How To File Income Tax Returns For Freelancers?
As soon as we hear the word - “Freelancer”, the first image which comes to our mind is of a person who is his/her own boss and has the liberty to manage time at will. But Everything Comes With a Price, and 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.
A freelancer is a self-employed person who enjoys the autonomy to select their own work, projects, and affiliations with companies. Freelancers are responsible for paying income tax on the earnings they receive from their projects or freelance work. According to the Income Tax Act, any income derived by an individual utilizing their physical or mental abilities through freelancing is categorized as "profit and gains from business and profession. Freelancers are required to pay tax on their freelancing income under the head Income from Business and Profession.
Taxation for Freelancers
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.
|Income Slab||Old Tax Regime||New tax Regime (until 31st March 2023)||New Tax Regime (From 1st April 2023)|
|₹0 - ₹2,50,000||-||-||-|
|₹2,50,000 - ₹3,00,000||5%||5%||-|
|₹3,00,000 - ₹5,00,000||5%||5%||5%|
|₹5,00,000 - ₹6,00,000||20%||10%||5%|
|₹6,00,000 - ₹7,50,000||20%||10%||10%|
|₹7,50,000 - ₹9,00,000||20%||15%||10%|
|₹9,00,000 - ₹10,00,000||20%||15%||15%|
|₹10,00,000 - ₹12,00,000||30%||20%||15%|
|₹12,00,000 - ₹12,50,000||30%||20%||20%|
|₹12,50,000 - ₹15,00,000||30%||25%||20%|
If the gross annual income during a year is more than Rs.1 crores, the freelancer is required to conduct a tax audit.
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 Presumptive Taxation Scheme can file their returns in ITR-3, applicable for income from business and profession.
Exemptions or Deductions
Freelancers can claim the deduction on their income under Section 80C to 80U. Thus, freelancers can claim the following deductions while filing ITR:
- Section 80C: Deductions on various investments such as life insurance premiums, ELSS, SSY, NSC, SCSS, payments made towards the principal of a home loan repayment, payment made towards pension plans, NPS payment, etc.
- Section 80D: Deduction on medical insurance premium
- Section 80E: Interest on education loan
- Section 80EEA: Interest on home loan for first-time homeowners
- Section 80G: Income tax benefits towards donations for social causes
- Section 80GG: Income tax deduction on house rent paid
- Section 80TTA: Interest on savings accounts
- Section 80U: Deduction for disabled individuals
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.
When and How Can Freelancers Pay Advance Tax?
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.
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
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 certain expenses they have incurred in the course of their work from their income. 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
- Rent paid for a property used for your work can be deducted.
- 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.
- 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.
- Deductible expenses include office supplies, equipment purchases (e.g., printers), monthly telephone and internet bills, and transportation costs related to work.
- 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 prepare your tax returns and e-file them within 48 hours. Plans are available starting at Rs.3,700 for freelancers and consultants.
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
|Accrual Basis of Accounting||Cash Basis of Accounting|
|Income is booked when it gets accrued or receivable.||Income is accounted for when it is actually received|
|Expenses are accounted for when there is an obligation to pay||Expenses are booked when actually paid.|
|Tax liability takes place when income is booked||Tax liability arises in the year in which the income is received|
|Can be followed for all heads of income such as salary, capital gains, and house property||The approach can be used only for P&L from business/profession and income from other sources.|
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 basis method. However, it's important to recognize that this choice might merely defer your tax payments, rather than providing 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:
- Sum up all your receipts to determine your total income.
- Deduct any expenses directly related to your freelance work.
- Include income from other sources, such as rental income or savings account interest.
- Identify the applicable tax slab and calculate your tax liability.
- Ensure to account for any Tax Deducted at Source (TDS). If your calculated tax liability exceeds Rs. 10,000, you must make advance tax payments by the specified due dates
The due date for Advance Tax
|On or before 15th June||At least 15% of advance tax|
|On or before 15th September||At least 45% of advance tax - tax paid in the last installment.|
|On or before 15th December||At least 75% of advance tax - tax paid till the time of last instalments.|
|On or before 15th March||100% of advance tax - tax paid till the last instalments.|
Need help from an expert in calculating your advance tax? Book an eCA
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: Freelancing or Work 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 Whereas in the case of freelancing, one is required to deposit advance tax during the year if his/her taxes during the year exceed Rs. 10,000.
Secondly, a salaried person gets Form 16 from his employer, covering all income, deductions, etc. Whereas 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 and how to file an ITR as a freelancer. If you still feel confused and need professional help, you can count on us. Tax2win provides expert CA services right at your fingertips. Simply
and get a simplified and relaxed ITR filing experience.
Frequently Asked Questions
Q- Is Income from freelancing activity taxable?
Yes. Income earned from freelancing activities is subject to 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 a deduction against your income is that the 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 the city/ India.
- Expenses incurred on daily office essentials like stationery, telephone bills, electricity bills, etc.
- Salary to staff expenses.
- The expense incurred on rent, if the premise is taken on rent, etc.
Q- Salary Income or Freelancer Income, which is more beneficial?
In the case of salary income, you do not have to worry about PF, Form 16 & Advance Tax, as these things are taken care of by your employer on your behalf. The same benefit is not available if you earn income as a freelancer. However, the benefits of both sources of income depend on various factors.
Q- What is presumptive tax?
Presumptive Taxation means using an 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 if I start earning salary income instead of freelancing income?
In that case, you need to file a 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 the return using Form ITR-4.
In case you are liable to get accounts audited, then use ITR-3 to file the return.
Q- Can I opt for Sec 44ADA, if my gross receipts exceed Rs.50 Lacs?
No, you cannot opt for Sec 44ADA. The only option available to you is to get accounts audited.
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, freelancers 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. do I need to visit a CA for my tax filing. Or is it possible to do it by myself?
For this taxpayers can consider ITR Form 3 or 4, taking that income as business income. However, given the amount of income, taxation might involve multiple complexities. Therefore, it is advised that you consult a professional CA for filing your ITR accurately.
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 is 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 to Freelancing work as an 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 a presumptive basis.
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