Profession.

In this guide, we will take a tour of the various tax provisions which are applicable to the Freelancers in India.

What is Income from Profession?

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 certain persons carrying on profession or business have been divided into two categories and freelancers can fall under either of these categories"

  • Category 1 - Specified Professionals
  • Category 2 - Others.

Specified Professionals

Who all covers unders specified Professionals as per sec 44AA?

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 :

  • Profession of Legal
  • Profession of Medical
  • Profession of Engineering
  • Profession of Architecture
  • Profession of Accounting
  • Profession of Technical Consultancy
  • Profession of Interior Decoration
  • Profession of Film Artist
  • Profession of Authorised Representative

Presumptive Taxation

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.

Claiming expenses under 44ADA

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.

Maintaining Books of accounts for freelancers u/s 44ADA?

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 :

  • If an assessee claims profits and gains from the profession lower than 50% of gross receipts and his total income exceeds the basic exemption limit.
  • If an assessee is a specified professional but his gross receipts exceeds Rs. 50 lakhs due to which he is unable to opt sec 44ADA.

Books of accounts are required to be maintained?

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,

  • Journal,
  • Ledger,
  • Cash book,
  • Original as well as carbon copies of bills issued and
  • The Payment vouchers.

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 :
  • Those specified professionals who are eligible to opt for section 44ADA.
  • Those specified professionals whose gross receipts does not exceed Rs. 1,50,000 and are also not eligible to opt section 44ADA.

What is audit u/s 44AB?

A person is required to be audited u/s 44AB, if he falls under the below criterias :

  • If a person carries a business and
    1. His total turnover exceeds Rs. 1 crore in any previous year or [in case 44AD, limit is 2 Crror]
    2. Profits and gains u/s 44AE or u/s 44BB or u/s 44BBB are claimed lower than the deemed profits in any previous year or
    3. Profits and gains u/s 44AD are claimed lower than the deemed profits in any previous year and his income exceeds the basic exemption limit.
  • If he carries a profession and:
    1. His gross receipts exceeds Rs. 50 lakhs in any previous year or
    2. Profits and gains u/s 44ADA are claimed lower than the deemed profits in any previous year and his income exceeds the basic exemption limit

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.

Other than Specified Professionals

What are non specified professions?

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.

Claiming of expenses and Audit Requirement

Now, as per the above conditions if you are liable to audit then here are some of the expenses that you can claim :-

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.

Self Employed Businesses

For business, establishment of an entity is required. The venture can either be a sole proprietorship, LLP, company, AOP or BOI.

Presumptive Income

Section 44AD deals with presumptive taxation for businesses. As per this section if your turnover does not exceed INR 2 crore , then you are eligible for the scheme. However, you are required to report 8% income if there are non-digital transactions and 6% income if all the transactions are in digital mode.

Maintenance of Books of Accounts

Every business entity is required to maintain books of accounts as per section 44AA if following conditions are satisfied in any of the three previous years:

Turnover exceeds INR 10 lakh or
Income exceeds INR 1.2 lakh.

However, individual and HUF is required to maintain books of accounts if in case income exceeds INR 2.5 lakhs or turnover exceeds INR 25 lakhs in any of the three previous years.
Moreover, if the return is filed under presumptive income and income declared is less than to be declared as per presumptive scheme, then you are required to maintain books of accounts.

Audit Requirement

If the turnover of business exceeds INR 1 crore or INR 2 crore (in case of Presumptive scheme), then the taxpayer is liable to get books audit by a qualified Chartered Accountant. The last date for getting it audited and filed is 30th September of the relevant A.Y.

How to save and where to invest?

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.

What is included in my income as a freelancer?

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

  • Income from salary - if you are in part time employment somewhere
  • Income from House property - if you have given your house on rent to someone
  • Income from Capital Gain - If you trade in securities market or have sold some assets during the year
  • Income from other sources - This will pertain to include interest received on FDs, lotteries etc.

Which is better: freelancing or work as a salaried person?

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.

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 :)

Frequently Asked Questions

Q- Is Income from freelancing activity taxable?

Yes. Income earned from freelancing activities is subject to the Income Tax.

Q- What expenses are allowed to me as a freelancer, if I opt to get my accounts audited?

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:

  • Expenses incurred on travel to meet your clients within the city, outside city/ india.
  • Expenses incurred on daily office essentials like stationary, telephone bills, electricity bills etc.
  • Salary to staff expenses.
  • Expense incurred on rent, if the premise is taken on rent, etc

Q- Is GST applicable on me?

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 Rs. 10 Lacs.

Q- Salary Income or Freelancer Income, which is more beneficial?

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.

Q- When do I have to file my income tax return?

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.

Q- Can I claim deductions like 80C, 80E etc, if I opt for Presumptive Taxation?

Yes, you can claim all deductions under Chapter VI-A including 80C, 80D, 80E etc.

Q- Which section of income tax is applicable on me?

Normally, Sec 44ADA, presumptive taxation for professional is applicable to all the specified professionals.

Q- What is presumptive tax?

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.

Q- What is Sec 44ADA?

As per this section, only those professionals can opt for presumptive taxation:

  • Whose gross receipts is upto ? 50 lac in the previous year, and
  • Who is a specified professional, and
  • He/ she must offer 50% of gross receipts as taxable income.

Q- Who can apply 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.

  • Architecture
  • Accountancy
  • Legal
  • Engineering
  • Medical
  • Artists
  • Information Technology Professionals
  • Interior Decoration
  • Technical Consultancy
  • Company Secretary

Q- Do I have to maintain accounting records?

Specified professionals have to maintain books of account,

  • If their disclosed income is less than 50% of gross receipts, and/ or
  • Turnover exceeds ? 50 Lacs.

Q- What if I start earning salary income instead of freelancing income?

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.

Q- Which ITR is required to file for freelancing 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.

Q- Can I opt for Sec 44ADA, if my gross receipts exceed Rs.50 Lacs?

No, you cannot opt for Sec 44ADA. Only option available to you is to get accounts audited.

Q- Can I opt for Sec 44ADA, if I am not a specified professional?

No, you cannot opt for Sec 44ADA.

Q- If I have to maintain accounts, which method of accounting should I opt?

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.

Q- When do I need to deposit advance tax?

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.

Q- Do I have to pay Advance Tax?

If your tax liability exceeds ?10,000 during the previous year then you need to pay advance tax.

Q- What if I do not pay Advance Tax?

If you do not pay advance tax on time, then you will be required to pay interest under section 234B & 234C.

Q- How do I save income tax on my 12 lpa income as Freelancer in India?

You can file your return under presumptive income under section 44ADA, to reduce your taxes.

Q- Do Indian freelancers working for foreign clients on Freelancer, Elance, oDesk, etc. need to declare their income from a foreign source in the schedule FSI of the ITR 4 while filing the income tax return?

Yes, Freelancer need to include that foreign income into its ITR 4.

Q- How do freelancers on Upwork, Freelancer and Fiverr pay taxes?

Freelancers can pay their taxes like everyone else, either through online mode or offline mode.

Q- I am a freelancer and earning around 5500 USD/month from Kolkata, India. I do need to visit a CA for my tax filing. Or is it possible to do it by myself?

For this taxpayer can consider ITR Form 3 or 4, taking that income as business income and to make it with accuracy do consult with CA for Tax filing.

Q- If I add my online freelancing income to my company salary account, how do I pay the tax of this extra income?

If the extra income added to the company salary, then tax upon it will be deducted by the employer while filing TDS returns and issuing Form 16.You are not required to pay extra taxes on that.

Q- Does TDS apply to freelancers? Can someone please clarify if I am liable to pay taxes or not?

TDS would apply on Freelancing work as employer is required to deduct TDS.

Q- Which ITR form do Indian freelancers have to fill to file their income tax?

ITR Form depends on the income from freelancing work if your income exceeds Rs 2Crs. Then they would be liable for audit and required to file ITR 3 otherwise ITR4 on presumptive basis.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.