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Freelancers Tax in India

More and more people in India are moving away from the traditional 9-5 jobs and seeking alternative employment paths. This could be photography, content marketing, programming, and so much more. These employment paths result in an income structure that looks very different from those who are on a regular payroll. It stands to reason, therefore, that the tax structure will be different as well. Here is a guide to freelancer tax in India.

Who is a freelancer?

A freelancer is someone who is self-employed and works with clients either on an assignment basis or on a retainer basis to provide a fixed set of services. A freelancer’s income can vary greatly from month to month depending on the assignments taken on. Moreover, freelancers cannot receive certain perks and benefits that regular employees get from their employers, such as a Provident Fund (PF), Leave Travel Allowance (LTA), or House Rent Allowance (HRA).

In contrast to regular employees, however, freelancing places a lot of the freedom and decisions regarding how and where they work in the hands of the freelancers themselves. For many freelancers, they can work from anywhere they can sit with their laptops and a working internet connection, such as a coffee shop or even at the beachside.

Freelancer tax in India

As far as freelancer tax in India is concerned, according to income tax laws, an income that a person earns by displaying their manual or intellectual skills is classified as ‘income from a profession. This income is taxed under the category of ‘Profits and gains from business or profession’. The first thing for freelancers to do is to know their gross income. The gross income earned by a freelancer is the combined total of all the income received through your profession during the financial year. Freelancers should endeavor to receive their income through banking channels as this makes it easier to keep a track of all received income. Moreover, the freelancer’s bank statements can then act as reliable income proof and can be used to obtain information on all received income.

Tax deductions for freelancers

Many freelancers starting out are not aware that they can claim tax deductions on their income. The conditions for claiming deductions are as follows:

  1. The expense must be related to the freelancing project you are working on
  2. It should be spent exclusively on the freelancing work
  3. It should have been incurred during the current financial year
  4. It should not be incurred for any purpose that is a punishable offense

The deductible expenses are as follows:

  1. Rent of property for carrying out your freelancing work
  2. Repair costs for repairs to the rented property. Also repair costs of your laptop, printer, and other such items can be included
  3. Depreciation of capital assets owned by you
  4. Expenses incurred for the purchase of office supplies such as laptop, printer, monthly telephone bills, internet bills, conveyance expenses
  5. Travel expenses for travel undertaken for your freelancing work
  6. Entertainment or hospitality expenses for when you take your clients out for some outing such as a meeting over a meal or any such outing was undertaken to procure new clients or retain old ones
  7. Registration of domains and apps that are purchased to test your product are also included
  8. In case you own business property then you can include local taxes and insurance expenses

GST and freelancer tax in India

The Goods and Services Tax (GST) has replaced the older Value Added Tax (VAT) and service tax system in India. Freelancer income may also be subject to GST subject to certain conditions. If a freelancer’s income is less than Rs 20 lakh and they do not provide services outside of their state do not have to register for GST. If your income is over Rs 20 lakh, however, then you need to register for it. Moreover, the percentage that a GST is liable for depends on the service provided by the freelancer.

1. GST for services: For most services, the GST rate is 18%. For example, if a freelancer earns an income of Rs 10,000, the GST on that income is 18%. Therefore, the freelancer will have to bill the client for Rs 10,000 + Rs 1800 (GST amount), which comes to a total of Rs 11,800.

2. GST for goods: The rate for this type of GST depends on the goods that the freelancer sells.

Books of accounts for freelancers

If your gross income in a financial year is over Rs 50 lakh, then you must take care to keep a close track of all your income receipts. All income and expenditure must be accounted for and all books of accounts should be up to date. You will also need to get your books of accounts audited.

Now the question arises, how should freelancers account for their income, should it be when it is received or when it is due? There are two types of accounting methods that freelancers can be used:

  1. Cash basis of accounting
  2. Accrual basis of accounting

Given below is a table illustrating the differences between the two:

Cash basis

Accrual basis

Income is accounted for when it is received

Income is accounted for when the right to receive arises

Expenses are accounted for when they are actually paid

Expenses are accounted for when the obligation to pay rises

Tax liability arises in the financial year that the income is received

Tax liability arises when the income is booked so the tax is payable even if the income hasn’t been received
This system is allowed only for profits and losses from profession and income from other sources

This system is allowed for all heads of income such as capital gains, salary, and so on

Presumptive Taxation system

Under the Presumptive Taxation Scheme of Section 44ADA of the Indian Income Tax Act, a freelancer can pay income tax on half of their gross annual income as long as the gross income is less than Rs 50 lakh. This system relieves freelancers of the arduous task of maintaining books of accounts and so is the easiest way to file for freelancer tax in India. Here the freelancer will presume that half their gross receipts should be considered as income when computing their income tax.

Suppose you earn Rs 30 lakh as gross income and have deductible expenses of Rs 10 lakh. Here, your gross taxable income without the Presumptive taxation system would be Rs 20 lakh. But if you use the Presumptive taxation system, you would take consider Rs 15 lakh as the presumed taxable income (half the amount of your gross receipts). Thus, your taxable income under the Presumptive Taxation System could work out to be more beneficial for you.

TDS deductions and freelancer tax in India

When paying freelancers, clients often deduct TDS (Tax Deducted at Source) and pay the freelancers the balance amount. You can claim the TDS deductions when filing your ITR form by using Form 26AS for this purpose.

Conclusion

A freelancer is as much liable for tax deductions as any business or professional. It is imperative that they should file an income tax return to save on taxes. Freelancers can take the help of a professional Chartered Accountant (CA) to file freelancer tax in India or they may also file it themselves online on the e-filing portal.

 

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