Freelancer’s Tax Computation: Expenses, Total Taxable Income, How much Tax to be Paid, Other Taxes That Apply

Rushabh decided to quit his job in April 2023 and started working as a Freelancer. He developed a windows app and he decided to sell it via his website. He hoped that people across the world would purchase and download his application. Rushabh launched his app in May 2023 and it went viral. People who purchased his app in India, paid using an Indian Payment Gateway called ‘Superfast’.

People purchasing his app from outside India used a foreign Payment Gateway. Both payment gateways charge 4% as commission fees. The total charged to Rushabh by the gateways is Rs. 24,000 as commission fees. Rushabh’s earnings in 2023-24 from sales of his app were ~Rs. 9,80,000.

Out of that, the portion of the revenue from India was ~Rs. 5,80,000 and the portion of the revenue from outside India was ~Rs. 4,00,000. Rushabh is now confused about how he should go about figuring out his Freelancing Expenses.

Freelancer Expenses

Rushabh’s total revenue from his app is Rs 9,80,000. Since he is a freelancer he is allowed to deduct certain expenses from his revenue. Rushabh starts to list down all the expenses which are directly related to this app revenue. An office table and chair was rented by him in his apartment so he could work on the app.

Rent paid = Rs 800 per month. 
Total Annual Rent = Rs 9,600  

Rushabh took high-speed internet services which cost him Rs 1,000 per month. 
Total Internet Costs = Rs 12,000. 

Rushabh also had a couple of meetings where he used a cab to reach and spent money with a few consultants who make apps and understood from them about the finer details of launching the app. 
Total expenses = Rs 8,000. 

He decided that he needed to hire a person to test his app and that he would need this person to work with him for 2 months. 
Total expenses = Rs 35,000. 

He also had domain registration expenses of Rs 10,000 and additionally Rs 2,000 to get the temporary hire started up on the work. 
Total expenses = Rs 12,000. 

Depreciation on laptop (Rushabh purchased a laptop for Rs 90,000 and 40% depreciation is allowed on laptops as per the income tax act). 
Total expenses = Rs 36,000. 

Rushabh also purchased insurance for his laptop for Rs 8,000 
Total expenses = Rs 8,000.

His telephone expenses of Rs 36,000 for the year, of which Rushabh allocated 50% as directly related to his freelancing work.
Total expenses = Rs 18,000.

Also payment gateway commission of Rs 24,000 shall be included as expenses.
Total expenses = Rs 24000.

So with the information Rushabh gave, this is the detail of his Income from Business/Profession or simply the Income of his Freelancing work.
Below his ‘Net Profit’ or ‘Freelancing Income’ is also calculated which is Rs 8,17,400 for the financial year 2023-24.

Now, we will calculate the Rishabh’s Total Taxable Income. Rushabh’s freelancing income is Rs 8,17,400. But how do we arrive at his total taxable income? Rushabh’s total income is the sum of his income under all heads less deductions if any. The heads of Income are –

• Income from Salaries – This includes any income of salary or other payments received by virtue of an employment. Rushabh’s one month’s salary of Rs 1,02,000 which was credited to his account after deducting PF of Rs 1,200 and TDS of Rs 2,000 before he quit his job at the end of April 2014. A standard deduction of Rs. 50,000 is allowed from the Salary Income.
• Income from House Property – Rushabh owns a one bedroom apartment and has given it on rent to 2 students who pay him Rs 15,000 in total monthly. He also paid property tax of Rs 15,000 to the local authorities. From total rental income from the house, property tax paid is allowed to be deducted. Additionally, a standard deduction of 30% is allowed on the net house property income (after deducting property tax paid). To understand how income from house property is calculated – read our detailed guide page here.
• Income from Freelancing or Business & Profession – Income from freelancing (business or profession) as calculated in the above table is Rs 8,17,400 for Rushabh.
• Income from Capital Gains – Rushabh did not sell any capital asset in the financial year 2023-24.
• Income from Other Sources – Income from interest on savings account, interest from fixed deposits – this is the residual head of income, incomes which cannot be taxed under any other head of income are taxed here. Rushabh has a fixed deposit on which he earned an interest of Rs 12,000. Additional he earned an interest of Rs 7,800 on his savings account.

With the details received from Rushabh – this is how his Total Taxable Income is calculated.

Gross Total Income of Rushabh is Rs 10,04,700.

Now, let’s help Rushabh find out how much tax he needs to pay. We had a chat with Rushabh and the details he shared with us is as under.

A PF of Rs 1,200 was deducted by Rushabh’s previous employer.  

A TDS of Rs 2,000 was also deducted by his ex-employer. 

On his Fixed Deposits a TDS of Rs 1,200 was deducted by the bank.

Rushabh purchased a life insurance policy of Rs 50,000 where the sum assured is Rs 4,50,000. 

Rushabh also has a PPF account in which he contributed Rs 60,000 in December 2023. 

Rushabh also purchased a health insurance policy and paid a premium of Rs 12,000, since he no longer had a health cover from his employer.  

Rushabh also purchased an ELSS mutual fund on the advice of a friend by investing Rs 25,000 in January 2024. 

This is how Rushabh’s tax shall be computed

Investments eligible for deduction under section 80 C- EPF of Rs 1,200 deducted by the previous employer.

Life insurance policy premium of Rs 50,000, Investment in PPF of Rs 60,000 and purchase of ELSS fund of Rs 25,000 – all these qualify for deduction under section 80C.

Total Rs 1,36,200 qualify as deduction u/s 80C. 

For purchase of a health insurance policy a maximum deduction of Rs 25,000 can be claimed under section 80D.

Therefore, Rushabh can claim the entire premium of Rs 12,000 as deduction u/s 80D. 

Rushabh can also claim deduction under section 80TTA for interest on savings bank account of Rs 7,800. 

Maximum deduction available under this section is Rs 10,000 or interest earned. 

TDS deducted Rs 2,000 by previous employer and Rs 1,200 by Bank on Fixed Deposit Interest. 
 

Below is the tax computation for Rushabh –

Total tax payable by Rushabh under old regime is Rs 82,330 (i.e., Rs. 85,530 less Rs. 3,200).

Rushabh may think of further reducing his tax liability by opting for new tax regime, but in that case Rushabh will not be able to claim any deductions from Gross Taxable Income. Hence, taxable income in this case will be Rs. 10,04,700.

Tax under new regime will be Rs. 63,130/-, and the net tax payable by Rushabh will be Rs.  59,930/-.

Do note that Rushabh has not paid any advance tax and since his tax liability exceeds Rs 10,000 in one year – Rushabh should have paid advance tax. 

Since no advance tax has been paid by him interest shall be charged under section 234B and 234C. 

We understood expenses of a Freelancer, and calculated Rushabh’s taxable income. We also helped Rushabh find out total tax payable by him. Rushabh has now understood Income Tax in detail and seeks out one of our Tax Expert to help him file his income tax return.

However, Rushabh is unsure if any other taxes apply to him. Whether TDS & GST apply to him as a freelancer? 
Let’s take a look

Goods and Service Tax: Goods and Service Tax: This is considered a supply of service under GST law. If the total revenue from freelancing work is Rs.20,00,000 or less, then GST registration is not mandatory and one is not liable for GST. However, a person registered under GST or liable for registration must pay GST on the above services at 18% on the services provided. Exports are zero-rated and input taxes paid in the form of IGST will be allowed as a refund.

Freelancers offering software services such as designing, app development, website designing, etc., paid a service tax of 15% for the period prior to GST rollout i.e. 1st July 2017. 

TDS
The Indian Payment Gateway charged Rushabh Rs. 24,000 as commission fees in the month of March. Rushabh has made a payment of Rs. 24,000 to the Payment Gateway for its services. According to law, Rushabh has to deduct TDS on this payment. This helped Rushabh understand the taxes applicable to him in detail.

One of our CAs helped Rushabh, regarding how to deduct TDS from payments and depositing TDS in a timely manner with the government to avoid penalties.

(Please note the names and details are all fictional and used purely for the purpose of understanding)

Have questions? Write to us support@cleartax.in. We do hassle free tax –filing for Freelancers.

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