App developers can deduct expenses they incurred to do the job from earnings. This could be anything from office furniture to cab fares for client visits.
Aditi had a runaway hit with her task manager app on the Google App and iOS store last year. She made about 7 lakhs rupees after 35,000 downloads from all over the world.
Let’s look at all the expenses she incurred as a freelancer. Remember these expenses must be directly related to building the app.
She bought office furniture, a desk and a chair, for Rs.9,600 to work on the app. She took a high-speed internet connection that costed her Rs.12,000.
She had a couple of meetings with consultants during the year and she took a taxi to meet them. Rs. 8,000. She hired a co-developer temporarily and paid her Rs.35,000 overall.
Registration on the Play Store and iOS costed her Rs.10,000.
Aditi can also claim depreciation on the laptop. A depreciation of 60% is allowed on laptops as per the Income Tax Act. Depreciation on Aditi’s laptop of Rs.60,000 works out to be Rs.36,000.
Aditi split her telephone bill of Rs.36,000 for the year as part business and part personal and claimed Rs.18,000 as expense directly related to app development.
She paid Rs.24,000 to the payment gateway partners as fee.
Net earnings = Earnings – Expenses related to app development
Expenses related to app development are summed up here
desk Rs 9600 + internet charges Rs.12,000
+ local travel Rs 8000 + co-developer salary expenses Rs.35,000
+ ios and playstore registration expenses Rs.10,000
+ depreciation laptop Rs 36000 +telephone expenses Rs.18,000
+ payment gateway feee Rs.24,000
Net earnings = Rs.6,80,000 – Rs. 1,52,600
Net earnings from freelancing work = Rs.5,27,400
Calculating taxable income
Aditi’s freelancing income is Rs 5,27,400. But total taxable income is the sum of income from the following heads:
- Income from Salaries
- This includes any income of salary or other payments received by virtue of an employment. Aditi’s one month’s salary of Rs 52,000 was credited to her account and PF of Rs 1,200 and TDS of Rs 2,000 was also deducted before she quit her job at the end of April 2014.
- Income from House Property
- Aditi owns a one bedroom apartment and has given it on rent to 2 students who pay her Rs 15,000 in total. She 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.
- Income from Freelancing/Business and Profession
- Income from freelancing (business or profession) as calculated is Rs 5,27,400 for Aditi.
- Income from Capital Gains
- Aditi did not sell any capital asset in FY 2014-15.
- 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. Aditi has a fixed deposit on which she earned an interest of Rs 12,000. She earned an additional interest of Rs 7,800 on her savings account.
|Income from Salary||52,000|
|Income from business and profession||5,27,400|
|Income from house property
|Less: Taxes Paid||15,000|
|Net Annual Value||1,65,000|
|Less: Standard deduction 30%||49,500|
|Income from other sources|
|Savings bank interest||7,800|
|Fixed deposit interest||12,000|
|Total taxable income||7,14,700|
Total Taxable Income of Aditi is Rs.7,14,700.
Calculating tax payable
A PF of Rs.1,200 was deducted by Aditi’s previous employer. A TDS of Rs.2,000 was also deducted.
A TDS of Rs.1,200 was deducted by the bank on her fixed deposits. Aditi purchased a life insurance policy for Rs.50,000. She also has a PPF account in which she contributed Rs.60,000 for this year.
Aditi also took out a health insurance policy and paid a premium of Rs 12,000. She also invested in an ELSS fund for Rs.25,000 on recommendation from her friend.
This is how Aditi’s tax will be calculated for the year:
Investments eligible for deduction under section 80C
- Life insurance policy premium of Rs 50,000
- Investment in PPF of Rs. 60,000
- Purchase of ELSS fund of Rs. 25,000
- PF of Rs 1,200
For purchase of a health insurance policy a maximum deduction of Rs 15,000 can be claimed under section 80D. Therefore, Aditi can claim the entire premium of Rs 12,000.
Aditi 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.
|Total Taxable Income||7,14,700|
|Less: Deductions under Section 80C|
|PF deducted by employer||1,200|
|Less: Deductions under Section 80D||12,000|
|Less: Deduction under Section 80TTA||7,800|
|Income less deductions||5,58,700|
|Tax on total income|
|up to Rs.2,50,000||Nil|
|Rs.2,50,000 to Rs.5,00,000||25,000|
|Rs.5,58,000 to Rs.5,00,000||11,600|
|Total tax including cess||37,698|
|Net tax payable||34,498|
Total tax payable by Aditi is Rs 34,498. Do note that Aditi has not paid any advance tax and since her tax liability exceeds Rs. 10,000 in one year – Aditi should have paid advance tax. Since no advance tax has been paid by her interest shall be charged under section 234B and 234C.
Other taxes applicable to Aditi
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 above services at 18% on the services provided.
Exports are zero-rated and input taxes paid in 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 2018.
TDS: The Indian Payment Gateway charged Aditi Rs. 24,000 as commission fees in the month of March. Aditi has made a payment of Rs. 24,000 to the Payment Gateway for its services. According to law, Aditi has to deduct TDS on this payment.
Read more about income tax for freelancers